•  Judge Denies Summary Judgment As Washington Mutual Mortgage Investors Await Trial

•  ThirdC ircuit Finds “Pay For Delay” Agreements Presumptively Anticompetitive

•  Global Investigation Into Interest Rate Manipulation Spreads To Include EURIBOR

•  What Is A Trustee To Do? The Perils Of Investing Abroad

•  On The Record

•  Conferences and Educational Seminars

Judge Denies Summary Judgment As Washington Mutual Mortgage Investors Await Trial

            On July 23, 2012, Scott+Scott won an important ruling for a certified class of plaintiffs in In re Washington Mutual Mortgage-Backed Securities Litigation, No. 09-cv-00037.  The Honorable Marsha J. Pechman of the U.S. District Court for the Western District of Washington denied the defendants’ motion for summary judgment, allowing the case to move forward toward trial.  The case, originally filed in August 2008, involves six public offerings of Washington Mutual (“WaMu”) mortgage-backed securities, each of which exceeded $1 billion.  Mortgage-backed securities are financial instruments that allow the holder to receive an income stream based on the payments that borrowers make on their mortgage loans.  The class of plaintiffs alleges that the loans that made up the collateral of these securities, however, were fundamentally impaired and delinquency-prone, causing millions of dollars of losses to the purchasers of the securities when the truth about the loans was revealed.

            WaMu was once one of the nation’s largest banks, but it did not survive the financial crisis.  In September 2008, the bank was seized by the U.S. Federal Deposit Insurance Corporation and was later sold to JPMorgan Chase.  To this day, it remains the largest bank failure in history.  The bank’s downfall led to numerous lawsuits, new laws reforming the nation’s banking and financial sector, and even an investigation by the U.S. Senate.  The bulk of the senate’s investigation focused on the origination and securitization of mortgage loans, the very same process at issue in the plaintiffs’ case.

The plaintiffs’ case is premised on the offering documents issued in connection with the mortgage-backed securities containing false and misleading representations and omissions.  The false and misleading representations and omissions concerned the underwriting and origination of mortgage loans that comprised the collateral of the securities.  The underwriting of the loans was affected by a fundamental change in 2006, whereby WaMu drastically lowered its underwriting guidelines in order to increase the volume of loans it was originating.  The key tools in WaMu’s effort to increase volume were reduced documentation and stated-income/stated-asset loans, whereby a borrower’s income and assets were not necessarily verified.  In its order, the court quoted from a document the plaintiffs uncovered during discovery where WaMu’s head of credit policy detailed the problematic nature of these loans and admitted that “‘a stated income loan is nothing but a liar loan’” and that “‘[l]oan consultants and definitely brokers, coach a borrower on the income to use’” for the loan application.  July 23, 2012 Order at 3.  Despite the concerns about these loans and the producers originating them, WaMu pushed forward with the plans to increase volume.  According to the court, “WaMu’s biggest loan producers were known to be engaged in fraud and material deviations in underwriting, and yet it appears WaMu executives looked the other way.”  Id. at 16-17.

After several months of discovery, which included dozens of depositions and a review of millions of pages of documents, the defendants moved for summary judgment in April 2012.  Summary judgment is a procedural mechanism whereby a party in litigation can argue that no issue of fact remains and that the party is entitled to a judgment as a matter of law before trial.  In denying the defendants’ motion, the court concluded that a trial is necessary.  In addition to denying summary judgment, the court also denied several other motions brought by the defendants seeking to exclude key witnesses, experts, and other evidence.  Trial is scheduled to begin September 17, 2012, in Seattle, Washington.

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Third Circuit Finds “Pay For Delay” Agreements Presumptively Anticompetitive

The Third Circuit Court of Appeals recently handed down a decisive ruling on “reverse payment” settlements, rejecting arguments that the anticompetitive agreements are not definitively violative of federal antitrust laws.  The decision on the defendants’ motion for summary judgment in the case captioned In re K-Dur Antitrust Litigation, 2012 WL 2877662 (3d Cir. July 16, 2012), represents a victory for purchasers of pharmaceuticals forced to pay supracompetitive prices for brand name drugs well after lower-priced generic substitutes should have become available.

