(Reuters) - On a fateful day in 2010, Philippe Selendy and Manisha Sheth of Quinn Emanuel Urquhart & Sullivan took the train to Washington, D.C., to pitch officials at the Federal Housing Finance Agency on a radical proposal: FHFA should hire Quinn Emanuel to sue the banks that sold toxic mortgage-backed securities to Fannie Mae and Freddie Mac, FHFA’s wards. The firm already had MBS expertise, thanks to partner Peter Calamari’s groundbreaking litigation for the insurer MBIA, and Quinn partner Shon Morgan was already advising Fannie on potential claims.
Selendy and Sheth laid out a grand vision in which Quinn Emanuel would use federal securities laws and the statute that created FHFA to go after the entire MBS industry in federal court. The banks would hire an army of lawyers to fight the suits, they told FHFA officials, but Quinn Emanuel pledged to match it.
“That was our goal, to level the playing field,” Selendy said in an interview Thursday.
This story, of course, has an ecstatic ending for FHFA. Quinn Emanuel (and conflicts counsel from Kasowitz Benson Torres) filed 18 suits for FHFA in 2011. As expected, the banks put up a ferocious defense, hiring a collection of prestigious securities lawyers to challenge FHFA on issues ranging from the timeliness of its filings to its loan-by-loan evidence of misconduct. Quinn and FHFA nevertheless won just about every skirmish, whether it was a discovery dispute, a bench trial or a petition for Supreme Court review.
As of Wednesday, when FHFA announced a $5.5 billion settlement with the Royal Bank of Scotland, the agency’s total recovery from MBS suits is more than $25 billion. The only remaining piece of the litigation is Nomura’s appeal of a post-trial judgment against the bank – and Reuters reported last November that FHFA seems poised to win that as well.
Quinn Emanuel did just fine, too. The firm worked on an hourly basis for FHFA, at what Selendy said was a discounted rate. He estimated that over the six years of the litigation, Quinn lawyers worked upward of 100,000 hours. As of late 2015, Quinn and Kasowitz had been paid $406.7 million, according to reporting by my Reuters colleague Nate Raymond. Selendy told me Thursday that the firms’ total amounts to less than 2 percent of FHFA’s recovery, but that’s $500 million.
As Selendy reflected on the six-year litigation in our interview, he emphasized that FHFA’s partnership with Quinn Emanuel doesn’t have to be a unique success for the federal government. He and his firm want other federal agencies (and state attorneys general) to learn from FHFA’s example that the government can leverage private lawyers’ expertise for the benefit of taxpayers.
“My hope is that the success of these cases will help spur” similar deals, Selendy said. “When there are cases when private counsel have perfected methods, it’s important for public agencies to consider that.” In particular, he said, the government should rely on private lawyers to take on cases involving “industries that are extremely well defended,” such as energy companies. But even in one-off cases, he said, federal agencies can replicate the FHFA model.
It’s important to remember that FHFA brought its civil suits against MBS issuers long before the Justice Department and the Securities and Exchange Commission went after the banks. FHFA and its law firms also pursued a different strategy than the rest of the federal government, reevaluating millions of underlying mortgage loans to show the entire MBS system was rotten. The agency and its lawyers had already won billions of dollars in settlements by the time the rest of the federal government reached its first MBS deal.
The federal government worked with private lawyers in at least two notable cases before Quinn Emanuel’s FHFA arrangement. In the early 1990s, the Federal Deposit Insurance Corporation hired David Boies, then at Cravath Swaine & Moore, to pursue claims stemming from the savings-and-loan crisis. The Justice Department subsequently brought Boies back into service for its antitrust litigation against Microsoft. State AGs frequently call upon private firms to handle novel or complex cases. The most famous example is their litigation in the 1990s against tobacco companies. Many states are now counting on private firms in litigation against pharmaceutical companies they blame for widespread opioid addiction.
After FHFA brought in Quinn and Kasowitz, the National Credit Union Administration hired private firms to prosecute its MBS claims on behalf of failed credit unions. Unlike the FHFA’s firms, NCUA counsel from Kellogg Huber Hansen Todd Evans & Figel and Korein Tillery worked on a contingency basis. By October 2016, they had earned more than a $1 billion in fees, 23.4 percent of NCUA’s recovery of $4.5 billion.
Had Quinn Emanuel and Kasowitz worked on the same terms for FHFA, they would have earned $5.8 billion. But Selendy, who credited FHFA general counsel Alfred Pollard and deputy GC Stephen Hart for their pragmatism, said he has no regrets about his firm’s hourly billing arrangement with FHFA. His priority, he said, was that the government stood behind Quinn’s full-bore litigation strategy. The end result, he said, proves that the government received excellent value for the cost of using private firms – a message he said Quinn is very interested in sending to other agencies.
“This has been an honor,” Selendy said. “It’s a rare opportunity in the lifetime of a lawyer to combine private practice with public good.”
The trick now for Selendy and Quinn is to make those opportunities a bit less rare.