Jan. 16 (Bloomberg) -- The U.S. Supreme Court put new limits on shareholders suits against a company's banks and business partners in a ruling that may hinder efforts to recoup billions of dollars lost in frauds at Enron Corp. and HealthSouth Corp.

The justices, voting 5-3, threw out a lawsuit by Charter Communications Inc. investors against two of its suppliers, Motorola Inc. and Scientific-Atlanta Inc. The court said the shareholders didn't show they relied on the alleged deception by the suppliers in making investment decisions.

Allowing additional shareholder lawsuits ``may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets,'' Justice Anthony Kennedy wrote for the court.

Business groups called the case their highest priority in the court's 2007-2008 term. Trade groups representing banks, accounting firms and law firms took an especially keen interest, saying their members might present tempting targets for shareholder lawyers. The ruling will bolster efforts by Merrill Lynch & Co. to block a lawsuit by Enron investors and by UBS AG to defeat claims by HealthSouth shareholders.

The case split the court along ideological lines, with Chief Justice John Roberts and Justices Samuel Alito, Antonin Scalia and Clarence Thomas joining in Kennedy's opinion.

Justices John Paul Stevens, Ruth Bader Ginsburg and David Souter dissented. Stevens wrote that Congress enacted the federal securities laws ``with the understanding that the federal courts respected the principle that every wrong would have a remedy.''

Justice Stephen Breyer didn't participate in the case. He owns stock in Cisco Systems Inc., which is now Scientific- Atlanta's parent company.

The Supreme Court in 1994 ruled 5-4 that federal securities law bars suits for ``aiding and abetting'' another company's wrongdoing. Congress changed the law in 1995 to permit aiding- and-abetting suits by the U.S. Securities and Exchange Commission, but not by private shareholders.

Investors said the 1994 ruling left room for accusations that outsiders took part in a scheme to deceive shareholders, while business groups said those types of claims were barred. The Bush administration largely supported the companies, though using different reasoning.

The case is Stoneridge v. Scientific-Atlanta, 06-43, U.S. Supreme Court.

Ex-Homestore Chief Executive's Conviction Overturned on Appeal

Ex-Homestore Inc. Chief Executive Officer Stuart Wolff won a reversal of his conviction for directing a $67 million fraud at the online home-listings company because the trial judge should have stepped aside, a court ruled.

The U.S. Court of Appeals in San Francisco threw out the conviction and 15-year prison sentence Jan. 14, ruling the trial judge, who held stock in Time Warner Inc.'s America Online unit, should have removed himself from the case. Prosecutors claimed AOL was a party to most of the fraudulent transactions with which Wolff was charged.

``The motion for the district judge's recusal should have been granted,'' a three-judge panel of the court ruled.

The court sent the case back to the Los Angeles trial court, to be reassigned to a new judge for a possible retrial. Wolff's sentence had been among the longest handed down in the U.S. government's crackdown on corporate fraud following the 2001 collapse of Enron Corp.

The case is U.S. v. Wolff, 06-50683, U.S. Court of Appeals for the Ninth Circuit (San Francisco).

Ex-Peregrine Systems President Lenz Pleads Guilty

Ex-Peregrine Systems Inc. President Gary Lee Lenz, whose fraud trial ended in a deadlocked jury, pleaded guilty to making false statements in a case that charged him with helping destroy the once-$4.7 billion company.

Lenz entered the plea yesterday before U.S. District Judge Thomas Whelan in San Diego. Lenz, 60, who was scheduled to go to trial Jan. 29, faces as many as five years in prison and a fine of $250,000.

``Mr. Lenz wants to put this behind him,'' Lenz's attorney, Thomas Bienert, said after the hearing. ``He has been under tremendous stress and expense for almost three years and wants to move forward with his life.''

Prosecutors charged 18 people in the fraud that sent software-maker Peregrine into bankruptcy. Eleven previously pleaded guilty, including former Chief Executive Officer Stephen P. Gardner and former Chief Financial Officer Matt Gless. A jury couldn't reach a verdict on any charges against Lenz and three codefendants in July after a 14-week trial.