Prior to marketing and selling a drug to the public, drug manufacturers are required to obtain U.S. Food and Drug Administration approval by way of a New Drug Application (NDA).  Under federal patent law, pharmaceutical companies that have obtained NDA approval are granted a period of legal market exclusivity to sell their newly-patented drugs.  The exclusivity rewards drug manufacturers for the time and resources invested in researching and developing new products.  Once the period of exclusivity expires, however, drug manufacturers can enter the market with generic equivalents and compete against the branded products with substantially lower prices.

Under the Drug Price Competition and Patent Restoration Act of 1984 (the “Hatch-Waxman Act”), 21 U.S.C. §355(j), generic drug manufacturers are permitted to file Abbreviated New Drug Applications (“ANDAs”) prior to the expiry of the branded drug’s patent or the end of the exclusivity period.  ANDAs enable generic drug manufacturers to rely on much of the same scientific evidence and test results as contained in the original NDA.  To obtain ANDA approval and launch a competing generic in the market early, generic manufacturers must certify that the original patent for the branded drug has expired, the patent is invalid, or the patent will not be infringed by the proposed generic drug. 

ANDA applicants are often sued for patent infringement by the branded drug manufacturer seeking to protect their monopoly on the manufacture and sale of the drug.  Since the passage of the Hatch-Waxman Act, many such patent infringement suits have been resolved through settlement agreements in which the patent holding brand name drug manufacturer paid the generic drug manufacturer to postpone or abandon entry of their generic equivalent into the market.  These settlement agreements are commonly referred to as “reverse payment agreements” and have come under considerable scrutiny by the U.S. Federal Trade Commission.

In 1995, Schering-Plough Corp. (later acquired by defendant Merck & Co.) obtained NDA approval to market and sell a sustained-release potassium chloride supplement used to treat potassium deficiencies.  The supplements—branded K-Dur—were patented in both tablet and chewable forms.  The plaintiffs alleged that in 1995, two generic drug manufacturers—Upsher-Smith Laboratories and ESI Lederle—filed ANDAs seeking approval to produce generic versions of K-Dur, certifying that their proposed generics would not infringe Schering’s K-Dur patents.  In response, Schering sued both companies, alleging infringement of its K-Dur patents.  By 2006-2007, however, both suits had been settled.  The plaintiffs alleged that under the settlements, Upsher and ESI agreed to delay or abandon their plans to market and sell generic K-Dur products.

In a ruling handed down on July 16, 2012, the Third Circuit found that such agreements effectively restricting or eliminating competition in the market for potassium chloride supplements could constitute per se illegal restraints of trade under federal antitrust laws.  The court rejected prior decisions that focused on evaluating the validity of the patent infringement litigation under a “scope of the patent test,” stating that such analysis “does not subject reverse payment agreements to any antitrust scrutiny.”  K-Dur, 2012 WL 2877662, at *12.  The court noted that the Hatch-Waxman Act was designed to promote the availability of low cost generic drugs and allow challenges to weak or narrow patents on branded drugs.  Reverse payments, on the other hand, incent generic manufacturers to avoid testing the validity of these patents, and “permit the sharing of monopoly rents between would-be competitors without any assurance that the underlying patent is valid.”  Id., *14.

The court held that any payment by brand name drug manufacturers to a generic patent challenger who agrees to delay entry into the market was “prima facie evidence of an unreasonable restraint of trade.”  Id., *16.  This presumption was rebuttable with a showing that the payment was not designed to delay entry of the generic, or that there was a procompetitive benefit for the payment.  The burden of proving that the reverse payment was not anticompetitive, however, was on the parties to the agreement.  Quoting another circuit court assessing the same conduct, the court determined that “‘[a] payment flowing from the innovator to the challenging generic firm may suggest strongly the anticompetitive intent of the parties entering the agreement. . . .’”  Id. (internal citation omitted).

