Bank Lawyer's Blog

A Billion Dollar Payday

Having written a blog for over a dozen years, I should be used to the fact that there's no gauging what might set some people off like Roman candles. Yet, I'm constantly surprised by the small sparks that light a flame.

I received more than one angry email from folks who thought it was outrageous...OUTRAGEOUS I TELL 'YA!...that the NCUA paid a couple of law firm's enough money to allow them to run for the U.S. presidency if they were so inclined and didn't mind millions of people second-guessing their groping of private parts or cavalier handling of sensitive email. However, let's "parse the nuances," shall we, before we stoke that anger?

The NCUA sued the favorite whipping boys of Princess Fauxcahontas, i.e., the nation's big banks, over putrid mortgage-backed securities that those banks had palmed off on corporate credit unions that later failed (thanks, in no small part, to losses suffered on those MBSs). The cases involved complicated legal issues, the defendants were all well-heeled and willing to put up a game fight (including burying their opponent under Redwood forests worth of dead trees-turned-motions, pleadings, and discovery), and it's not like the NCUA is staffed to handle once-in-a-generation, bet-the-farm litigation. Therefore, the NCUA found a couple of litigation law firms with the necessary expertise and gunslingers-on-call, and who were also willing to do something that many blue-stocking firms are loathe to do: get paid only if they actually win. They took the litigation on a contingency fee basis.

How well did that arrangement work out for the NCUA? According to Housing Wire's Ben Lane, pretty damned good.

The total amount recovered for the failed credit unions in those settlements is more than $4 billion, but this week, for the first time, the NCUA revealed just how much it cost to reach those settlements.

NCUA’s price tag for recovering $4.3 billion for the failed credit unions? Just over $1 billion, paid out to lawyers.

According to NCUA Board Chairman Rick Metsger, this was a good deal for both the NCUA and the firm's involved.

“We were the first federal financial institutions regulator to sue these firms, and we were going up against some of the world’s most powerful institutions,” Metsger said.

“The outcome was far from certain, but we engaged expert outside counsel, and our team has been very successful,” Metsger said. “To date, we’ve obtained $4.3 billion in recoveries, significantly reducing potential assessments for credit unions.”

Metsger said that the attorneys involved took the NCUA’s cases under contingency fee arrangements, meaning the law firms would have received far less than $1 billion if the NCUA lost the respective cases.

“Net recoveries have repaid some of the claims on the estates of the five failed corporates, including those of the Temporary Corporate Credit Union Stabilization Fund,” Metsger said.

“While earlier cases in which billions of dollars were at stake were pending, NCUA did not disclose attorney fee arrangements to protect our litigation position and ensure maximum returns,” Metsger said. “Now that most of the securities cases have been resolved, NCUA can state that, to date, legal fees to our two lead law firms come to approximately 23.2% of our total recoveries, or $1,003,029,479.”

Metsger said if the lawyers involved hadn’t agreed to the contingency agreements, which “insulated” the NCUA from the high costs of litigating unsuccessful cases, there would have been no money recovered. Instead, the NCUA recovered $4.3 billion.

“Without this fee arrangement, which shifted most of the risk of these legal actions to outside counsel, there would have been no legal investigation of potential claims, no litigation, and no legal recoveries,” Metsger said.

I agree with Mr. Metsger. Many large law firms would have been happy to perform the same work for the NCUA on an hourly basis, dumping boatloads of associates and paralegals into a whirling dervish of a billing cyclone that would have ensured the firm's partners that their kids could continue to attend Ivy League universities and their spousal units could afford those Jaguars in the driveways. As long as they didn't commit malpractice, whether they won or lost was not an economic risk to them.

Actually, 23.2% as a contingency fee seems to me to be a pretty fair percentage, although when you're talking about applying that percentage to $4.3 billion, 20% might also have justified the risk. On the other hand, no one knew how much moola the big banks would cough up, and, moreover, what's a measly $137.6 million among friends?

It's certainly a good fee for the two law firms involved, even taking into account the litigation risk and the fact that, except for out-of-pocket expenses (which, I assume, the NCUA was covering), I assume that the firms "carried the cost" of the litigation for three years out of their own pockets. However, I don't think it's unreasonable, nor do I think that the NCUA was somehow "screwed." It netted $3.3 billion (so far) and had relatively little downside risk.

