The most dramatic moment at the Sept. 21 hearing on Bank of America's proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors came near the end, when Gibbs & Bruns partner Robert Madden stood up to address Manhattan federal judge William Pauley's concerns about how the settlement came to be. Tall and clear-spoken, Madden captured the judge's attention as he explained that his clients, a group of 22 large institutional investors, hadn't entered a sweetheart deal with BofA, but had banded together to force the bank to pony up billions to investors for claims BofA thought it would never have to deal with.

"The problem was that these repurchase claims were lying fallow," Madden said, according to the transcript of the hearing. "No one was doing anything. None of (the investors now objecting to the deal) were doing anything. And, I'm sorry to say, the trustee wasn't doing anything. Limitations were running on those claims, and nothing was happening."

Or was it?

I've learned that in the summer of 2010, as Gibbs & Bruns began to push Countrywide MBS trustee Bank of New York Mellon to act on its assertions that mortgages underlying the Countrywide securities were deficient, another group of Countrywide MBS investors was finalizing its own notice of default to serve on BNY Mellon. Members of the RMBS Clearinghouse, run by former Patton Boggs partner Talcott Franklin, had undertaken an extensive analysis of the underlying Countrywide mortgages, and, according to two sources familiar with the Clearinghouse's activities, were on the verge of sending BNY Mellon a notice that would trigger put-back litigation.

The asset management firms BlackRock and PIMCO were key members of Franklin's Clearinghouse. But they were also Gibbs & Bruns clients. On Aug. 4, 2010, Gibbs & Bruns partner Kathy Patricksent an email to her MBS clients, including BlackRock, PIMCO, the New York Federal Reserve Bank, and MetLife. In that email, Patrick made it clear that Gibbs & Bruns clients should not support the Clearinghouse's effort.

"Since some of you were previously in the Clearinghouse, it may be that Mr. Franklin believes (mistakenly) that he is authorized to send a notice of default on your behalf," the email said. "If you have not already done so, it is important that you promptly advise him that he is not authorized to send a notice of default on your behalf ... You should also make clear that he should not include your bonds in the count of any bonds he uses to reach the percentages required to tender such a notice."

After Patrick's email went out, PIMCO and BlackRock left the Clearinghouse, which never sent its notice of default to BNY Mellon. Gibbs & Bruns's clients were left as the only investors pushing the trustee to act on their breach-of-contract claims against Countrywide successor BofA.

Patrick told me there was nothing inappropriate about her confidential email to her own clients. Nor did any action by her clients prevent the Clearinghouse from proceeding without them. (More on both points below.) Moreover, she said, Madden's comments to Judge Pauley were true: Gibbs & Bruns's clients were the only Countrywide MBS investors who took meaningful action to enforce their claims.

Nevertheless, in a deal that has generated so much controversy -- including complaints that the Gibbs & Bruns group shut other investors out of the settlement process -- the Kathy Patrick email is going to give opponents of the proposed $8.5 billion agreement new ammunition. At the very least, the new disclosures will mean more complications and delay for supporters of the embattled settlement.

This story begins back in 2009, when Tal Franklin (who did not return my phone calls) had the brilliant idea of setting up a sort of dating service for MBS investors. Because investors have to have significant voting rights to demand action from securitization trustees, Franklin devised a sort of dating service for MBS holders. They could register their bonds with the Clearinghouse, then investors with holdings in particular trusts could team up to obtain the requisite voting rights for asserting put-back claims. The Clearinghouse attracted some of the biggest MBS investors in the country, including Fannie Mae, BlackRock, and PIMCO.

Franklin wasn't the only lawyer interested in mortgage-backed securities litigation, though. By February 2010, PIMCO had already retained its longtime lawyers at Gibbs & Bruns to represent it in investigating potential MBS claims. That month, Gibbs & Bruns participated in a PIMCO-organized conference for MBS investors. According to Patrick, Franklin also spoke at the conference, making a pitch for investors to join the Clearinghouse. Patrick and Franklin spoke once on the phone later that month, Patrick said. Since then, they haven't talked.

BlackRock was at the February 2010 conference. By April or May, it had also signed a client agreement with Gibbs & Bruns. (Kathy Patrick goes way back with BlackRock: she represented a predecessor mutual fund in a 1990s case involving for-profit prisons in Texas.)

On June 17, Gibbs & Bruns sent the first letter on behalf of its clients to BNY Mellon. The letter, according to Patrick, asserted that the securitization trustee was obligated to take action on non-performing Countrywide mortgages. Gibbs & Bruns also demanded a meeting with BNY Mellon's then-lawyers at Pillsbury Winthrop.

