Goldman Sachs Group Inc. (GS) has signaled it will fight a U.S. lawsuit over subprime mortgage instruments the same way Bank of America Corp.’s Merrill Lynch unit and UBS AG (UBSN) have challenged similar claims -- by invoking the concept of caveat emptor: Latin for buyer beware.
The strategy may work. By insisting that purchasers of collateralized debt obligations knew what they were getting into, Goldman Sachs is following a well-traveled path. Both Merrill and UBS won dismissal of similar claims that they misrepresented the risks of such assets by saying the buyers were sophisticated enough to know better.
The Securities and Exchange Commission accused Goldman Sachs of creating and selling the CDOs without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the instrument. Goldman Sachs denied any wrongdoing, saying that it provided “extensive disclosure” to customers about the risks.
Goldman Sachs, whose mantra is clients’ interests always come first, has said “these are sophisticated investors who knew what they were buying,” said David Irwin, a former federal prosecutor in private practice in Towson, Maryland. The bank is arguing that the average buyer of this product isn’t some “credit union that didn’t know what it was doing,” he said.
In early 2007, as the U.S. housing market began to falter, Goldman Sachs created and sold the CDO vehicle, known as Abacus, linking it to bundles of subprime mortgages whose value would rise or fall depending on whether homeowners paid them off.
The SEC alleged in its April 16 complaint that, had Goldman Sachs customers known Paulson helped choose the securities that formed the basis of the CDO, and that Paulson was betting against them, they might not have bought any. The regulator’s case in Manhattan federal court may hinge on that issue, said lawyer Mark Zauderer of New York’s Flemming Zulack Williamson Zauderer LLC, who isn’t involved in the case.
Billionaire John Paulson’s firm earned $1 billion on the CDOs and wasn’t accused of wrongdoing by the SEC.
Goldman Sachs also said yesterday that the U.S. case hinges on the actions of an employee it placed on paid leave this week.
Fabrice Tourre, the 31-year-old Goldman Sachs executive director who was accused of misleading investors about the mortgage-linked investment in 2007, will be de-registered from the Financial Services Authority, a spokeswoman at the firm in London said yesterday.
“It’s all going to be a factual dispute about what he remembers and what the other folks remember on the other side,” Greg Palm, Goldman Sachs’s co-general counsel, said in a call with reporters yesterday, without naming Tourre. “If we had evidence that someone here was trying to mislead someone, that’s not something we’d condone at all and we’d be the first one to take action.”
By characterizing the case as a dispute involving a single employee, Goldman Sachs may be taking its first steps to publicly distance itself from Tourre in the case, some lawyers said. That could reduce bad publicity and ultimately make it easier for the company to settle the case.
Pamela Chepiga, a lawyer for Tourre at Allen & Overy LLP in New York, didn’t return a call seeking comment. The New York-based bank has denied wrongdoing and said it will fight the SEC’s case because it is “completely unfounded in law and fact.”
The case is Securities and Exchange Commission v. Goldman Sachs, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).
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BHP Says It Found Evidence of Possible Corruption
BHP Billiton Ltd. (BHP), the world’s largest mining company, found evidence of possible breaches of anti-corruption laws after the U.S. Securities and Exchange Commission requested information for an investigation.
BHP identified “possible violations of applicable anti-corruption laws involving interactions with government officials,” Melbourne-based BHP said today in a statement. The U.K.’s Serious Fraud Office said BHP “opened a dialogue” and is cooperating.
The company said the probe into the termination of some minerals exploration projects didn’t involve its business in China, where four Rio Tinto Group executives were jailed last month for bribery. U.S. regulators have increased scrutiny of corporate governance and compliance following the 2008 collapse of Lehman Brothers Holdings Inc.
The SEC couldn’t “confirm or deny the existence or non-existence of any investigation,” John Nester, a Washington-based spokesman, said in an e-mail.
BHP “has been in to see us,” David Jones, a spokesman for the U.K.’s SFO, said in an e-mail. The Australian Securities and Investments Commission couldn’t comment, spokeswoman Georgie Morell said.
BHP has exploration projects in Chile, Zambia, Australia, Gabon, South America, Russia, West Africa and Canada, the company said today in its quarterly exploration report, in which it revealed the probe.
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Goldman Faces Formal U.K. Probe After SEC Fraud Suit
The London units of Goldman Sachs Group Inc., the most profitable firm in Wall Street history, will be formally investigated by Britain’s financial regulator after U.S. authorities sued the bank for fraud.
