Goldman Sachs Group Inc. may be better off cutting its losses instead of fighting what it terms “unfounded” fraud claims, say professors of securities law who have examined the U.S. Securities and Exchange Commission’s lawsuit against the bank.
The most profitable firm in Wall Street history will probably lose what is typically the first hurdle in court, a motion to throw out the April 16 suit because it lacks legal merit, the professors said in interviews this week. After that, Goldman Sachs’s risks will mount and its negotiating position will weaken, they said.
“There’s a very low probability that Goldman could get the case dismissed,” said Thomas Hazen of the University of North Carolina at Chapel Hill, whose books include a two-volume treatise on broker-dealer law. “Every pretrial motion the SEC wins, Goldman gets one step closer to losing.”
Goldman Sachs is the first major Wall Street firm accused by regulators of fraud connected to the collapse of the subprime mortgage market. The SEC’s allegation that Goldman Sachs defrauded investors sparked a 13 percent, one-day decline in its shares. The New York-based firm, led by Chief Executive Officer Lloyd Blankfein, 55, said it will vigorously contest the claims. It must weigh the risks of a drawn-out legal battle against the benefits of a more immediate resolution.
Lucas van Praag, a Goldman Sachs spokesman, declined to comment yesterday on the likelihood of getting the case dismissed.
Even if top managers are certain they’re right on the merits of the case, Goldman Sachs should probably settle, said senior executives at three of the firm’s rivals. The executives, speaking anonymously because they wouldn’t comment publicly on a competitor, said Goldman Sachs would be better off by deciding to settle the suit, cut its losses, and focus on repairing the damage to the firm’s reputation.
The SEC’s case revolves around whether the firm should have told investors that hedge fund Paulson & Co. helped pick the underlying securities in a collateralized debt obligation -- and then bet against it. Paulson wasn’t accused of wrongdoing.
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Goldman Director Gave Tip on Buffett Deal, WSJ Says
A Goldman Sachs Group Inc. director tipped off a hedge fund billionaire about a $5 billion investment in the bank by Warren Buffett’s Berkshire Hathaway Inc. before it became public knowledge, the Wall Street Journal reported, citing a person familiar with the matter.
Goldman Sachs director Rajat Gupta told Galleon Group founder Raj Rajaratnam about the Berkshire investment, the newspaper quoted the source as saying. Federal investigators wrote to Gupta to say they had intercepted phone calls between Gupta and Rajaratnam, the report quoted the source as saying.
Goldman Sachs spokeswoman Connie Ling in Hong Kong declined to comment on the report when contacted by Bloomberg News. Gupta said last month he was stepping down as a Goldman Sachs director.
The bank, the most profitable in Wall Street’s history, in September 2008 agreed to sell $5 billion in preferred shares that paid 10 percent interest to Buffett, after the Lehman Brothers Holdings Inc. bankruptcy and Bank of America Corp.’s purchase of Merrill Lynch & Co. Buffett remains comfortable with his Goldman investment after regulators on April 16 sued the bank for fraud, Berkshire Director Thomas Murphy said.
Rajaratnam is being sued by the U.S. Securities and Exchange Commission for insider trading, which he denies. Gupta hasn’t been formally accused of any wrongdoing, the newspaper said, adding that his lawyer said he hadn’t violated any law.
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Swiss Court Limits UBS Clients Who Can Block Tax Data
A Swiss court slashed the number of UBS AG clients who can block the transfer of account data to U.S. tax authorities, ruling emergency changes to national law remove obstacles to a tax evasion settlement.
The ruling by the Swiss Federal Administrative Court in Bern means that as few as 25 UBS clients may be exempt from an agreement with the U.S. that seeks disclosure of data on 4,450 accounts. The government elevated the agreement to an international treaty to circumvent earlier rulings that would have allowed thousands to challenge the transfers.
Switzerland agreed in August to process account data for the U.S. to help UBS settle a lawsuit that sought information on as many as 52,000 bank clients suspected of tax evasion. The Swiss Parliament is scheduled to vote in June on amendments ministers made to national law in March.
