Nevin Shapiro, chief executive officer of Capitol Investments USA Inc., defrauded investors of at least $80 million to fund his lavish lifestyle after raising $880 million in a Ponzi scheme, U.S. prosecutors charged.
Shapiro, 41, raised money from at least 60 investors from January 2005 to November 2009 to finance Capitol, a Miami Beach-based wholesale grocery distribution business, authorities said in a complaint unsealed yesterday in federal court in Newark, New Jersey. Capitol and Shapiro “had virtually no legitimate business during this time”, the government said.
Shapiro surrendered to authorities after he was charged with securities fraud and money laundering.
He misappropriated $35 million for his personal use, paying millions of dollars in debts from illegal sports bets, buying $400,000 in floor seats to Miami Heat professional basketball games and buying diamond-studded handcuffs that he gave to a “prominent professional athlete,” according to the complaint.
Investors forced Capitol Investments into involuntary bankruptcy, the agency said.
The case is USA v. Shapiro, 10-cr-8082, U.S. District Court, District of New Jersey (Newark).
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RBS Sued by MBIA Over $2 Billion Credit Protection
Royal Bank of Scotland Group Plc is being sued by MBIA Insurance Corp., which is seeking to end an agreement to provide $2 billion in default protection on credit derivatives after the bank’s rating was downgraded.
MBIA’s LaCrosse Financial Products LLC unit agreed to provide credit protection to RBS for 10 years, according to the lawsuit filed in February in London and made public this week. Under the deal, MBIA and LaCrosse were allowed to terminate the deal if RBS’s credit rating fell below a specified level, according to the suit.
MBIA, the largest bond insurer, asked the court to approve ending the deal without stating what it would owe RBS if the contract were allowed to stand.
RBS, based in Edinburgh, Scotland, was bailed out with 45.5 billion pounds ($70 billion) in taxpayer aid between 2008 and 2009, more than any other bank in the world. It’s now majority-owned by the U.K. government. Bond insurers including MBIA and Ambac Financial Group Inc. have sued banks including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC)’s Merrill Lynch & Co. and GMAC LLC over home-loan securities they agreed to insure.
RBS spokesman Michael Strachan declined to comment.
The case is LaCrosse Financial Products LLC v. Royal Bank of Scotland Plc, case no. 2010/364, High Court of Justice, Chancery Division (London).
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Barclays Sued By Headhunter for Merrill Hire Payment
Barclays Plc (BARC) was sued in Singapore for failing to pay Pagoda Partners Pte. S$365,000 ($266,000) after Britain’s second-largest bank hired Timothy Last from Merrill Lynch & Co. on the recruitment firm’s recommendation.
Barclays was “unjustly enriched” by Pagoda after the headhunter sent the bank Last’s resume in January 2009 and wasn’t paid, according to documents filed with the Singapore High Court. A pre-trial hearing was held on April 19.
Last, Barclays Capital’s head of equity derivatives flow sales for Asia, excluding Japan, was hired as a direct referral after Pagoda failed to set up a meeting, Barclays’s lawyers from Straits Law LLC said in the court filing. “There was never any agreement for the engagement of” Pagoda, Barclays said.
Nick Burnham, a partner at Pagoda, declined to comment on the case. Last declined to comment, as did Clare Williams, a Hong Kong-based spokeswoman for Barclays.
The case is Pagoda Partners Pte. Ltd. v. Barclays Bank Plc, S977/2009 in the Singapore High Court.
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JPMorgan Sued by Fund Manager for $31 Million Over Spinout Pact
A JPMorgan Chase & Co. subsidiary was sued by a former employee who said the bank fired him without cause and breached a spinout agreement that allowed him to leave with the private equity team and platform he managed.
Varun Kumar Bery, former head of JPMorgan’s Private Capital Asia unit, filed the complaint on Monday against his former employer in Hong Kong’s Court of First Instance claiming damages “in the region of US$30.8 million.” JPMorgan spokeswoman Marie Cheung declined to comment on the matter.
The case is HCCL9/2010 in Hong Kong’s Court of First Instance.
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U.S. Seeks to Intervene in Municipal Bond Lawsuit
The U.S. Justice Department wants to intervene in a civil lawsuit alleging that Wells Fargo & Co. (WFC), UBS AG (UBSN), Morgan Stanley (MS) and more than a dozen other financial institutions conspired to rig bids for municipal derivatives.
The department’s antitrust unit is seeking to limit the pre-trial exchange of information among the parties in the civil lawsuit, according to a court order April 20 by U.S. Magistrate Judge Gabriel Gorenstein in Manhattan federal court. The 2008 lawsuit was brought by Mississippi, municipalities and other bond issuers.