The Financial Services Authority said in a statement yesterday that it will begin a formal probe after the U.S. Securities and Exchange Commission filed a lawsuit over Goldman Sachs’s marketing of a collateralized debt obligation. The FSA said yesterday it was reviewing whether a full investigation into the New York-based bank was warranted.
Prime Minister Gordon Brown called on the agency, which he created in 1997, to investigate Goldman Sachs, accusing employees of the bank of “moral bankruptcy.” The bank may be fined or individuals banned if the FSA finds a breach of its rules. A Goldman Sachs vice president named in the SEC case, Fabrice Tourre, works at the bank’s London office.
“The U.K. entity, Goldman Sachs International, is not mentioned in the SEC complaint, but the FSA’s latest move means that this part of Goldman Sachs is now under the spotlight too,” said Clive Cunningham, a regulatory lawyer at Taylor Wessing LLP who isn’t involved in the case. “The question is whether Goldman Sachs International was involved and, if so, did it breach any U.K. regulatory rules.”
Goldman Sachs will cooperate with the FSA’s investigation, the bank said in an e-mailed statement yesterday. The bank has previously denied wrongdoing and said it will fight the SEC’s case because it is “completely unfounded in law and fact.”
Tourre, 31, has been placed on paid leave until an unspecified date, a Goldman Sachs spokeswoman said yesterday. Pamela Chepiga, Tourre’s lawyer at Allen & Overy LLP in New York, didn’t return a call seeking comment.
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Staten Island Investment Adviser Charged With Fraud
Gryphon Holdings Inc.’s owner and four employees of the Staten Island, New York-based investment firm were charged with conspiracy to commit securities fraud and wire fraud in an alleged $17.5 million scheme.
Kenneth Marsh, 43, Gryphon’s president, and the employees, who are accused of falsely claiming endorsements from financier George Soros, are scheduled to appear in court yesterday, Brooklyn U.S. Attorney Benton Campbell said in an e-mailed statement.
Investors, usually elderly retirees, received unsolicited e-mails and phone calls touting Gryphon’s services, according to the statement. Once the victims provided contact information, Gryphon’s employees used high-pressure tactics and misrepresentations to sell more expensive versions of their services, Campbell said.
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Banca Carige Sues Citigroup Over Note, Swap Deal
Citigroup put its own interests above Banca Carige’s in January 2007 when it sold 10 million euros ($13.5 million) in a fund-linked note to the bank’s insurance units and entered into a 25 million euro fund-linked total return swap with Banca Carige, according to the complaint filed yesterday in federal court in Manhattan.
Banca Carige and the insurers “had no interest in risky or speculative investments, and were looking only to obtain good, consistent returns with as little risk as possible,” the Genoa-based bank wrote in its complaint.
Citigroup knew the investors’ objectives and misrepresented that the deal was a low-risk investment because the note and the swap were linked to an offshore bond fund that “earned reliable returns through an ‘arbitrage opportunity’ with municipal bonds,” Banca Carige said.
“Citi believes these claims are without merit and we will defend ourselves vigorously,” Danielle Romero-Apsilos, a spokeswoman for the New York-based company, said by e-mail.
The case is Banca Carige SpA v. Citigroup Inc., 10-cv-3310, U.S. District Court, Southern District of New York (Manhattan).
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Household International Sues Insurer Over Coverage
Household International Inc., found liable last year by a Chicago jury for misleading investors about the company’s business practices, sued an insurance company in a bid to force payment of its legal bills.
Princeton Eagle West Insurance Co., based in Hamilton, Bermuda, is refusing to provide $25 million of coverage, contending that some of the claims in the lawsuit predate Nov. 1, 2000, when the policy went into effect, Household Financial said yesterday in documents in federal court in Chicago.
“It is virtually certain that the entire limits of the Princeton policy will be needed for ongoing defense costs,” Household said in its statement of claim. “Princeton flatly denied Household’s request for payment.”
The jury last May 8 found the company and three executives including Chief Executive Officer William Aldinger, misled investors from 1994 to 2005 with reckless remarks in financial statements, inflating the value of the shares.
The insurance case is Household International Inc. v. Princeton Eagle West Insurance Co. 1:10-cv-02418. U.S. District Court, and the shareholder suit is Lawrence E. Jaffe Pension Plan v. Household International Inc., 1:02-cv-05893, U.S. District Court, Northern District of Illinois (Chicago).