“The protocol to change the agreement to provide legal assistance is applicable -- at least provisionally -- since March 31, 2010,” the judges said in the ruling published yesterday. “Accordingly, even with proof of the requirement of irreparable damage, this detriment cannot be corrected by a decision now.”
In yesterday’s case, the court said a U.S. taxpayer couldn’t use the prior court rulings to keep his account details hidden from the Internal Revenue Service, because of the provisional changes. The decision can’t be appealed.
The unidentified man said his facts are identical to those in the earlier cases, where information was kept secret, and sought an immediate ruling on the issue. The court said the temporary legislation overruled his claims, three judges said.
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Zenith National Investors Lose Bid to Halt Buyout
Zenith National Insurance Corp. investors lost a bid to block Fairfax Financial Holdings Ltd. from acquiring the insurer for $1.3 billion in cash.
A Delaware judge, over Zenith shareholders’ objections that executives are selling the California-based workers’ compensation insurer too cheaply, denied their request to halt the buyout. Toronto-based Fairfax, a rival insurer, is offering $38 a share for Zenith.
Chancery Court Judge J. Travis Laster in Wilmington concluded yesterday that Stanley R. Zax, Zenith’s chairman and chief executive officer, “acted reasonably” in negotiating the buyout with Fairfax CEO Prem Watsa without consulting Zenith’s board.
The ruling clears the way for Zenith shareholders to vote on the deal April 29. Fairfax’s bid was 31 percent more than Woodland Hills, California-based Zenith’s $28.91 closing price the day before the Feb. 18 offer.
“We’re happy with the judge’s decision and look forward to holding the shareholder vote as scheduled on April 29,” Mike Jansen, Zenith’s executive vice president and general counsel, said in a phone interview.
Paul Rivett, a Fairfax spokesman, and Carmella P. Keener, a Wilmington-based lawyer for Zenith investors, didn’t return calls for comment.
The case is In re Zenith National Insurance Corp. Shareholders Litigation, 5296-VCL, Delaware Chancery Court (Wilmington).
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Ex-Societe Generale Trader Agrawal Is Denied Bail
Former Societe Generale trader Samarth Agrawal must remain in jail following his arrest for stealing the company’s computer code for high-frequency trading, a U.S. judge ruled.
Agrawal, 26, was arrested on April 19 and accused of making copies of part of the code he’d been given access to and another part that he hadn’t. U.S. Magistrate Judge Michael Dollinger in New York yesterday denied Agrawal’s request for bail after prosecutors argued he was a risk to flee to his native India.
“His incentive would be quite overwhelming to depart,” Dollinger said. “His money is over there. His family is over there.”
Agrawal’s lawyer, Steven M. Statsinger, told the judge that eight or nine friends who appeared in court yesterday would have been willing to guarantee his bond.
Societe Generale is France’s second-largest bank by market value, behind BNP Paribas SA.
The case is U.S. v. Agrawal, 10-mag-00779, U.S. District Court, Southern District of New York (Manhattan).
Madoff’s DiPascali Should Forfeit $6.1 Million, U.S. Says
Federal prosecutors asked a judge to order Frank DiPascali, who pleaded guilty to helping Bernard Madoff carry out the largest U.S. Ponzi scheme, to forfeit personal property that could net $6.1 million.
The property includes DiPascali’s home in Bridgewater, New Jersey, appraised at $1.38 million, and its sellable contents, a condominium in Haverford, Pennsylvania, cars, all-terrain vehicles, water craft and bank accounts, according to a filing April 21 in federal court in Manhattan.
Most of the property already has been turned over to the government for sale, prosecutors said.
DiPascali pleaded guilty to 10 counts including conspiracy, fraud and money laundering. He admitted misleading thousands of clients at Bernard L. Madoff Investment Securities LLC, saying no securities trades took place in their accounts.
The case is United States of America v. Frank DiPascali Jr., 09-cr-00764, U.S. District Court, Southern District of New York (Manhattan).
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BP, Transocean Sued Over Worker Feared Dead in Blast
BP Plc and Transocean Ltd. were sued by the family of one of 11 workers missing and feared dead in the wake of an explosion two days ago aboard an offshore drilling rig in the Gulf of Mexico.