Now that everyone has the benefit of hindsight, and knows that you can squeeze blood out of Wall Street for selling lousy mortgage-backed bonds to banks and credit unions that later crater, the NCUA may not use the same arrangement in the future. Of course, the "future" will not likely involve the sale of such securities, so that is a moot point. The next time a cause of action surfaces for which there is not a lot of precedent, dusting off the same arrangement with hired guns may make sense. If it does, I expect that the NCUA will consider it.

ADA: A Class Action Gold Mine

Readers in a couple of states, one Southern and the other Midwestern, sent me emails about the latest shark-jumping by class action plaintiffs' lawyers out to squeeze blood out of banks via a federal law they last used to beat up banks over non-compliant ATMs: the Americans With Disabilities Act (ADA). Four years ago, I discussed the "drive-by" boinking of banks over their alleged failure to make sure that their ATMs were accessible to the disabled. Although the link to the article that is referenced in that previous blog post is not longer available, the wise words of Colorado Lawyer Jennifer Gokenbach, discussed later in this post, apply to the current scheme: threatening to sue (and in some cases, actually suing) banks because their web sites don't comply with the ADA.

I'm not an ADA expert, so I think it's best to listen to lawyers who purport to possess that expertise. Among those is Martin Orliock, a San Francisco lawyer with Jeffer Mangels Butler & Mitchell. The California Bankers Association last month issued an Alert about letters sent by a Pennsylvania law firm that has been sending letters to community and regional banks in various states, which letters allege that the bank's website does not comply with the ADA and demand certain actions be taken by the bank or all hell will rain down on its sorry head. The CBA alert contains links to such a letter (redacted to protect the innocent and the allegedly guilty), and to an article written by Mr. Orlick, the Chairman of his law firm's ADA Compliance and Defense Group. 

I have also received emails from bank officers in Kentucky and Indiana, and have spoken with lawyers in Texas and Colorado, who tell me that they (or their clients) have received similar letters. Although I did not find a similar statement in the letter linked by the CBA, an email from the Kentucky Bankers Association states that in one such letter to a Kentucky bank, the Pennsylvania law demands that the bank agree to retain that law firm to represent it in the event of future ADA-related complaints of a similar nature. I have not researched the ethical issues related to that particular settlement provision so I'll reserve comment on it for now, although I assume that the plaintiff's law firm has done so and found it to be appropriate. One banker told me that it would be like hiring the fox to guard the hen house. I would envision a wolf rather than a fox, but that's my defense-bias and class-action-phobia showing through.

There is no question that this round of litigation, and pre-litigation arm-twisting, is yet another example of the scourge (or benefit, depending on which way you lean) of bottom feeding under the guise of doing the Lord's work. In this round, the banks have a legitimate gripe that what private law firms are doing is carrying water for a Department of Justice that has, since 2008, been pushing the envelope in social re-engineering by suing banks on questionable theories. Regarding the ADA and websites, the basis cited by the DOJ is that businesses do not comply with a set of industry-issued guidelines (WCAG 2.0) that have not been formally adopted by the DOJ or any any other formal regulatory action by a government agency. In fact, although proposed guidelines for website compliance were first proposed by the DOJ in 2010, they still have not been finalized and currently are not expected to be finalized until 2018. This is not only regulation-by-enforcement (a favorite tactic of the CFPB), but also regulation-by-private-lawsuit.

I think that Mr. Orlick's article sets forth the problem in reasonably brief, but informative, fashion, and I'm not going to reiterate its content. Read it and either weep or laugh, but read it do what he advises, and do it whether or not your institution has yet received one of these letters. I especially urge banks to pay attention to the following provision from his concluding paragraph:

Banks and other businesses should consider hiring a web accessibility consultant through legal counsel to maintain privileges and confidentiality protections. Once a complaint letter is received from a potential Plaintiff, measures should be taken to protect electronically stored information (ESI) in anticipation of litigation.