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Judge Calls New York’s Greenberg Case ‘Devastating’
New York’s case against American International Group Inc. (AIG)’s former Chief Executive Officer Maurice “Hank” Greenberg is “devastating,” State Supreme Court Justice Charles Ramos said yesterday during a court hearing.
The judge is presiding over a lawsuit filed in 2005 by then-New York Attorney General Eliot Spitzer that accused Greenberg, 84, and former AIG Chief Financial Officer Howard Smith of using sham reinsurance deals and other transactions to distort the reported financial condition of the company.
Assistant Attorney General David Ellenhorn yesterday told Ramos that Greenberg directed or participated in fraudulent transactions. David Boies, Greenberg’s lawyer, said the state had “failed” and was relying on hearsay and inadmissible evidence from a federal case in which Greenberg wasn’t a defendant.
“I can see big problems with establishing a defense” to the state’s claims about securities fraud, Ramos told Boies. “Mr. Ellenhorn has put together a devastating case, a strong case, and we both know it.”
Greenberg’s lawyers and attorneys from New York Attorney General Andrew Cuomo’s office are each asking Ramos in Manhattan to grant their motion for summary judgment, or a decision before trial. Greenberg has also asked, in the alternative, for Ramos to dismiss the lawsuit. The former CEO wasn’t in court yesterday.
Greenberg has accused Spitzer of using the case to promote his political career, according to a filing in state Supreme Court.
The case is New York v. Maurice Greenberg, 401720/2005, New York Supreme Court, New York County (Manhattan).
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Rorech Testifies in First Insider-Trading Default-Swap Case
The U.S. Securities and Exchange Commission accuses Rorech, 39, of illegally feeding information on a 2006 bond sale by Dutch media company VNU Group BV to Renato Negrin, 46, a former Millennium Partners LP portfolio manager. Negrin, Rorech’s co-defendant, bought swaps to reap a $1.2 million profit when the deal was announced, the SEC said in a complaint in May.
Nancy Brown, an SEC lawyer, asked Rorech yesterday if he understood in July 2006 that Deutsche Bank had “restricted” VNU’s securities.
“At one point I believe we were restricted from trading securities but I did not believe I was restricted from soliciting,” Rorech responded. “How can you market without discussing what the relevant securities are?”
Rorech, who is on paid administrative leave from Deutsche Bank, is scheduled to continue his testimony today. U.S. District Judge John G. Koeltl in Manhattan is hearing the nonjury trial, which began April 7.
The SEC didn’t accuse Frankfurt-based Deutsche Bank or New York-based hedge fund Millennium of wrongdoing.
The commission’s civil suit focuses on efforts by VNU, later renamed Nielsen Co., to restructure its debt as part of a 7.5 billion euro ($10 billion) leveraged buyout.
After complaints from potential investors that the $1.67 billion in bonds wouldn’t be covered by existing VNU credit-default swaps, VNU created a tranche of bonds that would be covered.
The SEC said Rorech tipped Negrin about the restructuring before that announcement. Negrin bought 20 million euros of swaps, and profited by selling them after the deal was announced and the swap price rose, the SEC said.
Negrin is liable because he knew, or should have known, Rorech had a duty to keep the information private, the SEC said.
Rorech and Negrin argue that the SEC has no jurisdiction over the credit-default swaps because they are private contracts, not securities.
The case is Securities and Exchange Commission v. Rorech, 1:09-cv-04329, U.S. District Court, Southern District of New York (Manhattan).
Former IKB Chief May Call More Witnesses After Goldman Case
Former IKB Deutsche Industriebank AG (IKB) Chief Executive Officer Stefan Ortseifen may call more witnesses at his German criminal trial following the U.S. Securities and Exchange Commission civil case against Goldman Sachs Group Inc.
Ortseifen, 59, is on trial on charges that he failed to warn investors about the collapse of the U.S. subprime mortgage market before the bank was forced to seek a government bailout. The bank lost nearly all of its $150 million investment in the subprime-mortgage related products at the center of the SEC case against Goldman Sachs.
“We are considering calling more and other people to witness in the case,” Rainer Hamm, his lawyer, said in an interview at a court in Dusseldorf, Germany, where Ortseifen is being tried for misleading investors. Ortseifen is observing the Goldman development “with big interest” and it is too early to say if he will change his defense strategy, the lawyer said.