The Justice Department previously filed criminal charges in a related bid rigging probe. In February, a former worker at CDR Financial Products Inc. pleaded guilty to conspiring to rig bidding on investment contracts sold to local governments.
In the civil lawsuit, banks, brokers and dealers are accused of conspiring with one another to not compete and to rig bids for municipal derivatives sold to issuers of municipal bonds. The defendants allegedly allocated customers among themselves and fixed and stabilized prices, including the interest rates paid to issuers.
The consolidated civil case is Hinds County, Mississippi v. Wachovia Bank, 08-2516, U.S. District Court, Southern District of New York (Manhattan).
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Rorech Testifies He Didn’t Know Swaps Were Restricted
Jon-Paul Rorech, a Deutsche Bank AG (DBK) salesman accused in U.S. regulators’ first case alleging insider-trading of credit-default swaps, testified he didn’t know a company’s swaps were on the bank’s restricted list when he took an order for them.
The U.S. Securities and Exchange Commission accuses Rorech, 39, of illegally feeding information to Renato Negrin, a former Millennium Partners LP portfolio manager, on a 2006 bond sale by Dutch media company VNU Group BV. Negrin, 46, Rorech’s co-defendant, bought swaps to reap a $1.2 million profit after the deal was announced, the SEC said in a complaint in May.
SEC lawyer Nancy Brown yesterday showed Rorech part of Deutsche Bank’s restricted list that she said made clear bank employees in July 2006 weren’t allowed to solicit purchases of the VNU swaps, though traders could make markets in them, or take unsolicited offers.
“I’m surprised to hear we’re restricted to non-soliciting because no one ever told us that in New York,” Rorech testified yesterday.
On July 17, 2006, Rorech sold VNU swaps to Negrin with a face value of 10 million euros ($13.4 million).
Rorech got information on activity in the VNU swaps from traders that didn’t say they were restricted to unsolicited orders as they normally would if that were the case, he testified.
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. Rorech is on paid administrative leave from Deutsche Bank.
The case is Securities and Exchange Commission v. Rorech, 1:09-cv-04329, U.S. District Court, Southern District of New York (Manhattan).
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Merck Should Refund Money Paid for Vioxx, Lawyer Says
Merck & Co. (MRK) misled Louisiana officials about the heart-attack risks posed by its withdrawn Vioxx painkiller and should be ordered to refund more than $11 million paid for the drug, a lawyer for the state argued.
Managers of Louisiana’s state-sponsored health programs would have halted reimbursements for Vioxx prescriptions if they had known the drug posed a greater heart-attack risk than competing medicines, Stephen B. Murray Jr., one of the state’s lawyers, said in closing arguments of a trial over the refund claims. Merck had an obligation to fully disclose Vioxx’s health risks, he added.
“They can’t just put their heads in the sand and pretend there’s nothing wrong with the drug,” Murray told a federal judge in New Orleans yesterday. It’s the first of more than a dozen refund cases filed by states over Vioxx to go to trial. “They can’t just wait for the bodies to stack up.”
Merck pulled Vioxx off the market in 2004 after a study showed the drug doubled the risk of heart attacks and strokes. The company won 11 of 16 Vioxx lawsuits at trial before setting up a $4.85 billion settlement fund in 2007 to resolve thousands of injury claims over the drug. State officials allege Merck executives downplayed and distorted Vioxx’s health risks in medical literature, advertisements and communications with doctors.
The Louisiana case is State of Louisiana v. Merck, Sharp & Dohme Corp., 05-3700, U.S. District Court, Eastern District of Louisiana (New Orleans).
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Novartis’s NeuTec Used Law Firm in Insider Case, Court Told
NeuTec Pharma Plc, the biopharmaceutical company whose 2006 takeover by Novartis AG (NOVN) is at the heart of an insider-trading trial, employed the law firm where one of the defendants worked, a witness said.
NeuTec used McDermott Will & Emery LLP as advisers on patent disputes with Cambridge Antibody Technology Group Plc (CAT), NeuTec founder James Burnie testified. Michael McFall, one of three defendants, is a former mergers and acquisitions lawyer at McDermott. Andrew King, NeuTec’s ex-financial director, and Andrew Rimmington, a former partner at Dorsey & Whitney LLP are also on trial.
“You said that NeuTec received legal advice from McDermott Will & Emery, and this had come from a recommendation Andrew King had received through a contact,” prosecuting attorney Michael Bowes said to Burnie yesterday at Southwark Crown Court.