Prosecutors later dropped all charges against one of Lenz's codefendants, former Vice President Joseph Reichner. Patrick Towle, a former Peregrine revenue-accounting manager, and Daniel Stulac, who was Peregrine's engagement partner at the now-defunct auditing firm Arthur Andersen, are scheduled to be tried again Jan. 29. Three other defendants have trials pending.

Bienert said he will be allowed to seek probation for Lenz at the sentencing and that the government won't argue for a particular sentence.

``The prosecution notes in the plea agreement that prior to his involvement with Peregrine, Mr. Lenz led a law-abiding life,'' Bienert said. ``This was aberrant conduct and there is little chance of recidivism.''

Assistant U.S. Attorney Eric Beste declined comment.

The case is U.S. v. Gardner, 04-cr-2605, U.S. District Court, Southern District of California (San Diego).

For more verdict and settlement news from yesterday, click here.

New Suits

Betting Association Makes Complaint Over German Gambling Law

An association representing betting companies lodged a complaint with the European Commission over a German law banning Internet gambling.

The Jan. 1 accord is ``a direct contravention of European Union law,'' the European Gaming and Betting Association said yesterday in an e-mailed statement. The association includes PartyGaming Plc and other Web gambling operators.

The new rules, which expire at the end of 2011, ban any form of Web-based gambling or brokering of games over the Internet. German states may order Internet service providers to block gaming Web sites and banks to stop money transfers to them.

``Prohibition is not and has never been a solution,'' Norbert Teufelberger, chairman of the EGBA, said in the statement. ``It is not a responsible approach and cannot be a substitute to an efficient gaming policy.''

The treaty is ``already part of an ongoing legal dispute,'' said European Commission spokesman Oliver Drewes. ``The commission has to decide soon whether it will take this issue forward.''

Drewes declined to say whether the German gambling case or ones against any other countries will be considered in the commission's next batch of legal cases later this month.

For more new suits news from yesterday, click here. For copies of recent civil complaints, click here.

Lawsuits/Pretrial

Punitive Damages Shrink as High Court Reins in Trial Lawyers

A U.S. court crackdown on punitive damages resulted in the second consecutive year of declines and reversals of earlier verdicts, a trend working in favor of companies such as Ford Motor Co.

The Dearborn, Michigan-based automaker in the past five years has been hit with more than $392 million in punitive awards. Limits on such damages have given Ford victories in appeals of two decisions totaling more than $100 million and may help it in hundreds of other product-liability suits.

Punitive damages in the 50 biggest verdicts fell to $1.6 billion in 2007 from $1.8 billion in 2006 and $5 billion in 2005, according to data compiled by Bloomberg. A pivotal U.S. Supreme Court decision last year will aid in appeals and help reduce future awards, companies' lawyers say. The court said defendants can't be punished for harming anyone not included in a case, such as other customers.

``This may well bring sanity to the world of punitive damages,'' said Ford attorney Ted Boutrous, of Gibson, Dunn & Crutcher in Los Angeles. The ruling ``gives defendants not only the ability to challenge punitives as excessive but an avenue to eliminate or prevent such a verdict in the first place.''

The high court's decision, in a case involving Altria Group Inc.'s Philip Morris USA unit, led to orders last year to reconsider awards of $55 million and $52 million against Ford for accidents that killed one person and paralyzed another. The verdicts represent an earnings-per-share effect of 5.7 cents, or 1 percent.

The ruling may also lead to the reduction of a separate $28 million verdict in 2002 against Altria and the reversal of a $49 million verdict in 2005 against the Chrysler unit of DaimlerChrysler AG.

The largest 50 verdicts in all types of U.S. lawsuits, including both punitive and actual damages, rose to $6.9 billion in 2007 from $6.3 billion in 2006.

Punitive damages are added to compensation for actual injuries, to punish a defendant for behavior that goes beyond negligence, such as willful or malicious conduct.

While they can be reversed or reduced after trials, their unpredictability and the bad publicity they bring harms defendants, said Boutrous. They are ``very unsettling for a company that's trying to gauge its status and report to the market,'' he said.

In the past two decades, 22 states including Texas, Ohio and Virginia capped punitive damages, according to the American Tort Reform Association, which supports limits. U.S. Supreme Court decisions brought other restrictions.

