While Fabrice Tourre may have found himself fabulous when devising intricate transactions and presuming he survived their collapses, the e-mail trail he left behind was a less-than-marvelous repetition of history.
E-mails from the Goldman Sachs Group Inc. director are the center of the case saying the firm misled investors into a mortgage-linked investment. In one he wrote, “The whole building is about to collapse anytime now,” according to the complaint. “Only potential survivor, the fabulous Fab.”
His messages, Bloomberg News’ Katie Hoffmann reports, have left lawyers asking: What was he thinking?
“It is shocking how people are oblivious to the fact that e-mails are a treasure trove for lawyers,” said Jacob Frenkel, a partner at Shulman Rogers Gandal Pordy & Eckerin in Potomac, Maryland. “It’s a combination of not thinking, ignorance and arrogance.”
Corporate history is filled with instances of employees sending e-mails -- and coming to regret it.
American Home Products Corp., a predecessor of what is now Pfizer Inc.’s Wyeth unit, was forced to set aside billions to pay to dieters who suffered heart-valve damage and a fatal lung disease as a result of taking its diet pills. In some of the cases, the plaintiffs’ lawyers produced an American Home memo that they said characterized the company’s callous attitude toward the health problems.
“Do I have to look forward to spending my waning years writing checks to fat people worried about a silly lung problem?” said the e-mail from a low-level American Home official to one of the company’s executives.
Tourre, 31, is accused of misleading an investor, ACA Management LLC, into thinking that a hedge fund planned to invest in the equity of the deal instead of betting against it. He is denying the allegations. Pamela Chepiga, his lawyer at Allen & Overy LLP in New York, didn’t return a call.
In a January 2007 e-mail to a friend, he described “all these complex, highly leveraged exotic trades” that he created “without necessarily understanding all the implications of those monstruosities!!!”
E-mails help prosecutors because they show “the intent or mindset of someone,” said Charles Parker, head of securities practice at Locke Lord Bissell & Liddell in Houston. “Once a judge admits one of these e-mails into evidence, the company knows it’s in trouble.”
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Barofsky Says Criminal Charges Possible in Alleged AIG Coverup
Neil Barofsky, head of the Office of the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, has criticized the process by which insurer American International Group Inc. was saved from insolvency in 2008.
The secrecy that enveloped the deal was unwarranted, Barofsky says, adding that his probe of an alleged New York Fed coverup in the AIG case may result in criminal or civil charges, Bloomberg News’ Richard Teitelbaum reports.
In Senate Finance Committee testimony on April 20, Barofsky said SIGTARP would investigate seven AIG-linked mortgage-related securities similar to Abacus 2007-AC1, the instrument underwritten by Goldman Sachs Group Inc. that is at the center of a U.S. Securities and Exchange Commission lawsuit filed against the investment bank on April 16.
“I’ve been in contact with the SEC,” he told the committee. “We’re going to coordinate with them, but we’re going to lead the charge. We’re going to review these transactions.”
Barofsky and Treasury Secretary Timothy F. Geithner, who was head of the Federal Reserve Bank of New York at the time of the AIG bailout, have gone toe-to-toe over AIG, alleged lax oversight of TARP funds and even over the question of whom Barofsky reports to.
Barofsky, a former federal prosecutor who was once the target of a kidnapping plot by Colombian drug traffickers, says he’s also looking into possible insider trading connected to TARP. He says his agency would want to know if bankers bought stock in their companies before it was made public that their institutions would get TARP money, for example.
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Rajaratnam Sued Partner for Leaving Him Out of Lucrative Deal
Nine years before his indictment for using confidential tips to trade stocks, Raj Rajaratnam, a co-founder of hedge fund firm Galleon Group LLC, sued a partner for leaving him out of the loop on a deal that may have made him millions of dollars.
In September 2000, Rajaratnam filed a fraud lawsuit against the founder of a Silicon Valley venture capital firm in which he invested, TeleSoft Partners LP. In the complaint, Rajaratnam claimed Arjun Gupta, TeleSoft’s founder, and Prabhu Goel, a member of its advisory board, deprived him of an investment opportunity by concealing news of a 1999 transaction.
The two men engaged in “blatant self-dealing” and sought to “deprive plaintiffs and other limited partners of the opportunity to share in this investment,” Rajaratnam and Galleon co-founder Gary Rosenbach alleged in their complaint in Manhattan federal court.
