The first scheduled trial in the Federal Housing Finance Agency’s $200 billion litigation assault on Wall Street is still many months away, though at the rate the banks are settling, there may not be much left to try. The banks say that FHFA, the conservator for Fannie Mae and Freddie Mac, got lucky and drew a sympathetic judge. All we know is that the FHFA hit the jackpot with its lead lawyer, Philippe Selendy of Quinn Emanuel Urquhart & Sullivan.
FHFA’s biggest triumph yet came on Oct. 25, when JPMorgan Chase & Co. agreed to pay $4 billion to resolve claims that it misrepresented the quality of so-called private-label mortgage-backed securities it sold to Fannie and Freddie. The bank agreed to pay an additional $1.1 billion to claims relating to single-family mortgages (a wider pact between JPMorgan and federal regulators is still being hammered out, but the $5.1 billion FHFA portion is final). Of the 18 financial institutions sued by FHFA in 2011, at least five have settled, including Citigroup Inc. and UBS AG. Those settlements have gotten progressively more punitive, making Citi look smart for getting out early.
Lawyers for the banks have argued that they’re being coerced into settling by U.S. District Judge Denise Cote in Manhattan, who has sided against them on crucial pretrial issues. In May 2012 Cote rejected the banks’ silver-bullet defense: that FHFA’s claims are time-barred. The U.S. Court of Appeals for the Second Circuit affirmed in April, and a cert petition to the U.S. Supreme Court fell flat on Oct. 7. What really got the banks riled up, however, were a series of rulings denying pretrial discovery into Fannie and Freddie’s own mortgage practices. The banks say Cote blocked them from making an essential defense argument—namely, that Fannie and Freddie were keenly aware of the dangers of buying and bundling mortgage-backed securities. The banks pleaded with the Second Circuit to intervene, but the appeals court sat on the request for more than a year before denying it in July.
The FHFA litigation may be a classic case of fortune favoring the bold and well-prepared. When the financial crisis hit, the country’s oldest law firms were conflicted out of suing the big banks. Litigation shops like Quinn Emanuel; Kasowitz, Benson, Torres, & Friedman; and Susman Godfrey eagerly filled that vacuum. All those firms—including Kasowitz Benson in its role as cocounsel in the FHFA litigation—have scored big wins for MBS investors. But Quinn Emanuel’s structured finance litigation practice, led by Selendy, has proven particularly adept at taking on the banks.
At the relatively tender age of 46, Selendy is now overseeing scores of Quinn attorneys, who are working on some of the most significant cases facing the banking industry. “Philippe has been a pioneer in this space from day one,” said Michael Carlinsky, head of complex litigation at the firm. The work has undoubtedly been very lucrative for Quinn Emanuel, though it’s worth noting that the firm is not handling the FHFA cases on a contingency-fee basis.
In one of his first financial crisis cases, Selendy represented the bond insurer MBIA Inc., which claimed that Countrywide Financial Corp. duped it into providing financial guaranty insurance for faulty mortgage-backed securities. Way back in 2010, Quinn Emanuel won a ruling that MBIA could use statistical sampling to build its case against Countrywide, rather than going through the laborious process of proving that the 300,000 home loans at issue conformed to lending standards. The ruling gave MBIA newfound leverage over Countrywide’s parent, Bank of America Corp., which finally resolved the case in May as part of a global $1.7 billion settlement with MBIA.
The MBIA case “paved the way” for a similar ruling by Cote allowing sampling in the FHFA cases, Selendy told us. “At the end of the day, we’re students. One thing that distinguishes our team is that we learn from every source we can, which includes other cases we have,” he said.
As you might expect, Selendy said he doesn’t think he won the lottery by drawing Judge Cote in the FHFA cases. She hasn’t unfairly favored either side, he said. “The data we have demonstrates a very high rate of material misrepresentations,” he said. “The problem for the defendants is that they have terrible cases on the merits.”