My previous blog post also contains some sound advice from Ms. Gokenback that is applicable to this round of ADA lawsuits, which is to check with an insurance professional to see if you have any potential existing coverage for existing claims, or, if not, what might be the availability of obtaining such coverage for future claims. Obviously, the best time to check to see if your backside is covered is prior to it being exposed to the four winds.

To those banks that are ahead of the curve on this issue and have already had an ADA-compliance analysis performed on their weebsites, good for you. From what I've seen thus far, you are a rare breed. Most folks might have thought that since regulations are at least two years off, it might be safe to wait until the bank had legally enforceable standards to go by. Silly them!

If anyone thinks this is a trend that will pass, I wish I could agree. With trial lawyers traditionally being a bedrock of Democratic support (they are giving twice as much to Democrats as to Republicans in this election cycle), I think that these types of lawsuits by the DOJ, CFPB, other federal agencies, and the class action plaintiffs' bar, are only going to increase, especially under the regime of Clinton II.

King Richard Corralled?

Several readers have requested a post about this week's PHH federal appellate court decision that set off an IED in the middle of the CFPB's road to world domination. I think that it's premature to judge the ultimate impact of that decision because the CFPB is likely to appeal it, first to the full court (if they'll take it) and then, if the full court upholds the two-judge majority decision, to the SCOTUS. If CFPB wins before the full court, PHH is certain to appeal to the SCOTUS. I think that there's a lot of water to flow under the bridge before this one is done.

One bank lawyer friend's immediate comment was that the CFPB would be foolish to appeal. He thinks that the majority opinion "saved the CFPB's bacon" by not declaring its entire structure unconstitutional and blasting it out of existence. As Dorsey & Whitney partner Joe Lynyak opined several months ago, the court could have clearly found the CFPB's entire existence to be unconstitutional. Instead, the court merely struck the provision of Franken Dodd that made the CFPB's Pontifex Maximus removable only for cause. Hereafter, the Commander-in-Chief can remove would-be despots like Little Richard Cordray "at will." Not that a president in tune with the unbridled expansion of federal power to "do good, as I see the good," like the current occupant of the Oval Office, or his most likely successor, might be opposed to King Richard's gentle ministrations, but in theory, he or she could kick the tin-horn to the curb on a whim, as opposed to having henchman have to manufacture evidence of wrongdoing out of whole cloth. 

I don't see how the CFPB could avoid appealing the decision. It sets a precedent that will not be helpful when the same court hears the appeal of "The Little Bank That Could," which is now about to resume steaming down the tracks. That four year-old lawsuit, which directly challenges the constitutionality of the CFPB, has been up and down and all around, and most recently was put on hold until the PHH decision was rendered (although those with an eye for such things observed that State National Bank filed an amicus brief in the PHH case). As the dissent in the PHH case observes, " in all likelihood, that challenge will be before this Court relatively quickly." If you think C. Boyden Gray and his cohorts won't seek to disinherit the rest of the CFPB's red-headed stepchildren, you don't understand that the steam generated when you piss off a Texan must be released only with scaldingly extreme prejudice. No, I don't see the CFPB letting pass what Princess Fauxcohontas, with her characteristic facility for blowing smoke, characterizes as a "a small, technical tweak." She also states flatly that her brainchild will appeal and will be vindicated upon appeal. In light of her direct connection with the mind of The Great Spirit, we'll take her at face value, although, simultaneously, one must remember that she's made a career out of mythical connection to the Cherokee nation that the Cherokees are unable to discover, because, you know, "it's the cheekbones."

I'm not a fan of "activist judges" (an epithet launched against the majority of the court panel by consumer advocates, who favor activists who lean to the left, not to the right), whatever their "leanings." I favor the exercise of judicial restraint, regardless of the effect of the ruling. I know that flies in the fact of an era in which the SCOTUS creates constitutionally protected "rights" it discovers in "zones" created by "penumbras, formed by emanations from" the Bill of Rights. Nevertheless, that's the way I roll. I'm a quaint little "Burkean-Kirkian" conservative kind of guy. Therefore, I agree with the dissent that, since the court could have decided in favor of PHH without reaching the constitutionality of the CFPB, it ought not to have addressed the constitutionality issue. God knows, all three judges determined that Cordray was dead wrong on RESPA, statutes of limitation, the retroactive application of new agency interpretations, due process, the sun not rising in the west and setting in the east, and the fact that in 1964, "She Loves You," not "Please Please Me" replaced "I Want To Hold Your Hand" as #1 on the Billboard Top 40. There was enough ammunition to overturn Cordray's obviously daed-wrong decisions without going where no man (not even William Shatner) has gone before. I think that the dissent may have provided ammunition for overturning that aspect of the decision on appeal.