Rajaratnam, who faces federal insider trading charges in the biggest such scheme ever alleged at a hedge fund, may have to answer questions about the lawsuit should he testify at his own trial in October. On cross-examination, prosecutors may seek to use details from the litigation to show his “thirst for information,” said Jacob Frenkel, a former federal prosecutor now in private practice in Potomac, Maryland.
“For someone to bring such a claim suggests that they were prepared to pursue aggressively access to information, and had certain expectations about information,” Frenkel said of the 2000 suit, which settled the next year on confidential terms.
Jim McCarthy, a spokesman for Rajaratnam, and Yusill Scribner, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined to comment. Gupta and Goel didn’t return calls seeking comment. Rosenbach said in an interview that Rajaratnam handled the TeleSoft suit, which he doesn’t recall.
“He must have felt he had an injustice done against him,” Rosenbach said.
Rajaratnam, 52, is the central figure in a wide-ranging insider trading probe that has led to charges against 21 people, including 11 who have pleaded guilty. Prosecutors said Rajaratnam used secret tips from hedge fund executives, corporate officials and other insiders to earn millions of dollars in illegal stock trades. He denies the charges.
The case is Rajaratnam v. Arjun Gupta, 00-cv-06733, U.S. District Court, Southern District of New York (Manhattan).
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Bank of America Loses Court Freeze on Colonial Assets
Bank of America Corp., the biggest U.S. lender, lost a court-ordered freeze on assets of the failed Colonial BancGroup Inc.
The decision by the U.S. Court of Appeals in Atlanta overturned a judge’s order blocking the Federal Deposit Insurance Corp. from disposing of assets claimed by Bank of America. The Charlotte, North Carolina-based bank hadn’t exhausted administrative remedies, so it couldn’t yet pursue claims for $1 billion in cash and loans, the court said in its decision made public yesterday.
Colonial was closed by regulators and taken over by BB&T Corp. last year after the company acknowledged it had about $1.7 billion in bad real-estate loans.
Bank of America sued Colonial to block disposition of the assets, claiming the Montgomery, Alabama-based bank was holding them in trust for one of its units. A federal judge in Miami last September extended an injunction barring the FDIC and Colonial from disposing of those assets.
The FDIC appealed, arguing that the lower court didn’t have jurisdiction to block the oversight agency from fulfilling its function as a receiver. It also argued that Bank of America must first pursue any claims administratively, under the federal Financial Institutions Reform, Recovery and Enforcement Act of 1989.
The three-judge federal appeals court panel, which included retired U.S. Supreme Court Justice Sandra Day O’Connor, agreed.
Shirley Norton, a Bank of America spokeswoman, didn’t immediately return a call seeking comment on the court’s decision.
Andrew Gray, an FDIC spokesman, didn’t return a call seeking comment.
The case is Bank of America NA v. Colonial Bank, 09-14739, U.S. Court of Appeals for the 11th Circuit (Atlanta).
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Moody’s, S&P Lose Bid to Dismiss Rhinebridge Suit
Moody’s Corp. and McGraw-Hill Cos.’ Standard & Poor’s unit lost a bid to dismiss a lawsuit claiming the two rating companies misled investors in a structured investment vehicle known as Rhinebridge.
U.S. District Judge Shira Scheindlin didn’t rule on the merits of the 2009 case and said only that the investors had alleged enough facts for the lawsuit to go forward.
“The risk that caused plaintiffs’ losses -- that Rhinebridge consisted of toxic assets that would become worthless -- was precisely within the zone of risk concealed by the top ratings” given by the ratings companies, the judge said in a 29-page opinion issued yesterday in New York.
The institutional investors who sued -- King County, Washington, and the Iowa Student Loan Liquidity Corp. -- claimed the ratings companies and other defendants such as IKB Deutsche Industriebank AG, the German lender that managed the SIV, misrepresented the value of Rhinebridge and its debt.
The plaintiffs were among states and local governments that invested in SIVs. The investment vehicles issued short-term debt and used the proceeds to purchase higher-yielding mortgages, credit card receivables or other loans. After credit dried up and Rhinebridge collapsed, the plaintiffs sued, saying “false” evaluations hid the risks.
“We are confident that when the court considers more than the plaintiffs’ baseless allegations -- which it was required to accept as true at this preliminary stage of the cases -- it will be apparent that the facts and applicable law do not support the claim, and we will prevail,” Frank Briamonte, a spokesman for McGraw-Hill, said in a statement. Thomas Lemmon, a spokesman for Moody’s, didn’t have immediate comment.