IKB was bailed out in 2007 by KfW Group and banking associations and has received guarantees of as much as 12 billion euros ($16.2 billion) from the Soffin bank-rescue fund. Ortseifen is charged with misleading investors by downplaying the effect of the real estate crisis in a press release on July 20, 2007. Ortseifen stepped down nine days later and shares of IKB fell 20 percent.
The SEC says a Goldman executive misled a collateral manager, ACA Management LLC, and IKB about Paulson’s role.
The German case is LG Dusseldorf, 14 KLs 6/09.
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Schwab Agrees to Pay $200 Million in Fund Settlement
Charles Schwab Corp. (SCHW) said it agreed to pay $200 million to settle claims that it misled investors on the amount of mortgage-backed securities held by its Schwab YieldPlus Fund.
Schwab signed a memorandum of understanding to settle the claims filed in 2008 by paying the $200 million to plaintiffs, without admitting liability and avoiding trial, the San Francisco-based company said yesterday in a statement. The settlement agreement cuts first-quarter net income by $105 million, or 9 cents a share, bringing the company’s net income reported last week down to $14 million, or 1 cent per share.
The lawsuit alleged that Schwab incorrectly described the fund, once the world’s largest short-term bond fund, as “safe.” The plaintiffs sought damages of as much as $802 million, the estimate of losses made by their lawyers’ experts. A trial was scheduled for May.
Schwab had denied wrongdoing, saying the fund’s losses were caused by the collapse of the financial markets. U.S. District Judge William H. Alsup denied Schwab’s bid to dismiss the case earlier this month.
The case is In Re Charles Schwab Corp. Securities Litigation, 08-cv-01510, U.S. District Court, Northern District of California (San Francisco).
Schottenfeld Settlement in Galleon SEC Case Approved
Schottenfeld Group LLC won a judge’s approval of a $763,000 settlement with the U.S. Securities and Exchange Commission in the Galleon Group LLC insider-trading investigation.
U.S. District Judge Jed Rakoff in New York approved the agreement in an order yesterday. Schottenfeld Group agreed to pay $460,475 in disgorgement, $72,203 in interest and a $230,238 civil penalty, according to a March 29 letter from the SEC to Rakoff. The firm also agreed to implement policies to assure compliance with securities laws.
Galleon founder Raj Rajaratnam is accused in both civil and criminal cases of using secret tips from hedge fund executives, corporate officials and other insiders to earn millions of dollars in illegal stock trades. Rajaratnam and Danielle Chiesi, a New Castle Funds LLC consultant, are among 21 people who were charged criminally since October in two overlapping insider trading cases.
Zvi Goffer and David Plate, formerly of Schottenfeld Group, have pleaded not guilty in the criminal case. Gautham Shankar, a former trader at Schottenfeld Group, pleaded guilty and is cooperating with prosecutors.
Schottenfeld Group’s disgorgement represents the amount the firm either profited or avoided losing in the Galleon case, according to the SEC’s letter.
The criminal case is U.S. v. Rajaratnam, 1:09-cr-1184, U.S. District Court, Southern District of New York (Manhattan). The SEC case is SEC v. Galleon Management LP, 09-cv-08811, U.S. District Court, Southern District of New York (Manhattan).
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Ex-Siemens Managers Get Suspended Terms Over Bribery
Two former managers at Siemens AG (SIE), Europe’s biggest engineering company, were found guilty of breach of trust by a Munich court and received suspended sentences and fines.
A former unit chief executive officer, identified only as Joerg Michael K., 55, received a suspended sentence of two years and was ordered to pay 160,000 euros ($215,000), the Munich court said in an e-mailed statement yesterday. The head of accounting at the unit, Hans-Werner H., 55, received an 18-month suspended sentence and was ordered to pay 40,000 euros.
“Both men tolerated and supported a system of slush funds at Siemens,” the court said. The system was “set up for the sole purpose of paying bribes.”
Siemens, based in Munich, has been embroiled in a bribery scandal since 2006, leading to investigations in at least a dozen countries, revealing it paid kickbacks and bribes to win contracts. Siemens agreed to pay $1.6 billion to settle probes in the U.S. and Germany in 2008. Prosecution of individual managers has been ongoing.