For more lawsuits news from yesterday, click here.

Trials

AIG's Greenberg Approved Part of General Re Deal, Witness Says

Maurice ``Hank'' Greenberg, the former chief executive officer of American International Group Inc., approved a key element of a sham reinsurance transaction, a witness testified yesterday at the trial of five executives.

The defendants are accused of conspiring on a deal with General Reinsurance Corp. to let AIG inflate its reserves by $500 million. Former General Re Vice President Richard Napier said Greenberg approved a $5 million fee to General Re for ``accommodating'' AIG on its accounting. Greenberg denies wrongdoing and isn't charged with a crime.

Napier, who pleaded guilty to conspiracy, is the first cooperating witness to testify in the trial of former General Re CEO Ronald Ferguson and four other executives at federal court in Hartford, Connecticut. Prosecutors played a taped phone call from 2000 in which Napier discussed Ferguson and Greenberg, saying the transaction was a ``done deal.''

``Hank and Ron talked and they came to terms at $5 million,'' said Napier on the tape. ``Predictably, once Hank says that's a good deal, there's no more negotiating.''

Napier said the fee was part of an oral side deal that nullified a reinsurance contract that said General Re would pay $500 million in premiums to New York-based AIG for $600 million in coverage. Amy Foote, an attorney for Greenberg, declined to comment.

Under questioning by Assistant U.S. Attorney Raymond Patricco, Napier detailed e-mails, meetings and phone calls in late 2000. Napier said executives created a phony paper trail to make it appear AIG, the world's largest insurer by assets, could lose money when secret side deals guaranteed the company had no risk.

``There's no way that AIG would be looking for General Re to perform under the agreement,'' Napier said as the trial entered its second week. Jurors yesterday heard tapes of calls involving John Houldsworth, who worked at a General Re subsidiary in Ireland that recorded phone lines of employees. He also pleaded guilty to conspiracy.

Napier and Houldsworth, who face as many as five years in prison, are seeking leniency at sentencing for their cooperation.

Ferguson, 65, is on trial with former General Re Chief Financial Officer Elizabeth Monrad, 53; Christopher Garand, 60, a former senior vice president; Robert Graham, 59, a former assistant general counsel; and Christian Milton, 60, AIG's former head of reinsurance.

The case is U.S. v. Ferguson, 06-cr-137, U.S. District Court, District of Connecticut (Hartford).

Pischetsrieder Denies He Knew of Bribes at Volkswagen Trial

Bernd Pischetsrieder, Volkswagen AG's chief executive officer from 2002 to 2006, told a German court he only learned about bribery payments to labor leaders at the carmaker after the scandal broke 2 1/2 years ago.

``I first learned about these things in June 2005, when we received hints about irregularities with a delivery contract,'' Pischetsrieder said at the Regional Court of Braunschweig, Germany, yesterday. ``Four weeks later I knew much, much more.''

Pischetsrieder testified in the trial of former Volkswagen human-resources manager Klaus-Joachim Gebauer and former works council head Klaus Volkert. The case is part of a probe into allegations that from 1995 to 2005 Volkswagen managers bribed worker representatives in exchange for favorable votes on policy.

He didn't know that Volkert received extra bonuses and other illicit benefits, Pischetsrieder said. When Pischetsrieder became chief executive, former personnel manager Peter Hartz told him that Volkert was ``treated like a brand management board member,'' and this, he thought, included the salary.

``I had no reason at the time to think twice about that remark or to ask any questions,'' Pischetsrieder said. ``It seemed adequate to me given his role as the head labor representative of the worldwide workforce,'' he said.

Volkert is accused of demanding illegal bonuses and other payments totaling almost 2.7 million euros ($4 million). Gebauer is accused of organizing ``side programs'' involving prostitutes and extra benefits for worker representatives, costing the Wolfsburg, Germany-based company 1.26 million euros. Both defendants claim their actions didn't harm Volkswagen.

At the time, Volkert was head of Volkswagen's works council, the body representing the carmaker's workforce. Under German law, some company decisions need the council's consent.

For more trial news from yesterday, click here.