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Ex-Rothstein Law Firm Manager Charged in Ponzi Scheme
The former chief operating officer of the defunct Fort Lauderdale, Florida, law firm at the center of an alleged $1.2 billion Ponzi scheme was charged with money-laundering conspiracy.
Debra Villegas, 42, was accused yesterday of helping Scott W. Rothstein sell investors discounted stakes in bogus cases that were supposedly being handled by his firm, Rothstein Rosenfeldt Adler PA. Villegas was charged by federal authorities in Fort Lauderdale.
“She could have done the right thing and reported Rothstein’s fraud to law enforcement, but instead she assisted him in carrying out the scheme,” John V. Gillies, the special agent in charge of the FBI’s Miami office, said in a statement.
Prosecutors asked that Villegas be required to forfeit real estate in Weston, Florida, a 2009 Maserati and $1.2 billion in cash -- the total losses in the alleged scheme -- according to both the charging document and the FBI statement.
A lawyer for Villegas, who is scheduled to be arraigned in federal court in Fort Lauderdale today, couldn’t be reached for comment. Villegas was charged in a document known as a criminal information. Prosecutors typically charge by information, rather than letting a grand jury issue an indictment, in cases in which defendants have agreed to cooperate.
Rothstein in January pleaded guilty to two counts of wire fraud and three conspiracy charges. He used the Ponzi scheme to keep afloat his law firm, fund a lavish lifestyle and buy political influence, he admitted. He faces as long as 100 years in prison at his sentencing June 9.
The case is U.S. v. Villegas, 10-60126, U.S. District Court, Southern District of Florida (Fort Lauderdale).
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Lehman Executives Didn’t Conceal Barclays Profit, McDade Says
Lehman Brothers Holdings Inc.’s former president said company executives negotiating the sale of its brokerage to Barclays Plc made no attempt to conceal from their advisers that the British bank might profit from the deal.
Herbert “Bart” McDade, who helped negotiate the Barclays deal and is now a managing member of investment firm River Birch Capital LLC, was the first witness yesterday in a trial that began April 26 over whether Barclays should pay as much as $11 billion to Lehman for the alleged “windfall” the bank received when it bought the brokerage.
The fight in U.S. Bankruptcy Court in Manhattan before Judge James Peck pits the U.K.’s second-biggest bank, which more than doubled its profit last year, against Lehman, which wants money to pay off creditors and brokerage customers. Lehman said Barclays failed to tell the court how much money it made on the deal, which was sealed in the wake of Lehman’s 2008 bankruptcy, the biggest in U.S. history.
McDade said yesterday that Lehman’s lawyers at Weil Gotshal & Manges LLP and Simpson Thacher & Bartlett LP were at meetings where assets were valued before the sale. That statement is at odds with allegations by Lehman and its creditors that Barclays was given a “secret” discount that was never disclosed to Lehman’s advisers or the court.
McDade said that in negotiating the sale, “we wanted to move all of our illiquid securities in terms of our challenge in managing the balance sheet.” He recognized Barclays was better off not taking them, he said in response to questions from Barclays’s lawyer, David Boies of New York-based Boies Schiller & Flexner LLP.
“You never had any discussion with anyone at Barclays about the idea of a discount?” Boies said.
“No, I did not,” McDade said.
Barclays, which reported the $4 billion gain on the brokerage in 2008, has said Lehman is unlawfully trying to reopen a sales contract approved by the judge.
The cases are In re Lehman Brothers Holdings Inc., 08- 13555, and James W. Giddens v. Barclays Capital Inc., 09-01732, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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Virgin Boss Sought to ‘Sound Out’ BA, Lawyer Says
Virgin Atlantic Airways Ltd. owner Richard Branson asked an executive to “sound out” a contact at rival British Airways Plc over proposed changes to fuel surcharges, a prosecutor told a London court.
Branson in 2005 explored charging first class passengers a higher fuel surcharge and reducing the charge for economy passengers, prosecutor Richard Latham told the court at a price- fixing trial yesterday. Latham said Branson asked commercial director Willy Boulter to find out what BA’s response would be.
Three former BA executives and one current manager are being tried for scheming with Virgin to fix fuel surcharges on trans-Atlantic flights. The airlines are the top long-haul carriers at London’s Heathrow, Europe’s busiest airport. Virgin’s employees gained immunity by admitting their roles in the scheme. BA has paid $628 million to cover related fines and class-action settlements.
“Branson wanted Boulter to sound out his contact to see if BA would follow,” Latham said. “Boulter was reluctant to do this” because he thought the discussions would be more complicated than previous talks.