Burnie, who is NeuTec’s chief executive, confirmed the statement to Bowes.
The three men deny the eight charges and will present their defense later in a trial, which is scheduled to last six weeks. Bowes said yesterday that they made 39,000 pounds ($60,000) each in 2006 after King gave McFall early notice that Basel, Switzerland-based Novartis would buy NeuTec. McFall then passed on the information to Rimmington, the FSA alleges.
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KB Home’s Bruce Karatz Guilty in Backdating Trial
Former KB Home (KBH) Chief Executive Officer Bruce Karatz was found guilty by a U.S. jury of hiding from auditors and regulators that he backdated stock options.
Jurors in federal court in Los Angeles yesterday found Karatz guilty of two counts of mail fraud and two counts of making a false statement. He was acquitted of 16 charges, including mail and wire fraud, securities fraud and filing false proxy statements.
Karatz, 64, was accused of unauthorized and undisclosed backdating of stock options that brought him $6.62 million in compensation he wasn’t entitled to from 1999 to 2005. He stepped down as chief executive at Los Angeles-based KB Home in 2006 after 20 years in charge of the homebuilder.
“The jury got 80 percent of it right,” Karatz’s lawyer, John Keker, said outside the courthouse. “We’re very disappointed about the other counts. We’ll continue to fight those.”
Keker said he’ll file requests for acquittal by the judge and for a new trial, and if those fail, he’ll file an appeal. In a separate statement Keker said he was pleased that the jury acquitted Karatz of all charges that alleged backdating.
U.S. District Judge Otis D. Wright scheduled sentencing for Sept. 8 and increased Karatz’s bail to $2 million.
Karatz faces as long as 80 years in prison on the four counts for which he’s been convicted, Thom Mrozek, a spokesman for U.S. Attorney Andre Birotte Jr., said in a statement.
Keker argued during the trial that Karatz had been authorized by the company’s compensation committee to select the grant dates of the options awarded to him and other executives. Karatz didn’t hide that the option dates weren’t the same as the dates on which the committee awarded them and nobody at KB Home thought there was an issue with that, according to his lawyer.
The case is U.S. v. Karatz, 09-203, U.S. District Court, Central District of California (Los Angeles).
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Credit Suisse Among Banks to Settle Refco Lawsuit
Units of Credit Suisse Group AG (CSGN), Bank of America Corp. and Goldman Sachs Group Inc. (GS) were among the banks that agreed to pay $49.5 million to settle an investor lawsuit alleging fraud at Refco Inc., according to court papers.
The 2005 lawsuit in Manhattan federal court sought to hold Refco’s underwriters partially responsible for the firm’s failure to disclose that it hid hundreds of millions of dollars in debt owed to it by former Chief Executive Officer Phillip Bennett. In a court filing April 20, lawyers for the investors said they reached a settlement with the banks and asked a judge to approve it.
“We settled with the underwriters,” James Sabella, a lawyer for RH Capital Associates LLC and Pacific Investment Management Co., the lead investors in the case, said yesterday in a phone interview. “We think it’s a good settlement.”
The investors previously settled with another underwriter for $3.5 million, with Austria’s Bawag PSK Bank for $140 million, and with Refco investor Thomas H. Lee Partners for at least $130 million, Sabella said. Refco’s auditor, Grant Thornton LLP, hasn’t settled with investors.
Once the biggest independent U.S. futures trader, New York-based Refco collapsed in 2005, two months after raising $670 million in an initial public offering. Refco Inc., as it was known after the IPO, filed for bankruptcy after disclosing that a firm owned by Bennett owed the company hundreds of millions of dollars. Bennett pleaded guilty to fraud and is in prison.
Dawn Wilson, a lawyer for the underwriters, declined to comment.
The case is Mazur v. Refco, 05-cv-8626, U.S. District Court, Southern District of New York (Manhattan).
R.J. Reynolds Loses $46.3 Million Smoker’s Verdict
R.J. Reynolds Tobacco Co. (RAI), the second-biggest U.S. cigarette maker, must pay $46.3 million to the widow of a Florida man who died from lung cancer in 1995, a jury in Gainesville, Florida, decided yesterday.
Six state-court jurors voted unanimously in favor of Lyantie Townsend, the widow of Frank Townsend, who took up smoking at age 13 or 14, according to Greg Prysock, the winning lawyer in the case.
The verdict is the latest in favor of a Florida smoker following a 2006 Florida Supreme Court decision in the “Engle” case, which allowed smokers to file individual suits after the court decertified a statewide class-action case.