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Global Investigation Into Interest Rate Manipulation Spreads To Include EURIBOR

            On June 27, 2012, the U.S. Department of Justice (“DOJ”), U.S. Commodity Futures Trading Commission (“CFTC”), and U.K. Financial Services Authority (“FSA”) announced separate agreements with Barclays to settle charges that Barclays manipulated the Euro Interbank Offered Rate (“EURIBOR”) and the London Interbank Offered Rate (“LIBOR”).  EURIBOR and LIBOR are benchmark interest rates used in financial markets around the world.  Barclays paid $160 million to the DOJ in exchange for non-prosecution under U.S. criminal laws.  The CFTC agreement settled charges of attempted manipulation and false reporting and imposed a $200 million penalty.  The FSA also imposed a penalty of £59.5 ($92.2 million) against Barclays.

            The agencies’ investigations revealed that between 2005 and 2008, Barclays’ EURIBOR and LIBOR submissions were, at times, based on Barclays’ and other leading banks’ financial positions on interest rate derivative contracts and a desire to conceal the banks’ poor financial conditions during the depths of the financial crisis. 

            Barclays is the second bank to settle charges of LIBOR rate manipulation.  UBS disclosed in March 2011 that it had received subpoenas from U.S. and Japanese regulators over its LIBOR reporting, and in July 2011, UBS reported that it received immunity from U.S. regulators and was cooperating with the investigation. 

            EURIBOR is a reference rate overseen by the European Banking Federation (“EBF”), which is an association of the European banking sector based in Brussels, Belgium.  EURIBOR is determined using submissions from a panel of over 40 banks selected by the EBF and considered to be the most active in the European Union.  The EURIBOR panel includes many banks that operate in the United States:  Barclays, Citibank, Deutsche Bank, JPMorgan Chase, HSBC, and UBS.

            EURIBOR is defined as the rate “at which Euro interbank term deposits are offered by one prime bank to another prime bank” within the Economic and Monetary Union of the European Union. EURIBOR-EBF,  EURIBOR is fixed every business day for 15 maturities, ranging from one week to 12 months.  EURIBOR panel banks submit their rates electronically to Thomson Reuters, the EBF’s agent, which calculates the rate by eliminating the highest and lowest 15% of submissions and averaging the remaining submissions.  That average rate becomes the EURIBOR rate for a particular maturity and the set of rates are published throughout the world.

            According to the Barclays’ settlement agreements, between 2005 and 2008, Barclays’ traders requested the bank’s submitters to contribute EURIBOR rates that would be beneficial to the positions held by the traders on derivative contracts.  Evidence collected by U.S. and U.K. regulators indicates the manipulation within Barclays occurred at the bank’s “Money Market Desk” and “Swap Desk.”  The Money Market Desk within Barclays is responsible for managing Barclays’ liquidity position and is therefore best placed within the bank to assess the rates at which cash may be available in the money market.  Accordingly, Barclays’ Money Market Desk was responsible for Barclays’ daily EURIBOR submissions to the EBF.  Barclays employs derivative traders who trade financial instruments tied to EURIBOR, including interest rate swaps and Eurodollar futures contracts.  Derivatives traders enter into interest rate swaps as counterparties to Barclays’ clients.  The desk at which the derivatives traders work is called the Swap Desk.

            Between 2005 and 2008, derivatives traders at the Swap Desk emailed EURIBOR submitters at the Money Market Desk to request the submitters provide EURIBOR rates that would benefit the bank’s financial positions on derivative contracts.  The Money Market Desk routinely complied with these requests.  For example, between September 2005 and May 2009, at least 58 requests from derivatives traders for EURIBOR submissions were made to Barclays’ submitters.

            Further evidence gained from the investigation indicates Barclays’ practices were wide-spread among EURIBOR panel banks.  At least 20 requests made by Barclays’ Swap Desk to the Money Market Desk were based on communications between derivatives traders at Barclays and other banks.