Anyone who reads this blog knows my long-term objection to the structure of the CFPB and my concerns about its constitutionality and its potential, as a basically unchecked power, to overreach. However, when you put a horse down, you want it to stay down, not stagger to its feet and start running around the ranch again, blood flowing from the bullet hole in its noggin. You want it moving in only one direction: straight to the glue factory.

The DC Court of Appeals should get another crack at this one. Although "removal at will" is better than nothing, I'd prefer a more permanent solution on a more appeal-proof basis. However, I also think that, following November 8th, bi-partisan support in Congress might grow for a governing commission for the CFPB (as was originally proposed, before Warren, Frank, Dodd, Pelosi, and the rest of the Nanny State crew opted for the "God Emperor" alternative). That would allow some other "tweaks" that Warren might not like, but would remove future constitutional challenges to the CFPB's existence. A wild card, of course, is the prospect of President Clinton picking a progressive to fill Scalia's empty chair on the SCOTUS. That could embolden the CFPB to go all-in on a series of "no surrender" appeals, reasonably confident that ideology will trump (no pun intended) solid legal reasoning in upholding the current structure, as well as the unimpeded right of the CFPB to strike down all evildoers when, where, and as it sees fit.

As I said previously, this saga is far from over, and it's too early in the game to bet on the outcome.

Mudd Comes Clean

Time flies when you're having fun. Actually, it flies even when you're not.

Ask Daniel Mudd.

It was a mere decade ago when, as the head of Fannie Mae, he wanted Aunt Fannie to be provided with more authority to make residential acquisition, development, and construction loans because Fannie Mae hadn't already heated the housing market to the boiling point with its loose lending policies for permanent residential mortgage loans, and Mudd wanted to achieve Warp Factor 4 ASAP! As we noted at the time, the market was being adequately serviced and there was no need for Aunt Fannie's gentle ministrations, and "[u]ntil the 800-pound gorilla proves that there's room (and a need) for it at the table, I'd say let's not let it eat." We were also suspicious that a "slowdown" was on the horizon. If we'd guessed "crash and burn," we would have hit the nail on the head, of course, but hindsight is always 20/20.

Six months later, Mudd, along with ousted Fannie Mae executives, was caught up in an influence-peddling scandal involving contributions by Fannie Mae officials to a certain US Senator who, in turn, allegedly ran interference with an investigation of Fannie Mae by the Inspector General of its overlord. That little kerfuffle did nothing to wipe the mud from Mudd's reputation.

The crowning blow came in 2011, when the SEC sued Mudd and other former Fannie Mae (and Freddie Mac) executives for securities fraud. As the SEC alleged in its press lease:

Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, Director of the SEC's Enforcement Division. "These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk on the company's books. All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country's investors.

While the other defendants settled more quickly, Mudd hung on.However, recently, he announced that he finally settled: for a paltry $100,000. It's also not clear whether that payment will be his personal responsibility or will be covered by a D&O carrier. Not that any of the defendants had their heads handed to them. According to Housing Wire's Brena Swanson, none of the defendants paid more than $250,000. The Reuters article to which Swanson links states that the two lower-ranking Fannie Mae officers sued along with Mudd settled for $25,000 and $10,000. A hundred and thirty-five thousand dollars to settle all claims against former Freddie Mac officers in what is described as one of the SEC's "biggest cases to arise from the financial crisis and mortgage meltdown." And none of the settling defendants admitted wrongdoing. Yeah, that'll show 'em!

You have to ask the obvious question: if you're going to settle for such a paltry amount, why did you bring the suit in the first place?

Perhaps what Marc Cuban said two years ago, following his butt-whooping of the SEC, is correct. "I stood on the court steps and said the SEC is a joke. I thought that then, and I think that now."