Joerg Michael K., who joined Siemens in 1974, became the head of the communications unit in 2001. He was told about the system of slush funds and chose not to stop it. He later gave another Siemens employee in charge of organizing the system powers to sign sham contracts.
Hans-Werner H., who learned about the scheme in 2003, didn’t have his accounting staff thoroughly review the transactions, according to the court. Between 2002 and 2004, the system put 49 million euros in the slush funds which were used for bribery.
Boehringer Agrees to Settle Wisconsin Medicaid Suit
Boehringer Ingelheim GmbH, the world’s largest privately held drugmaker, agreed to pay $7.75 million to settle Wisconsin claims that it overcharged a government health program for medicine.
Boehringer Ingelheim Pharmaceuticals, Boehringer Ingelheim Roxane, Roxane Laboratories and Ben Venue Laboratories, all units of Boehringer, agreed to pay the state Medicaid program $7 million and $750,000 to Miner, Barnhill & Galland PC for legal fees, in a settlement announced yesterday by Wisconsin Attorney General J.B. Van Hollen.
“This settlement again demonstrates to anyone who attempts to defraud medical assistance programs that my office will pursue them to the fullest extent of the law,” Van Hollen said in a statement. The state won’t “line the pockets of those who would engage in deceptive and fraudulent pricing activities.”
Boehringer, based in Ingelheim, Germany, complies with all federal and state Medicare and Medicaid guidelines, Amy Kunkel, a company spokeswoman, said in an e-mail.
“This case was settled to end expensive and disruptive litigation,” she said. “Wisconsin acknowledged that the settlement did not constitute an admission of fault or liability by Boehringer.”
The case is State of Wisconsin v. Abbott Inc., 04-cv-1709, Dane County (Madison).
Vodafone, O2 Win U.K. Appeal of Price Controls
Vodafone Group Plc (VOD), Telefonica SA’s (TEF) O2 unit and other mobile network operators overturned a U.K. ruling that applied retroactive price controls that cut fees they charge to connect callers from other networks.
The Court of Appeal in London yesterday ruled that a lower court couldn’t force the U.K.’s telecommunications regulator Ofcom to apply a court-ordered reduction of limits on “termination fees” back to 2007. The other operators are France Telecom SA’s Orange unit and Deutsche Telekom’s T-Mobile.
“I’m satisfied that the tribunal has no power to direct Ofcom to impose revised price controls on a retrospective basis,” said the three judge panel. The money involved in the case amounts to “hundreds of millions of pounds,” the judges said in the ruling.
The ruling is a victory for Ofcom, which challenged a finding by the Competition Appeal Tribunal that it should apply price controls retroactively when charges are reduced further by a court. Ofcom was ordered in 2009 to further cut price controls it had already lowered in 2007.
Simon Gordon, a Vodafone spokesman, and Simon Lloyd, a spokesman for O2, didn’t return calls seeking comment.
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Obama Considers Corporate Lawyer for Justice Department Job
James M. Cole, a corporate defense lawyer who served as an independent monitor of American International Group Inc., is being vetted by the Obama administration for the No. 2 job at the Justice Department, according to a person familiar with the matter.
Cole, a partner at Bryan Cave LLP in Washington and a former Justice Department prosecutor, would replace former Deputy Attorney General David W. Ogden, who left office earlier this year. If nominated by Obama, Cole would need to be confirmed by the Senate.
Cole was an official with the Justice Department for 13 years before entering private practice, according to his law firm’s Web site. His law practice includes advising companies on securities, regulatory and criminal law matters.
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Lawyers Made $60,000 From U.K. Insider Scam, Prosecutors Say
Two attorneys who worked at the London offices of U.S. law firms made illegal trades in NeuTec Pharma Ltd. after the company’s financial director leaked information about a proposed takeover, prosecutors told a court.
Andrew Rimmington, a former corporate partner at Dorsey & Whitney LLP, Michael McFall, an ex-corporate partner at McDermott Will & Emery LLP and NeuTec’s former financial director Peter King are on trial for insider trading in a case brought by the Financial Services Authority.
Prosecutor Michael Bowes said the two lawyers made a profit of 39,000 pounds each ($60,000) in June 2006 after King gave McFall an early warning about Basel-based Novartis AG’s (NOVN) plan to purchase NeuTec. McFall then passed the information on to Rimmington, Bowes said. The men deny wrongdoing.
They will present their defense later in the case, which is scheduled to last six weeks.
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