            Many interest rates for loans and mortgages are set by reference to EURIBOR.  For investors, EURIBOR can be referenced to payments made in connection with over-the-counter interest rate derivative contracts and exchange-traded interest rate contracts.  Counterparties to these derivative contracts include small businesses, large financial institutions, and public authorities.  The counterparties may have been damaged by Barclays’ and other banks’ EURIBOR rate manipulation.  For more information, please contact David Scott at or Donald Broggi at

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What Is A Trustee To Do? The Perils Of Investing Abroad

            The U.S. Supreme Court’s recent decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), created havoc out of order and has left many investors navigating unchartered waters.

            The Securities Exchange Act of 1934 (the “Exchange Act”) contained sweeping antifraud provisions designed to protect the investments of U.S. investors large and small.  The present day class action was birthed in a subsequent amendment to the Federal Rules of Civil Procedure in 1966, standardizing the “opt-out” class action.  In 1971, the U.S. Supreme Court extended the Exchange Act’s antifraud protections to private litigants, including new class action litigants.

            Since 2000, U.S. investors have recovered billions of dollars from corporate malefactors under these provisions.  In fact, nine securities fraud class actions netted investors more than $1 billion each in recovery, including more than $7 billion recovered from banks involved in Enron, and more than $6 billion for WorldCom investors.  One third of these “mega settlements” involved foreign issuers, including Tyco International, headquartered in Bermuda since 1997, Nortel Networks Corp., a Canadian telecom interest headquartered in Ontario, Canada, and Royal Ahold, an international retailer based in Amsterdam, Netherlands.

            The Exchange Act does not explicitly provide for extraterritorial application against foreign issuers for transactions on their home stock exchanges.  U.S. courts, however, have applied a so-called “conduct and effects” test developed by the Second Circuit Court of Appeals to enable American investors to recover in U.S. courts for stock purchase losses suffered on foreign exchanges.  Foreign stocks thus presented very little additional risk because there was recourse to U.S. courts under the antifraud provisions of the U.S. securities laws, just as if the stock had been purchased on the NYSE or NASDAQ.

            But in 2010, a perfect storm swept those protections away.  The mega settlements had created serious angst among well-heeled and politically connected business interest groups, both in the United States and abroad.  Joined by its overseas brethren, the U.S. Chamber of Commerce was steadily convincing U.S. policy makers that the threat of rampant securities fraud liability was running foreign capital from our shores.

            On this backdrop, just before the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was enacted in July 2010, the Supreme Court decided Morrison, a so-called “f-cubed” securities fraud class action.  An “f-cubed” or foreign-cubed securities class action is a private cause of action in which a foreign plaintiff sues a foreign issuer in a U.S. court, seeking losses for transactions that occurred on a foreign exchange.  The Supreme Court affirmed the dismissal of the plaintiffs’ claim in Morrison because the exclusively Australian plaintiffs purchased the Australian-issued securities exclusively on an Australian exchange.  In fact, though some of the underlying fraud occurred here in the United States, American investors were expressly excluded from the Morrison class definition.

            Morrison did not involve claims by American investors for losses suffered on their purchases of securities on foreign exchanges.  The Morrison decision, however, now bars any private action for violations of the U.S. securities laws if the relevant transaction took place on any foreign exchange.  In so doing, the Court’s new “transactional test” unceremoniously wiped out decades of securities class action jurisprudence protecting U.S. investors.

            In Morrison’s wake it is unclear whether pension fund trustees who expend fund assets purchasing stock on foreign stock exchanges still do so without exposing themselves to liability to pensioners for losses on those investments.  No U.S. court has yet taken up the issue, but there are decades of common law applying rigorously high standards to fiduciaries.

            Can trustees head overseas and sue foreign issuers in their own states as Morrison demands?  Yes and no.  Many countries do not offer remedies for secondary market transactions.  Those that do have relatively nascent bodies of law that have not addressed complex issues such as class-wide proof of reliance.  Even where robust securities laws have been enacted, very few countries other than the United States permit opt-out class actions, instead requiring that individual class members vigilantly monitor their own investment portfolios and band together with other aggrieved investors to defray the high costs of bringing suit individually.  And even then, U.S. investors face the very real risk of being “home-towned” in foreign tribunals.  These options are limited.

