A top Manhattan class-action lawyer spread anxiety across trading desks recently when he identified 27 traders by name in a lawsuit alleging that their employers colluded to rig trading in Fannie Mae and Freddie Mac bonds.
Now, the lawyer’s suit is effectively on hold — meaning that any evidence he collected could remain under wraps, while the traders may have no legal venue for answering any questions the filing may have raised.
That’s because Dan Brockett, the lawyer at Quinn Emanuel Urquhart & Sullivan LLP who drafted the suit, lost his attempt this month to lead a proposed class action accusing nearly a dozen banks of ripping off pension plans and others through collusion and fraud.
Instead, the decision by U.S. District Judge Jed Rakoff means that a similar suit will go forward against at least 10 banks, led by two other law firms, Scott + Scott and Lowey Dannenberg.
Brockett’s suit was akin to several previous class actions that have made him a nemesis of Wall Street. His firm says it has won more than $35 billion in damages from banks. That includes $25 billion for the Federal Housing Finance Agency over toxic mortgage-backed securities and nearly $2 billion for investors who claimed they were cheated by banks in the market for credit default swaps.
But Brockett’s latest suit had a twist: Early in the process, even before a court rules on whether to certify a class action, Brockett took the unusual step of identifying more than two dozen traders as “key personnel” on their firms trading desks.
His suit stopped short of accusing the traders themselves — but raised tantalizing questions about the substance and sources of the information he gathered in a preliminary investigation.
“We’re disappointed we weren’t chosen as the lead but we support the plaintiffs’ case and hope they get a good recovery,” said Brockett, who declined to discuss the evidence he collected.
It’s unclear to what extent, if at all, the lead attorneys will adopt Brockett’s legal theory that reduced trading commissions resulting from the U.S. government’s takeover of Fannie Mae and Freddie Mac during the global financial crisis prompted bank employees to cut corners. The plaintiffs have until Thursday to file a consolidated complaint laying out their theory.
Scott + Scott and Lowey didn’t respond to requests for comment.
Quinn Emanuel, in partnership with Robbins Geller Rudman & Dowd LLP, spent about $750,000 on its preliminary investigation, about double the amount spent collectively by the two firms picked to lead the case, according to a transcript of an April 29 hearing. Quinn and Robbins together have 1,000 lawyers worldwide compared with about 113 at the combined Scott and Lowey firms.
“Our firm did a 10-month investigation, interviewed well-placed industry insiders, including the head of one of the agency desks at one of the defendants, and several industry traders at the defendants,” Manisha Sheth of Quinn Emanuel told Rakoff during the April 29 hearing.
Rakoff said his decision to appoint Scott and Lowey as lead counsel was influenced by the fact that they had the largest client, the Treasury of Pennsylvania, which he understood would be actively engaged in the direction of the case.
In March, Brockett drew wide attention on Wall Street after he listed the names of the bank employees. As common as investor lawsuits against Wall Street banks are, they almost never identify employees by name in their preliminary stages. None of the other 10 lawsuits filed against the banks by other firms named as many individuals.
Rakoff will soon decide whether the case will have class action status. He has said in court that he’s committed to a May 4, 2020, trial date. In choosing Scott and Lowey, Rakoff said his only concern was whether those firms had the resources to litigate the case on their own.
Last June, Bloomberg News reported that the Justice Department had opened a criminal investigation into whether some traders manipulated prices in the market for unsecured bonds, known as agencies, issued by the government-backed companies. The size of that market runs into the hundreds of billions of dollars. No individuals or banks have been charged.
All of the defendant banks in Brockett’s civil suit had traders identified in the complaint. Six were associated with Deutsche Bank AG, and five each with UBS Group AG and FTN Financial Securities Corp. Other defendants include Bank of America Corp., Barclays Plc, BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley. The banks have declined to comment.
The lawsuit filed by the Scott and Lowey firms identify the same banks except Morgan Stanley as defendants but single out just four specific traders as examples of the revolving door on bond-trading desks. It also alleges the misconduct began several years earlier, in 2009, and ran only to April 2014.
Antitrust experts said the lead firms could pick pieces from the Quinn Emanuel complaint or stick with the lawsuit as initially proposed. Cases can change, however, once plaintiffs begin receiving evidence from the banks, they said.