Meanwhile, a leading member of Franklin's Clearinghouse, Bill Frey of Greenwich Financial, was pulling together data on Countrywide MBS defaults, based on first-lien mortgages BofA agreed to modify despite second-lien mortgages on the same property. (Frey subsequently discussed the strategy at an October 2010 MBS investors' conference organized by David Grais of Grais & Ellsworth.) Frey found, according to his comments at that conference, "defaults in every single (Countrywide MBS) trust." Fannie Mae, another Clearinghouse member, reviewed and ultimately endorsed Frey's analysis.

Throughout the early summer of 2010, Clearinghouse leaders held long conference calls to decide how to proceed against Bank of New York Mellon and Countrywide, based on Frey's evidence of default. By early August, Franklin had prepared a draft notice of default to be sent to BNY Mellon. I've been told the draft notice -- which I've been unable to obtain -- included the evidence Frey had assembled of specific breaches in specific trusts.

Then Patrick sent the Aug. 4 email to her clients and the Clearinghouse effort fell apart.

"Several of you have contacted me to indicate that the alternative clearinghouse organized by Tal Franklin may be on the verge of sending a letter to Bank of New York declaring BONY in default of its obligations under the Countrywide (pooling and servicing agreements)," the email said. "That is not in your interests."

Gibbs & Bruns, the email said, believed it was making progress with BNY Mellon and did not want that progress to be halted by the Clearinghouse notice of default. "We were aggressively pushing BNY Mellon to take action throughout the summer," Patrick told me. "Our clients were understandably anxious that a lawyer they had not engaged was purporting to act on their behalf."

Patrick said the email, which was sent only to her clients, didn't seek to squelch the Clearinghouse, but just to remind her clients to make sure Franklin knew what they wanted to do. "All our clients did was say, 'You can't use our holdings (to reach the 25 percent voting rights threshold),'" Patrick told me. "If the Clearinghouse had 25 percent in any deal and had information indicating default, they should have sent the notice. I don't know why they didn't."

They didn't because without PIMCO and BlackRock, the Clearinghouse couldn't muster the requisite voting rights. The other Clearinghouse investors were effectively stranded. And that leads to a question that has dogged supporters of the proposed $8.5 billion BofA settlement: Why didn't Gibbs & Bruns invite more Countrywide MBS investors and their lawyers into talks with BNY Mellon and BofA? I've previously reported on AIG's claim that Patrick didn't return a call from its lawyers at Quinn Emanuel Urquhart & Sullivan (Patrick said the Quinn lawyer who called didn't identify himself as counsel to AIG) and David Grais's assertion that he was told he could not participate directly in settlement talks (Patrick has said that Grais's discussions were with BofA and the trustee, not her). Patrick has always said that she responded to any Countrywide MBS investors who contacted Gibbs & Bruns, but she declined to disclose whether Clearinghouse members who supported the draft notice of default subsequently called Gibbs & Bruns, citing client confidentiality.

After BlackRock and PIMCO made it clear that they would not support the Clearinghouse's letter to BNY Mellon, Gibbs & Bruns continued to pursue the trustee. Patrick sent the bank a letter on Aug. 20, following an unsuccessful meeting with BNY Mellon's Pillsbury lawyers. On Sept. 3, the trustee told Gibbs & Bruns that it did not intend to take any action on her letter. Patrick told me she received BNY Mellon's letter in the middle of the day. By day's end, she said, she was circulating a draft notice of non-compliance among her clients.

Gibbs & Bruns made the final version of that letter public in October 2010. One source familiar with Franklin's Clearinghouse draft notice told me the Gibbs notice read like a "watered down" version of Franklin's draft, "with less evidence."

Patrick heatedly rejected the suggestion that she borrowed strategy or language from Franklin or the Clearinghouse. She never even saw his draft letter to BNY Mellon, she said, nor did she receive any Clearinghouse materials from her clients. The notice of deficiency Gibbs & Bruns sent to the trustee, she said, "was based on binders of evidence I and my team put together over the course of months of investigation, none of which came from the Clearinghouse."

Patrick also rejected speculation that BlackRock backed away from the Clearinghouse effort and threw in with Gibbs & Bruns because it didn't want to take a hard line with Bank of America, which still owned 34 percent of the asset manager in the summer of 2010. (David Grais raised the issue of BlackRock's alleged conflict of interest in Walnut Place's petition to intervene.) BlackRock had already signed on with Gibbs & Bruns by the time the Clearinghouse draft default notice was circulating, she said. The asset manager didn't change course in August 2010, according to Patrick. It had already picked its course.

And as Gibbs partner Bob Madden told Judge Pauley at the Sept. 21 hearing, that course forced Bank of America to the negotiating table for a year of hard-fought talks. "This was no effort to help Bank of America. This was an effort to bring Bank of America to justice" Madden said. "This was no collusive, self-selected group of people who decided to get in a room with Bank of America and cut a sweetheart deal."

Will Judge Pauley agree -- or will news of the Clearinghouse's aborted pursuit of BoA and BNY Mellon lead him to authorize discovery on that question? I bet I'm not the only one who can't wait to find out.

(Reporting by Alison Frankel)

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