Prosecutors said that the carriers colluded from July 2004 through April 2006 to match fees charged to passengers to cover rising fuel costs, the U.K.’s antitrust regulator said at the trial in Southwark Crown Court.
Andrew Crawley, British Airways’ head of sales; Martin George, a former board member; Iain Burns, ex-head of communications; and Alan Burnett, former head of U.K. and Ireland sales, are pleading not guilty.
The men could be sentenced to as long as five years in prison if convicted.
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Monsanto Urges U.S. High Court to Reverse Ban on Alfalfa Seeds
Monsanto Co. asked the U.S. Supreme Court to set aside a judge’s order barring the planting of alfalfa seeds engineered to be resistant to the company’s Roundup herbicide.
Monsanto, the world’s largest seed maker, said a federal judge should have held a hearing to test allegations that the seeds were likely to contaminate organic plants. The seeds were banned until the U.S. Agriculture Department completes work on an environmental impact statement.
“The injunction is unlawful and is causing harm today,” Gregory Garre, an attorney for Monsanto, told the justices.
Alfalfa, the fourth-most-planted U.S. crop behind corn, soybeans and wheat, is worth $9 billion a year, with annual seed sales valued at $63 million, according to a USDA study. Dairy cows are the primary consumers of alfalfa hay.
The Supreme Court is due to issue a ruling by July in the case.
The case is Monsanto v. Geertson Seed Farms, 09-475. U.S. Supreme Court (Washington).
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SEB, HVB Appeal Ruling on Brewer’s ‘Gambling Monster’
Bayerische Hypo-und Vereinsbank AG and SEB AB appealed a Singapore court ruling that Asia Pacific Breweries Ltd. wasn’t responsible for $57 million in loans taken out by a former executive to fund his gambling addiction.
Singapore’s Court of Appeal will deliberate on the “extremely complicated case” before making a decision, Chief Justice Chan Sek Keong said at the hearing yesterday. The banks had sought to dismiss an Aug. 31 ruling that they were “easy prey” to loans fraudulently obtained by Chia Teck Leng, the Singapore-based company’s former finance manager, in the brewer’s name.
Skandinaviska Enskilda Banken, also known as SEB, and HVB were reckless and took their “eyes off the ball,” by ignoring their usual procedures in dealing with Chia, Davinder Singh, Asia Pacific Breweries’ lawyer, told the court yesterday. Both European banks say the company should be liable for their losses as Chia was the most senior finance person in the brewer’s Singapore unit and responsible for financial matters.
There was a “deafening silence” on the brewer’s own lapses in allowing Chia to carry out his fraud from 1999 to 2003, said Alvin Yeo, a lawyer for Munich-based bank HVB.
Asia Pacific Breweries wants “to go scot-free when they unleashed this gambling monster on the banking community,” said Sundaresh Menon, a lawyer for Stockholm-based SEB. Putting a gambler in charge of finances was like “putting an alcoholic in charge of a brewery,” he said.
Chia signed loan agreements in the front seat of his car, made telegraphic transfers to an unnamed patron account at Crown Ltd., Australia’s biggest casino owner, and had the banks send correspondence to a post office box address, warning signs which the banks missed, Singh said.
“Any reasonable banker exercising common sense and prudence would have been incredulous,” he added.
Both SEB and HVB missed discrepancies in documents that “were staring bank officers in the face” and ignored normal procedures when dealing with Chia, Judge Belinda Ang said in August. Chia, described as an “inveterate gambler who unremittingly resorted to cheating and forgery” by Ang, was sentenced to 42 years in jail in 2004 for cheating and forgery.
Ola Kallemur, a Stockholm-based spokesman for SEB, declined to comment. A spokeswoman at UniCredit SpA, which acquired HVB, couldn’t immediately comment.
The cases are Skandinaviska Enskilda Banken AB, Singapore Branch v. Asia Pacific Breweries (Singapore) Pte Ltd. & Another, CA121/2009; and Bayerische Hypo-Und Vereinsbank Aktieengesellschaft v. Asia Pacific Breweries (Singapore) Pte Ltd. & Another, CA122/2009, Singapore High Court.
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Investor Suit Deadlines Eased by Court in Merck Case
The U.S. Supreme Court relaxed the deadlines for shareholder fraud lawsuits, saying investors can proceed with accusations that Merck & Co. misled the public about the risks posed by its now-withdrawn Vioxx painkiller.