The family of Shane Roshto, a Transocean employee from Mississippi, yesterday sued both companies for negligence in federal court in New Orleans.
The Deepwater Horizon drilling rig, which is owned by Transocean and leased by London-based BP, was working about 50 miles off the Louisiana coast when it exploded on April 20.
“Shane Roshto was thrown overboard by the force of the drilling explosion, and his body has not yet been located,” Scott Bickford, a lawyer representing the Roshto family, said in the complaint. “The whereabouts of many crew members are still unknown.”
The U.S. Coast Guard yesterday dispatched a search plane and helicopter to join two boats searching the waters overnight, Ashley Butler, a Coast Guard spokeswoman, said in a telephone interview. The Coast Guard said the rig has sunk.
Guy Cantwell, a spokesman for Vernier, Switzerland-based Transocean, declined to comment on the worker’s lawsuit or allegations the companies had violated safety rules.
“The cause of the fire and explosion is unknown at this time,” the company said in a statement posted yesterday on its Web site. “An investigation into the cause of the incident and assessment of the damage will be ongoing in the days or weeks to come.”
The case is Roshto v. Transocean Ltd. and BP Plc, 2:10-cv- 01156, U.S. District Court, Eastern District of Louisiana (New Orleans).
Mariner Energy Faces Investor Suit Over Apache Bid
Mariner Energy Inc., the oil and gas explorer being bought by Apache Corp. for more than $2 billion in cash and stock, was sued in Delaware Chancery Court by a shareholder contending the deal undervalues the company.
The sale comes at a fraction of Mariner’s true value, the Southeastern Pennsylvania Transportation Authority said April 21 in a complaint in Delaware Chancery Court. Philadelphia-based SEPTA is the nation’s fifth-largest public transportation system.
“The merger represents a staggeringly good deal for Apache and conversely a staggeringly bad deal for Mariner’s shareholders,” lawyers for SEPTA said in the complaint. “Mariner’s stockholders will receive a token cash payment and shares in Apache, a much larger company with a wholly different asset portfolio than Mariner’s.”
Apache, the second-largest independent U.S. oil producer, has spent about $10 billion on acquisitions in the past decade. Under the buyout, Mariner shareholders will get 0.17043 share of Apache and $7.80 in cash for each of their shares. Apache will assume $1.2 billion in debt.
A Mariner spokesman, Patrick Cassidy, said the company doesn’t comment on pending litigation.
The deal gives Apache access to Mariner’s 2 billion barrels of oil equivalent in potential reserves, Simmons & Co. analyst Bill Herbert said in an April 15 note to investors. The deal will also add to Apache’s holdings in shallow Gulf of Mexico waters and in the Permian Basin of West Texas.
SEPTA is seeking a court order barring the transaction plus unspecified damages.
The case is SEPTA v. Josey, CA5427, Delaware Chancery Court (Wilmington).
Ex-Siemens Executive Charged With ‘Tolerating’ Bribery
Siemens AG’s former management board member Thomas Ganswindt was charged by Munich prosecutors for failing to halt corruption at the company.
Ganswindt, 49, was charged with failing to adequately supervise a company and aiding both bribery and tax evasion, the Munich Regional Court said in an e-mailed statement detailing the allegations yesterday. The charges were made in January.
Ganswindt is the first former member of Siemens’s management board to be indicted over the bribery scandal that led to investigations in at least a dozen countries since 2006. Siemens agreed to pay $1.6 billion to settle probes in the U.S. and Germany in 2008. Probes against individual managers are ongoing.
“The accused is alleged to have violated his duty of seeing that laws are complied with at the company, by tolerating and supporting a system of slush funds,” at Siemens, the court said.
Ganswindt headed Siemens’s former communications unit from 2001 to 2004, when he became a member of the company’s central management board. In mid-2003, he learned that former Siemens employee Reinhard Siekaczek had set up a system of slush funds at the unit, according to the charges.
Michael Rosenthal, Ganswindt’s attorney, declined to comment.
