The Federal Housing Finance Agency's reported mortgage-backed securities suits against a slew of major banks haven't yet been filed. But if you want to know what they're likely to look like, check out Mass Mutual's 168-page MBS complaint against Bank of America, Merrill Lynch, Bear Stearns, and J.P. Morgan, filed Thursday. (It's so big the Massachusetts federal court docket splits it into four parts: here, here, here and here.) Or you could look at AIG's $10 billion megasuit against BofA, Countrywide, and Merrill, filed on Aug. 8, or Allstate's 114-page complaint against Goldman Sachs on Aug. 15, or U.S. Bank's MBS breach of contract suit against BofA, which came at the beginning of this week.
All of those complaints -- and many, many more raising allegations that big banks misrepresented the quality of the mortgages underlying the asset-backed securities they packaged and sold -- were filed by the law firm representing FHFA in its MBS investigation: Quinn Emanuel Urquhart & Sullivan. And that's no accident. Quinn Emanuel, a 450-lawyer firm whose partners take home an average of more than $3 million a year, made a conscious decision more than three years ago to push into structured finance litigation against money-center banks, at a time when most litigators didn't know the first thing about these instruments. In a way, the anticipated FHFA suits are the culmination of Quinn Emanuel's four-year investment in MBS litigation.
Before 2007, Quinn Emanuel was usually competing for a seat on the banks' side of the table. Then name partner John Quinn, a onetime Cravath, Swaine & Moore lawyer, had a revolutionary thought. Quinn Emanuel doesn't have a big corporate practice, he reasoned, so there were no conflicts to keep the firm from suing financial institutions. Rather than vie with a pack of premier law firms for bank business, he decided the firm should give up its relationships with banks and accounting firms and start representing corporate clients with claims against big banks. "We deduced there weren't very many prestigious law firms willing to be adverse to financial institutions," name partner William Urquhart told me Friday.
The firm's New York office was perfectly positioned for the new practice area. Quinn Emanuel New York lawyers represented the trustee in the Parmalat bankruptcy, so they'd already had some experience litigating against banks. And litigators Peter Calamari and Philippe Selendy had at least a glancing knowledge of structured finance from cases they'd handled against UBS and Bear Stearns. So when the housing bubble burst and mortgage-backed securities began to crater, Calamari, Selendy, and structured finance partner Jonathan Pickhardt hunkered down to learn all they could about the instruments -- before Quinn Emanuel even had a single MBS client. "We invested an enormous amount of lawyer time to gain a deep, deep understanding of mortgage-backed securities," Urquhart said.
"We had the expertise, and we had the horsepower," added Calamari. "By the spring of 2008, it was apparent residential mortgage-backed securities were a disaster."
The firm's first MBS client was MBIA, the bond insurer. In October 2008, as the economic crisis worsened, Quinn Emanuel filed MBIA's suit against Countrywide in New York state supreme court. That litigation produced some landmark MBS decisions from Judge Eileen Bransten, who refused to dismiss MBIA's contract and fraud claims, ruled that MBIA can use statistical sampling to determine the percentage of deficient underlying mortgage loans, and granted the insurer access to discovery on the relationship between credit rating agencies and MBS issuers. Other businesses with MBS investments -- including Mass Mutual, Allstate, and Assured Guranty -- saw how the MBIA case was going and came to Quinn with their own claims. In October 2010 the FHFA disclosed that it had hired Quinn to analyze its potential MBS claims.
The work has already paid off big for Quinn Emanuel, even though MBS settlements are so far a rarity. (Two Quinn clients, Assured and the FHFA, have reached multibillion MBS settlements with BofA; the previous FHFA settlement involved mortgage loans Fannie Mae and Freddie Mac bought directly from Countrywide for their own securitizations; the expected new FHFA suit will center on mortgage-backed securities Fannie and Freddie invested in.) Unlike traditional plaintiffs firms, Quinn bills about 90 percent of its MBS cases at hourly rates, rather than on contingency. The volume of MBS litigation, in combination with the firm's booming IP practice, has made Quinn Emanuel one of the three or four most profitable firms in the country.
Calamari told me that the MBS wave won't last forever. New York has a six-year statute of limitations on fraud and contract claims; other states have narrower windows. The FHFA cases are reportedly being filed now to beat a three-year statute. "It's clear that deadlines are coming," Calamari said.
But the end is near only for new filings. When it comes to results of the MBS litigation, we're just at the beginning.
(Reporting by Alison Frankel)
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