            There are efforts afoot in Congress to legislatively upend Morrison and to extend the extraterritorial reach of the U.S. federal securities laws.  But such efforts could take some time.  In the meantime, pension fund trustees should contact their congressmen or women to encourage them to support the movement to protect U.S. investors transacting on foreign exchanges with the full force of U.S. securities laws.

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On The Record

“It is difficult to make our material condition better by the best laws, but it is easy enough to ruin it by bad laws.”

Theodore Roosevelt, United States President

Speech in Providence, Rhode Island, August 23, 1902

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Conferences and Educational Seminars


+August 4-8, 2012

National Association of State Retirement Administrators (NASRA) 58th Annual Conference

Resort at Squaw Creek

Olympic Valley, CA

NASRA is a non-profit association whose members are the directors of the nation’s state, territorial, and largest statewide public retirement systems.  NASRA members oversee retirement systems that hold more than two-thirds of the more than $2 trillion in state and local government assets and that provide pension and other benefits to most state and local government employees.  The annual NASRA conference is held exclusively for members and takes place the first week in August every year.  Presentations by informed speakers are on a variety of pertinent subjects, including investment management, world events applicable to the pension industry, actuarial, data processing, health care, and significant happenings in each of the states and territories.


+August 12-15, 2012

National Association of State Auditors, Comptrollers and Treasurers (NASACT) 97th Annual Conference

Grand Hyatt Seattle

Seattle, WA

NASACT was founded in 1915 to allow principal state officials concerned with state financial management to gather annually and discuss issues of mutual interest.  Over the years, state financial management has become increasingly complex and, in response, NASACT has grown to address new needs by offering increased levels of service, training, and networking.  NASACT is also affiliated with the Center for Governmental Financial Management (CGFM), a not-for-profit 501(c)(3) entity created to facilitate NASACT’s mission and goals on an international level.  The association’s Washington office acts as a liaison with congressional committees, federal agencies, and other national associations on issues of interest to NASACT while its Lexington, Kentucky office is the main headquarters for training and development.  NASCAT’s annual conference held each August is the association’s premiere event designed to provide maximum opportunities for state auditors, state comptrollers, and state treasurers to network with each other and hear industry leaders speak on current and emerging issues.


+August 19-21, 2012

Texas Association of Public Employee Retirement Systems (TEXPERS) Summer Forum

Grand Hyatt

San Antonio, TX

A small group of individuals, who were members of several Texas public employee retirement systems, formed TEXPERS in 1989 as a statewide voluntary nonprofit association to provide quality education to trustees, administrators, professional service providers, and employee groups and associations engaged or interested in the management of public employee retirement systems.  TEXPERS Retirement System and Associate Membership have grown substantially, representing $475 billion in assets.  TEXPERS executes its educational mission by organizing two annual conferences for pension trustees to receive information about investments, fiduciary duties, governance, ethics, and legal matters.  This year’s forum takes a look into the financial market, which is up 80% since 2009 and topics to include market risk in several asset classes.



Government Finance Officers Association Conferences


+August 6-10, 2012

GFOA National Training Conference

Minneapolis Marriott City Center

Minneapolis, MN


+August 13-16, 2012

IBEW 3rd District Progress Meeting

Sheraton Station Square

Pittsburgh, PA


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Scott + Scott LLP is a nationally recognized law firm headquartered inConnecticut with offices in New York City, Ohio and California. The firm represents individual as well as institutional investors who have suffered from corporate stock fraud. Scott+Scott has participated in recovering billions of dollars and achieved precedent-setting reforms in corporate governance on behalf of its clients. In addition to being involved in complex shareholder securities and corporate governance actions, Scott+Scott also has a significant national practice in antitrust, ERISA, consumer, civil rights and human rights litigation. Through its efforts, Scott+Scott promotes corporate social responsibility.

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