Smokers and their families have won 13 verdicts in 15 trials in these post-Engle cases, including five in March and April, according to Edward Sweda, senior staff attorney for the anti-smoking Tobacco Products Liability Project.
The jurors in Gainesville yesterday returned a verdict of $10.8 million in compensatory damages plus $80 million in punitive damages, Prysock said. Because jurors found Townsend 49 percent responsible for his illness and death, R.J. Reynolds must pay 51 percent, or $46.3 million.
“We’re disappointed with the jury’s verdict and plan to appeal,” said Reynolds spokesman David Howard.
The case is Townsend v. R.J. Reynolds Tobacco Co., 08-CA-131, Florida Circuit Court (Gainesville).
Businesses Win at U.S. Supreme Court in Pension Plan Dispute
The U.S. Supreme Court sided with businesses in a dispute over the meaning of ambiguous pension plans, ruling that a federal trial judge should have deferred to Xerox Corp. (XRX)’s interpretation of its plan.
The justices, voting 5-3, overturned a lower court ruling favoring more than 100 Xerox employees who were rehired by the company after they left and received pension distributions. The employees say Xerox, in calculating their future benefits, improperly accounted for the money they had already received.
The question in the Supreme Court case was whether a trial judge should afford plan administrators the deference they normally receive even after they make a mistake in interpreting a plan provision.
Writing for the court, Chief Justice John Roberts said judges should continue to defer to administrators, as long as their interpretation is reasonable. Rejecting what he called the “one-strike-and-you’re-out approach,” Roberts said a “single honest mistake” shouldn’t trigger tougher judicial scrutiny.
The ruling is a victory for business trade groups including the U.S. Chamber of Commerce. It’s a defeat for the Obama administration, which argued in favor of the employees.
The majority stopped short of upholding Xerox’s calculation of benefits, instead sending the decade-old case back to a lower court for additional proceedings.
The case is Conkright v. Frommert, 08-810, U.S. Supreme Court (Washington).
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Obama Says He Will Have Supreme Court Nominee by May
President Barack Obama said he will announce a nominee to replace retiring Supreme Court Justice John Paul Stevens by next month and that he’ll seek a candidate who values individual rights and privacy when ruling on cases.
Obama said he’s confident the nomination will go through the Senate confirmation process in time to have Stevens’s successor in place when the court begins its next term in October.
The president, repeating the stand of his predecessors, said he won’t have any “litmus tests” on abortion rights.
“But I will say that I want somebody who is going to be interpreting our Constitution in a way that takes into account individual rights, and that includes women’s rights,” he said. “That’s going to be something that’s very important to me.”
Stevens, 90, announced April 9 that he will retire at the end of the court’s term this summer. The president already has begun talking with and vetting potential nominees for the high court, White House press secretary Robert Gibbs said yesterday.
Leading candidates include U.S. Solicitor General Elena Kagan and federal appellate judges Diane Wood in Chicago and Merrick Garland in Washington. All were considered for the Supreme Court vacancy Obama filled last year with Sotomayor, who replaced Justice David Souter.
Other potential court nominees include federal appellate judge Sidney Thomas; Homeland Security Secretary Janet Napolitano; Michigan Governor Jennifer Granholm; former Georgia Chief Justice Leah Ward Sears; and Harvard Law School Dean Martha Minow.
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On the Docket
Deutsche Bank’s Ackermann to Testify in IKB Former CEO’s Trial
Ackermann will be summoned by the Dusseldorf Regional Court, which hasn’t yet set a date for the testimony, court spokesman Peter Schuetz said. Ortseifen is facing charges he misled investors.
At the opening of his trial last month, Ortseifen blamed Deutsche Bank for causing IKB’s near-collapse in 2007. Deutsche Bank halted all transactions with IKB on July 27 that year, hurting IKB’s reputation and triggering the crisis, the former executive said. Deutsche Bank has rejected Ortseifen’s claim.
IKB was bailed out in 2007 by KfW Group and banking associations and has received guarantees of as much as 12 billion euros ($16 billion) from the Soffin bank-rescue fund. Ortseifen is charged with misleading investors by downplaying the effect of the looming crisis in a press release on July 20, 2007, shortly before IKB received a first bailout package.
Rainer Hamm, Ortseifen’s lawyer, has said he may have more witnesses called in light of the U.S. Securities and Exchange Commission civil case against Goldman Sachs Group Inc. IKB lost nearly all of its $150 million investment in the subprime-mortgage-related products at the center of the SEC case against Goldman Sachs.
The case is LG Dusseldorf, 14 KLs 6/09.
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