Litigation Departments

Shareholder Suit Yields No Damages, $9.5 Million in Lawyer Fees

Plaintiffs' lawyers will take home $9.5 million in a shareholder suit against the Schering-Plough Corp. even though the plaintiffs will get no damages, a federal judge ruled.

U.S. District Judge Katharine Sweeney Hayden made the award because the suit resulted in the New Jersey drug company agreeing to make ``widespread changes to its corporate governance and compliance practices,'' the judge said in the Jan. 14 opinion.

The plaintiffs' splitting the fees are: Morris & Morris in Wilmington, Delaware, Squitieri & Fearon and Abraham Fruchter & Twersky, in New York and the Law Office of Bernard Gross in Philadelphia. The defendants were represented by Lowenstein Sandler and Wachtell, Lipton, Rosen & Katz.

The case is In re Schering-Plough Corp. Shareholders Derivative Litigation, 01-Cv-1412, U.S. District Court.

Thacher Proffitt Names Hans Chair of the Litigation Group

Richard F. Hans was named chair of the litigation and dispute resolution practice group at Thacher Proffitt & Wood effective Jan. 1. Hans, who joined the firm in 2006 from DLA Piper Rudnick Gray Cary, focuses his practice on both director and officer, and professional liability insurance; insurance and reinsurance; banking and securities matters; and corporate governance. He succeeds John M. Woods who held the title from 2003 to 2007.

``We will continue to focus on and grow those areas in which we have a recognized depth of experience, particularly litigation in the financial markets, criminal and regulatory investigations, securities and commercial litigation, corporate governance and insurance,'' Hans said in a statement released Jan. 14.

Thacher Proffitt has more than 300 lawyers and has offices in New York, Washington, White Plains, New York, Summit, New Jersey, and Mexico City. The firm focuses on the capital markets and financial services industries.

For more litigation department news from yesterday, click here.

Court News

West Virginia Justice Refused Earlier Recusal Request for Massey

The chief justice of West Virginia's Supreme Court, asked to step aside in a case involving Massey Energy Co. because its top executive is a friend, refused to do so in another case involving the company, the plaintiff in a coal mining case has said in seeking a rehearing.

The friendship was cited in requests by Harman Development Corp., a coal mining company, to have Chief Justice Elliott Maynard withdraw his decisive vote and to disqualify himself from any rehearing. Maynard voted in November to throw out a $50 million verdict against Massey. Harman lost that ruling.

Owner Hugh Caperton claims Maynard had meals in Monaco with Massey Chief Executive Officer Don Blankenship in July 2006 and dined with him in November. That sort of relationship renders the judge too biased to participate in the case, Caperton argued.

``It's come up before,'' said Massey attorney D.C. Offutt. ``It's well-known they've known each other from childhood.'' Blankenship didn't pay for the European trip, Offutt said.

To support the requests to void Maynard's vote and have him disqualify himself, Caperton's lawyer Bruce Stanley filed pictures of the men and female traveling companions in Monaco.

Maynard didn't return a call for comment placed to his office in Charleston, West Virginia, where the court sits.

The state supreme court issued a 3-2 decision reversing the jury verdict for Harman on Nov. 21. The court will hear on Jan. 24 Caperton's petition to reconsider the case, Offutt said.

The case is Caperton, Harman Development Corporation v. A.T. Massey Coal Co., 33350, Supreme Court of West Virginia (Charleston)

On the Docket

Japan Tobacco Appeals Order to Stand Trial in $1 Billion Fraud

Japan Tobacco Inc.'s Canadian unit and a former tobacco executive will conclude a hearing tomorrow urging a judge to overturn an order requiring them to stand trial. The company is facing charges it helped defraud the Canadian government of about C$1 billion ($1 billion) in the 1990s by avoiding taxes through cigarette-smuggling operations into the U.S.

The Canadian government has asked Ontario Superior Court Judge Ian Nordheimer at the same hearing to overturn the part of the May 30 ruling and order six other tobacco executives to stand trial.

The case is Regina v. JTI-MacDonald Inc., Ontario Provincial Court (Toronto).

For Bloomberg articles by lawyers on litigation topics, click here.

For news about bankruptcy litigation, click here. For news about intellectual property litigation click here.

To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York at eamon2@bloomberg.net.

Last Updated: January 16, 2008 09:30 EST