The nation’s highest court unanimously ruled that the two- year window for shareholder suits under federal law hadn’t closed by the time the first shareholders sued Merck in November 2003. The court said that two-year period doesn’t begin until investors have indications of intentional company wrongdoing.
The ruling will mean more flexibility for shareholder lawyers, giving them longer to decide whether to file fraud lawsuits. The decision will extend the length of time companies are vulnerable to suits over alleged misconduct.
Writing for the court, Justice Stephen Breyer said that, because shareholders must prove intentional deception, they shouldn’t have to file a suit before they have a reasonable chance to get evidence of that element of the case.
“Merck is disappointed in today’s decision, but believes that the allegations in the complaint are unfounded and will continue to defend itself vigorously,” Bruce Kuhlik, Merck’s general counsel, said in a statement. Kuhlik said the company would seek to have the suit dismissed on other grounds.
Merck pulled Vioxx from the market in September 2004 because of links to heart attacks and strokes.
The case is Merck v. Reynolds, 08-905, U.S. Supreme Court (Washington).
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Boston Scientific Unit’s Defibrillator Plea Rejected
A judge rejected a Boston Scientific Corp. unit’s guilty plea to charges it hid defects in heart defibrillators, after some doctors and patients complained about the deal.
U.S. District Judge Donovan Frank in St. Paul, Minnesota, yesterday rebuffed the Guidant unit’s plea agreement with prosecutors and suggested the company should be placed on probation for failing to disclose defects with its heart devices to regulators. Boston Scientific agreed to plead guilty to two misdemeanors and pay $296 million to settle a U.S. Justice Department probe.
“At a minimum, the public’s interest in accountability would be served by Guidant and Boston Scientific being placed on probation,” Frank said in his 37-page ruling yesterday.
Prosecutors said in court papers Guidant officials learned as early as 2002 some of the implantable defibrillators had a tendency to short circuit and caused users’ deaths. The company didn’t disclose the defects for more than three years, the government said.
Paul Donovan, a Boston Scientific spokesman, didn’t return calls for comment on the judge’s ruling.
The case is U.S. v. Guidant LLC, 10-mj67-DWF, U.S. District Court, District of Minnesota (St. Paul).
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AstraZeneca to Pay $520 Million to Settle U.S. Seroquel Probe
AstraZeneca Plc agreed to pay $520 million to resolve U.S. investigations into the marketing of the schizophrenia drug Seroquel, the Justice Department said yesterday.
The London-based company said in October that it had reached an “agreement in principle” to settle allegations it marketed Seroquel for unapproved uses.
With sales of $4.87 billion last year, the drug was the company’s second-biggest seller after the ulcer medicine Nexium. The agreement follows similar settlements by drugmakers including New York-based Pfizer Inc. and Eli Lilly & Co. of Indianapolis.
AstraZeneca is facing as many as 26,000 lawsuits over Seroquel, according to court filings. The company in March won the first of the cases to come to court. The suits claim the drug caused diabetes, and many also claim the company promoted Seroquel, approved for schizophrenic and bipolar patients, for uses that hadn’t been approved on the drug’s label.
In the U.S., doctors may prescribe medicines for unapproved uses. Companies are barred from marketing them for uses not cleared by regulators.
Seroquel is approved by U.S. regulators for use in treating adults and adolescents with bipolar disorder or schizophrenia and as an add-on therapy for adults taking antidepressants.
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Refco Investors’ Mayer Brown Lawsuit Barred by Court
Mayer Brown LLP and a former partner of the Chicago-based law firm can’t be sued by Refco Inc. investors over work done for the futures trader that collapsed after a fraud was discovered, an appeals court said.
The U.S. Court of Appeals in Manhattan yesterday upheld a 2009 lower-court ruling that barred Refco investors from suing. The issue before the three-judge panel was whether a company’s outside counsel can be liable for false statements that the lawyers created but which weren’t attributed to the firm or its attorneys when they were disseminated.
“We hold that a secondary actor can be liable for false statements in a private damages action for securities fraud only if the statements are attributed to the defendant at the time the statements are disseminated,” the court said.
U.S. District Judge Gerard Lynch in New York in March 2009 threw out the case against the law firm and Joseph Collins, the former partner who was in charge of Refco’s account.
Under federal securities law and a U.S. Supreme Court case called Stoneridge, they couldn’t be sued by individual investors for aiding a fraud. Lynch ruled.
The case is PIMCO v. Mayer Brown, 09-1619, 2nd U.S. Circuit Court of Appeals (Manhattan).
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To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York, at firstname.lastname@example.org.