Are State AG Deals Class Actions in Disguise?

By Alison Frankel

Class Action Lite? Plaintiffs Lawyers in Muni Bond Derivative MDL Say BofA’s Settlement with State AGs Is De Facto Class Action without Oversight; Judge Refuses to Enjoin Deal But Calls for Court Approval of Notices

State attorneys general have done an admirable job of stepping up to confront the challenges of the financial crisis (though of course, we hasten to add, those same AGs haven’t missed the chance to garner heroic headlines for their efforts). State regulators took the lead in forcing banks to buy back auction rate securities from most customers when the ARS market froze in February 2008, and they’re now leading an effort to persuade mortgage issuers to write down loan principal in an acknowledgment of mortgage servicing deficiencies.

But a brewing dispute involving Bank of America’s December 2010 settlement with 20 state AGs who alleged antitrust violations in the municipal bond derivatives market raises some provocative questions about whether regulatory settlements are supplanting private class actions—and whether they should.

Last December, 20 state attorneys general announced that they’d reached a $67 million settlement with BofA to resolve allegations that BofA was part of a nationwide scheme to rig bids and allocate market share in the marketing and sale of municipal bond derivatives. The state AG deal was part of BofA’s multifaceted, $137 million resolution of various state and federal investigations of the muni bond derivatives market.

Notably absent from the December 2010 deal were plaintiffs in a private multidistrict litigation raising similar allegations of antitrust violations in the muni bond derivatives market. And in January, co-lead class counsel from Boies, Schiller & Flexner; Susman Godfrey; and Hausfeld filed a fascinating 39-page motion with Manhattan federal district court judge Victor Marrero, who’s overseeing the muni bond derivatives MDL, seeking “to protect the interests of the putative class and preserve this MDL court’s jurisdiction.”

The motion argues that BofA’s settlement with the AGs amounts to “a national opt-in settlement for the class claims in this case [that] competes with the class mechanism presided over by this court.” Under the procedure BofA and the states established, the plaintiffs’ brief asserts, class members across the country (and not just in the 28 states whose AGs eventually signed the deal) would receive a written notice of the $67 million settlement and would be invited to participate in it. In effect, the filing argues, BofA and the AGs had reached a class action settlement without the inconvenience of dealing with a judge or class counsel.

“As presently contemplated, only BoA and the AGs of the settling states will get to decide what is, or is not, included in any written communications to the class,” the brief says. “The proposed settlement will thus undermine and thwart the authority of this court and class counsel. Further, the proposed settlement with potential opt in class members is based on negotiations not authorized by class counsel, but nonetheless will not be subject to any fairness procedures.”

Class counsel William Isaacson of Boies Schiller told us the BofA settlement with the AGs is unprecedented in his experience. “Now there are two ways to do a class action?” he said. “It makes you wonder about the whole body of class action law and court supervision.”

The plaintiffs sought to block BofA and the AGs from sending written notices to class members, or, in the alternative, to require that any such communications be approved by Judge Marrero before being sent out.

BofA, represented by lead counsel Kevin Sullivan of King & Spalding, countered in a 31-page memo that the AG deal isn’t a class action and doesn’t interfere with class members’ claims. “Class plaintiffs’ motion distorts the AG settlement agreement by incorrectly characterizing it as a class settlement,” the brief says. “The AG settlement agreement simply provides a mechanism for Bank of America to make individual settlement offers to certain putative class members prior to class certification and there is no legal basis to interfere with that process.”

The only unprecedented element of the settlement, BofA asserts, is the class’s attempt to block it. “No case under the All Writs Act or Federal Rule of Civil Procedure 23 [has] granted such relief,” the brief says, when a defendant has reached a broad regulatory agreement that offers putative class members a voluntary opportunity to participate before a class is even certified. “The AG settlement agreement will not immediately resolve all or nearly all of the claims before this court,” BofA argues. “Indeed, it will not even resolve all pending claims against Bank of America in this litigation. Nor will the AG settlement agreement circumvent a settlement pending in this court. As such, there is no basis for an All Writs Act injunction here.”

In a five-page order Tuesday, Judge Marrero walked a middle line. He denied the plaintiffs’ motion to enjoin BofA from proceeding with opt-in notices to putative class members, but said any such notices had to be approved by him first. He also ordered a conference among “the parties” (by which he presumably means class counsel as well as BofA and the AGs) to decide what the notices will say. “Such relief [is] appropriate and the minimum necessary to protect the interests of putative class members in this proceeding, to protect the court’s jurisdiction, and to preserve the court’s ability to render meaningful relief of the claims before it,” he wrote.

Both sides claimed a partial victory, with the plaintiffs pointing to the part of the order that delays notices from going out until they’re approved by the judge and a BofA spokesman highlighting Judge Marrero’s denial of the plaintiffs’ request for an injunction.