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Celgene to Get Canada High Court Hearing Over Thalomid Pricing
Celgene Corp., the biotechnology company specializing in blood-cancer medicines, will get a hearing before Canada’s highest court over the country’s demands to provide pricing information for the drug Thalomid.
The Supreme Court of Canada yesterday agreed to hear Celgene’s appeal of a Federal Court of Appeal ruling that said Canada’s Patented Medicine Prices Review Board was entitled to information about the pricing of the drug. The high court gave no reason for its decision.
Celgene’s two top-selling drugs are Revlimid and Thalomid, for a form of blood-cancer called multiple myeloma. They brought in more than 80 percent of the company’s total $2.25 billion in 2008 revenue. Celgene didn’t have approval to sell Thalomid in Canada, although it had permission from regulators to provide the medicine to Canadian doctors for emergency treatment.
The appeals court, in a 2-1 ruling on Dec. 23, said the price review board “has a legitimate interest” in the price paid for the medicine “because this is the price that will be paid for the medicine by the ultimate consumer in Canada.”
Celgene, based in Summit, New Jersey, had argued the drug was sold at its New Jersey plant and shipped to the Canadian doctors. As a result, Celgene said the review board didn’t have the jurisdiction to demand the pricing information.
The case is Celgene Corp. v. Attorney General of Canada, 33422, Supreme Court of Canada (Ottawa).
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Standard Chartered Ordered to Pay Banker It Fired on First Day
Standard Chartered Plc was ordered by Singapore’s High Court to pay Fermin Aldabe for wrongful dismissal after the lender’s global senior risk manager said he would resign on his first day on the job.
The London-based bank must pay Aldabe at least S$40,333 ($29,384) including one month’s salary of S$27,500 and his wage from Nov. 17 to Nov. 30, 2008, Justice Steven Chong said in his judgment yesterday. Aldabe was fired after saying he’d resign when told he wouldn’t be paid for a two-week period before the start date stipulated in his offer letter.
While Standard Chartered will also have to reimburse Aldabe his relocation costs to Singapore from Argentina, where he had been based, Judge Chong rejected his claim for S$1.54 million including losses for giving up another job opportunity. The judge described the sum as “astronomical and outrageous.”
“The court has found that Standard Chartered is not above the law and cannot withdraw from a contract without consequences,” Aldabe, now a senior research fellow at the National University of Singapore’s Risk Management Institute, said in an e-mailed response yesterday, adding that he was “very pleased” with the ruling.
Standard Chartered was “glad that a significant portion” of Aldabe’s claim was dismissed, the bank said. The ruling is a “substantial victory” as the bank successfully defended the claim of fraudulent misrepresentation, said Standard Chartered’s lawyer Herman Jeremiah from Rodyk & Davidson LLP.
The case is Aldabe Fermin v Standard Chartered Bank 174/2009/B in the Singapore High Court.
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Close Brothers Loses Appeal of $6.2 Million Fine
Close Brothers Group Plc, a British investment bank founded in 1878, lost a court challenge over a 4 million-pound ($6.2 million) market-abuse fine levied by the U.K.’s Financial Services Authority.
Close Brothers’ Winterflood Securities unit and two of its brokers were fined because they didn’t spot “warning signs” of a 2004 share-ramping scheme in securities of Fundamental-E Investments Plc, the FSA said. Close Brothers challenged the fine, claiming that because it didn’t intend to distort the price of the shares, it didn’t commit market abuse.
The Court of Appeal in London dismissed the appeal yesterday. Justice Martin Moore-Bick said in the judgment that FSA rules relating to “market abuse of a kind which creates a false impression or distorts the market” aren’t limited to situations when “the transaction was motivated, at least in part, by an intention to achieve either of these results.”
“There is no finding, that Winterflood or its traders deliberately or knowingly committed market abuse,” Close Brothers said in an e-mailed statement. “This financial penalty, together with the costs of the referral, has been fully provided for by Winterflood in prior years.”
Two traders, Stephen Sotiriou and Jason Robins, were fined 200,000 pounds and 50,000 pounds respectively.
