By Chris Bruce
Two Gibson Dunn litigators scored the latest — and what may prove to be one of their last — victories related to the financial crisis when a New York appeals court ruled the housing market crash, rather than their clients, caused losses at two hedge funds.
Mark A. Kirsch and Christopher M. Joralemon, who have teamed up for the better part of two decades, say this sort of litigation driven by the financial crisis is fading, although they don’t expect the slowdown to last. A new breed of cases will arise sooner or later, Joralemon and Kirsch told Bloomberg BNA.
“Obviously the market is pretty frothy right about now, and when that happens you see some drop-off in financial litigation, but when the market turns and investors are disappointed you’ll see an uptick by disappointed investors,” Kirsch said.
The duo are eyeing structured finance, student loans and auto loans as potential flashpoints when the next downturn comes.
Kirsch and Joralemon have been a team since the early 2000s, when at Clifford Chance they successfully defended Citigroup against $13.2 billion in potential claims arising from financial problems at Italian dairy giant Parmalat that embroiled several major banks.
They joined Gibson Dunn in 2009. “Our timing was fortuitous, as Gibson Dunn was ascendant at the time, and, in our humble view, has been the premier U.S. litigation firm for at least the past seven or eight years,” Joralemon said.
Their most recent win on behalf of Los Angeles-based TCW Asset Management Company was the third in a trio of cases involving the company. In 2011, Kirsch and Joralemon won a case brought by the China Industrial Bank. The suit, which alleged fraud by Morgan Stanley in a swap transaction, also named TCW in its role as the collateral manager of a collateralized debt obligation (CDO) related to the deal.
That case, dismissed in 2011 by the New York Supreme Court, was followed by a suit involving another CDO. Stuttgart, Germany-based Landesbank Baden-Württemberg sued Goldman Sachs and TCW in connection with a $2 billion CDO that again featured TCW as the collateral manager. Judge William H. Pauley of the U.S. District Court for the Southern District of New York dismissed that suit in 2011.
The latest CDO-related win came March 2, when a panel of the New York Supreme Court’s appellate division ruled for TCW in a suit brought by two hedge funds, the Basis PAC-Rim Opportunity Fund (Master) and Basis Yield Alpha Fund (Master). A trial court denied TCW’s motion for summary judgment, but the appeals court reversed.
In an unusual result, the court agreed with TCW that the losses stemmed not from alleged negligent misrepresentation by TCW, but from the housing market crash. The court said the Basis funds failed to counter testimony by TCW’s expert — Glenn Hubbard, dean of Columbia Business School and a former chairman of the U.S. Council of Economic Advisers — who testified that the losses were brought about by “unforeseeable macroeconomic events.”
According to Joralemon, TCW’s role in the case is significant on several levels. Collateral managers, who oversee collateral in structured finance transactions such as CDOs and related instruments, generally weren’t big targets early on, when the post-crisis litigation first started. Instead, most of the focus was on banks that sponsored or structured the transactions.
That changed over time, according to Joralemon, as plaintiffs’ lawyers started looking for other actors. Collateral managers “were obvious targets,” he said, because they selected the assets that ultimately failed to perform.
He also cited TCW’s perspective on the most recent case. “The identity of the client in this story is critical,” Joralemon said. “TCW never wavered in its view that the allegations were baseless, and wanted to pursue the case to its just end.”
It’s head-on-a-swivel time for Joralemon and Kirsch, who see much of the post-crisis litigation winding down even as they watch the underpinnings of new cases take shape. According to Kirsch, a host of ongoing cases will simply run out of time.
The statute of limitations has run on many claims, he said, adding that many still in the pipeline are working their way toward conclusion. “At this point, those claims, if not extinct, will soon become an endangered species,” he said.
Joralemon also sees the endgame for those battles, but says the next few years could be interesting for all the wrong reasons. “There’s a lot going on in structured finance these days that gives me pause,” he said. “There’s the packaging of student loans, there is structured finance that packages rent streams, and there’s auto loans. It’s hard to say what’s going to be the next flashpoint, but if we have another crisis, all of these things will be in play and all of them will generate litigation in the next 10 years.”
Then there are other kinds of crises, the nonfinancial kind that come without warning late on Friday nights. Joralemon, the pro bono partner in New York for Gibson Dunn, cited recent efforts by a team of Gibson Dunn lawyers who helped the family of a man who assisted the U.S. Army in Afghanistan.
The man’s family flew to the U.S. after being granted a visa. After landing at Los Angeles on their way to Seattle, they were immediately detained, according to Joralemon, “for no apparent reason.” Gibson Dunn lawyers received a call when the family failed to arrive as scheduled and went to court to seek their release after learning the family was to be sent to a Texas detention center the next day, Joralemon said. A court recently ordered them freed and the family made it to Seattle, he said.
“I admire those people who at 8 o’clock on a Friday night after a very tough week get a call that says, `Please help this family,’ and spend the next five days fighting to right what was clearly a wrong,” Joralemon said.
That focus on solving problems is at the core of law practice, according to Joralemon. “My son is 9 years old and one day he was explaining to a friend what Dad does,” he said. “My son said, `Lawyers help people solve their problems.’ I’d never said anything like that, but he distilled it and synthesized law practice to its essence. It was a small and intimate point, and I’ll always remember it,” he said.
Different impulses drove Joralemon and Kirsch into law practice. Kirsch’s initial path to being an attorney was straightforward. “I thought it would be very interesting, and I was right,” he said. “Also, one summer when I was a messenger at Bear Stearns, I delivered to law firms and thought they had really nice offices.”
For Joralemon, direction came early on at home. His mother, accustomed to mediating squabbles between Joralemon and his sisters, one day pronounced that he should become a lawyer. That stuck, Joralemon said.
“Even when I grew older, that voice was always in my head,” he said.
To contact the reporter on this story: Chris Bruce in Washington at email@example.com
To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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