David Cohen filed a reply to the response by Point Blank Solutions in opposition to Cohen's motion to lift the stay on the appeal of the derivative settlement, pending in the Second Circuit Court of Appeals.
The reply consists of a broad disparagement of any potential negative consequences if the Second Circuit Court of Appeals overturns the settlement.
2. The main thrust of the Debtor's Response is the wholly unsupported allegation that if Mr. Brooks is convicted of one or more charges in his ongoing criminal trial (which shows no signs of concluding anytime soon), the asset forfeiture that might result from such conviction could deprive Mr. Brooks of the ability to repay the incentive and equity-based compensation sought by the SEC on behalf of the Debtor pursuant to SOX § 304. Yet there is absolutely no support for the proposition that Mr. Brooks has insufficient funds to satisfy both the potential asset forfeiture arising from his criminal case and the repayment of compensation to the Debtor under SOX § 304. Instead, the Debtor asks the Court to speculate about Mr. Brooks' financial situation as well as the Government's intentions in the event of a conviction.
As to the issue of the settlement funds escrow, Mr. Cohen states the escrow will not simply be dissolved, but the subject of litigation, and subject to the same form of automatic stay being litigated here.
Mr. Cohen does raise the interesting argument that if the class action settlement were dissolved and the class action re litigated, as a securities claim, itself would subject to the automatic stay, and be subordinated as a result of the bankruptcy.
The reply also responds to the RNI case cited by Point Blank Solutions, by stating that case was close to plan confirmation and the appeal was not in an advanced stage, so is not comparable to this motion. The other cases are not addressed.
The reply does not restate the original claim that the appeal is not subject to the automatic stay.
The appeal does seem subject to the automatic stay, and the issue is whether the court will lift that stay.
The 304 recovery represents the largest potential recovery, especially for equity investors.
I think there are two issues which weigh against it being in the best interests of the estate for the appeal to be lifted now.
First is the unknown results of the ongoing criminal action. It is unclear to me how the assets of Mr. Brooks will be allocated if the US wins the criminal case against Mr. Brooks. The court has already restrained around $200 million (I think) from Mr. Brooks. While it certainly seems fair that any proceeds from this action should be subordinated to investors, neither Point Blank or David Cohen have made such a plain claim. It seems to be unresolved.
Second, if the derivative settlement is terminated, it will also negate the class action settlement, per the settlement terms. The class action claim should be subordinated in bankruptcy as an equity claim, but if there is $200 million in assets being pursued, and if (even) a fraction of that is recovered, the estate is no longer insolvent and the pursuit of those funds by the class action participants will surely be engaged.
The one factor which appears to weigh in favor of allowing the appeal to proceed is judicial economy. If the appeal delayed is the same as having the appeal denied, then it seems to be surely in the best interests of fairness and judicial resources to lift the stay. At some point, the appeal should proceed, if Mr. Brooks has funds available and the SEC does prosecute the 304 claims, or even to allow the class action to be prosecuted by a more investor oriented law firm. The settlement handsomely rewarded plaintiff attorneys with very little penalty to the former officers. It is amazing to me the settlement was approved.
I wonder how important it is however for an immediate ruling. Oral arguments were heard in January 2010 so a ruling must be imminent. If there can be a process by which the ruling can be sealed until a more appropriate time, that seems the best course.
If and when the Appeals Court overturns the settlement, it would seem likely the case will be returned to District Court, or in this case to Bankruptcy Court, and the settlement process will have to begin anew. No end is in sight.
This is an interesting case which encompasses much public policy.
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