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Deutsche Telekom Should Lose Appeal of Fine, Court Aide Says
Deutsche Telekom AG, Europe’s biggest phone company, should lose a final appeal of a 12.6 million-euro ($16.9 million) European Union antitrust fine levied seven years ago for abusing its dominant market position in Germany, an adviser to the EU’s top court said.
The company’s appeal is “unfounded” and “must be dismissed,” Advocate General Jan Mazak of the European Court of Justice in Luxembourg said in a non-binding opinion yesterday. The court follows such legal advice most of the time.
The European Commission, the EU’s antitrust regulator, accused Deutsche Telekom in May 2003 of overcharging competitors for access to its local phone network, saying the Bonn-based company’s so-called margin squeeze deterred new companies from entering the market. Deutsche Telekom, which appealed two months later, agreed to cut its fees in 2004.
Deutsche Telekom lost a first appeal of the fine two years ago, when the EU’s second-highest court backed the commission’s decision that the company had abused its dominant position by charging competitors higher prices than the retail prices end- users had to pay.
Spokespeople for Deutsche Telekom didn’t respond to calls seeking comment.
The case is C-280/08 P Deutsche Telekom v Commission.
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Lehman Liquidator Fees Top a Quarter-Billion Dollars
Alvarez & Marsal LLC, the liquidator of bankrupt Lehman Brothers Holdings Inc., has collected $262.2 million in fees over 18 months, topping a quarter-billion dollars for its work, according to a regulatory filing.
Milbank Tweed Hadley & McCloy LLP, the law firm for the Lehman creditors’ committee, got $47.7 million through March 31. Dennis Dunne, a lawyer from the firm, didn’t respond to an e- mail seeking comment.
The defunct investment bank also disclosed fees paid to the law firms mounting suits against Barclays Plc, scheduled to go on trial April 26 in U.S. Bankruptcy Court in Manhattan over Lehman’s allegation that it made an $11 billion “windfall” on its 2008 purchase of the North American Lehman brokerage.
Jones Day, Lehman’s special counsel for U.S. and Asian litigation, made $20.5 million through March 31. Quinn Emanuel Urquhart Oliver & Hedges LLP, special counsel to the creditors’ committee, made $6 million, according to the filing.
Jenner & Block LLP, the law firm headed by Lehman examiner Anton Valukas, earned $48.4 million for more than a year’s work producing a 2,200-page report on the bankruptcy that was the subject of a hearing in Washington this week about flaws in regulation of banks.
Weil Gotshal & Manges LLP of New York collected $164.8 million for acting as the investment bank’s lead bankruptcy law firm.
Lehman, once the world’s fourth-biggest investment bank, filed the biggest U.S. bankruptcy in September 2008 with assets of $639 billion. It has said it will spend five years liquidating to pay unsecured creditors as little as 14.7 cents on the dollar.
The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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Delaware Judge Drops Lawyers, Challenges Business as Usual
When J. Travis Laster left private practice last fall for a seat on the Delaware Chancery Court, the 40-year-old attorney said he had found a “dream” job.
The five-member Wilmington-based Court of Chancery hears cases that run from neighborhood property disputes to stockholder challenges to the nation’s biggest corporate takeovers. There are no juries, and because it’s a so-called equity court, the judges can base decisions on fairness when the law doesn’t directly address the issue at hand.
Laster’s dream job turned into a nightmare for some lawyers who appear before him. Laster took the extraordinary step in March of removing three law firms as lead counsel in a Revlon Inc. shareholder suit. They lost the potentially lucrative designation because he found they proposed settling the case without adequately probing for corporate misdeeds.
“Their advocacy has been nonexistent,” Laster wrote of the firms he replaced. “No one actually litigated anything.”
In the usually collegial confines of the Delaware courts, where more than half of all Fortune 500 companies litigate their disputes, the new judge may have voiced what others thought about practices there, said John C. Coffee Jr., professor of securities law at Columbia University in New York.
Laster didn’t return a call seeking comment.
The case is In Re: Revlon Inc. Shareholders Litigation, CA4578, Delaware Chancery Court (Wilmington).
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To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York, at email@example.com.