Morgan Stanley Chief Executive Officer James Gorman denied allegations the U.S. bank misled investors about mortgage derivatives it sold them.
The firm is being probed by U.S. prosecutors over whether the bank misled clients when it sold them collateralized debt obligations as its own traders bet that the value of the securities would drop, the Wall Street Journal reported today. The New York-based firm hasn’t been contacted by the Justice Department, Gorman told reporters in Tokyo today.
Wall Street firms are facing unprecedented scrutiny from lawmakers and prosecutors over whether they missold CDOs linked to the subprime mortgages that caused the credit crisis. Goldman Sachs Group Inc. is fighting a lawsuit from the U.S. Securities and Exchange Commission, which alleges the firm misled investors about a mortgage-linked security in 2007.
“We should expect to see a whole slew of cases appear through the rest of the year,” said Ralph Silva, an analyst at London-based Silva Research Network, which specializes in financial services firms. “Because they are near-impossible to prove, I suspect most are going to be settled on the threat of a perp walk.”
Morgan Stanley arranged and sold CDOs backed by home loans, even as its trading desk would sometimes bet that their value would fall, the Journal said, citing traders. The investigation is reviewing whether Morgan Stanley clearly represented its roles, according to the report.
“We have no reason to believe there is any substance behind any supposed investigation that appeared in the Wall Street Journal article,” Gorman said at the press conference, convened to discuss the firm’s Japanese securities and investment banking ventures with Mitsubishi UFJ Financial Group Inc.
Spokesmen for the Manhattan U.S. Attorney’s office and the SEC declined to comment, the Journal said.
The probe stemmed from an ongoing civil-fraud investigation of more than a dozen Wall Street firms’ mortgage bond businesses by the SEC that began in 2009, the newspaper said. The Manhattan U.S. Attorney’s office is conducting a criminal probe into some of those firms’ activities, it said.
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Cuomo Sues Bank of New York Mellon’s Ivy Over Madoff
New York Attorney General Andrew Cuomo sued Ivy Asset Management LLC, its former Chief Executive Officer Lawrence Simon and ex-Chief Investment Officer Howard Wohl claiming that the fund misled clients about investments tied to Bernard Madoff.
Ivy, a New York-based investment adviser owned by Bank of New York Mellon, withheld damaging information about Madoff so the firm could make millions of dollars in fees, Cuomo said yesterday in a statement.
From 1998 to 2008, Ivy was paid more than $40 million to give advice and conduct due diligence for clients with large Madoff investments, Cuomo said. Internal e-mails reveals that even after the company learned Madoff wasn’t investing client funds as promised, Ivy kept silent so as to not lose the fees, according to Cuomo.
Ivy said it would defend itself against the claims, saying in a statement yesterday that it informed its clients that the company “had questions about Madoff that it could not answer,” and it recommended that clients “reduce their exposure to Madoff.”
The advisory business that is the focus of the complaint is no longer in operation and the executives involved left in 2008, Ivy said in the statement.
Madoff pleaded guilty last year to running a $65 billion fraud, the biggest Ponzi scheme ever, and is serving a 150-year prison term.
Cuomo is seeking damages and penalties from Ivy, Simon and Wohl, and all fees that Ivy received. He also seeks to bar Simon and Wohl from acting as investment advisers.
Any restitution would go to Ivy’s alleged victims, which include hundreds of investors as well as 76 upstate New York union pension and welfare plans, according to Richard Bamberger, a Cuomo spokesman.
The case is New York v. Ivy, New York state Supreme Court (Manhattan).
3i Is Sued by Gaming Pair Over Equity-Fund Closure, Times Says
3i Group Plc, the longest-established U.K. private-equity company, is being sued for 6.12 million pounds ($9 million) over the closure of an equity fund, the London-based Times reported.
Richard Segal and Stephen Hill, who were brought in to set up and run the 400 million-pound Quoted Private Equity fund, are suing 3i in London’s High Court after being told in February 2009 that the fund was being closed and they would forfeit certain performance payments, the newspaper said.
Segal, the former chief executive officer of PartyGaming Plc and Stephen Hill, the ex-CEO of Betfair Ltd., say that, before joining 3i, they had “each established themselves as highly successful businessmen,” the Times reported, citing legal documents it’s reviewed.
Neither of the two could be reached for comment and 3i declined to comment, the newspaper said.
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Iceland Issues Warrant for Kaupthing Ex-Chairman Einarsson
Iceland’s special prosecutor is investigating Kaupthing’s 2008 collapse as well as alleged market manipulation and forgery before and after it.
Four people have been arrested in the probe of Kaupthing, formerly Iceland’s largest bank. Ingolfur Helgason, who was the bank’s chief executive officer of Iceland operations, and former Chief Risk Officer Steingrimur Karason were arrested when they returned to Iceland yesterday. The two were questioned by prosecutors throughout the day.
“The investigation is ongoing and I’m unable to comment on its next steps,” Special Prosecutor Olafur Thor Hauksson said yesterday in a phone interview.
A Reykjavik court on May 7 ordered that former Kaupthing worldwide CEO Hreidar Mar Sigurdsson and Magnus Gudmundsson, the co-chief executive of a one-time Kaupthing unit in Luxembourg, be held in solitary confinement to protect the integrity of the investigation. Sigurdsson and Gudmundsson were arrested May 6 on suspicion of forgery and market manipulation.
Kaupthing, Glitnir Bank hf and Landsbanki Islands hf collapsed in October 2008 after they amassed debt of $61 billion, equivalent to 12 times the country’s gross domestic product. The government took over the three banks and was forced to seek an International Monetary Fund bailout as its currency lost as much of 80 percent of its value.
Calls to Helgason and Karason’s offices at Consolium Sarl, a Luxembourg-based consulting firm, either didn’t go through or were immediately disconnected. Einarsson couldn’t be reached for comment after regular business hours.
Iceland Freezes Assets of Johannesson in HF Group Tax Probe
Icelandic authorities froze the assets of Jon Asgeir Johannesson, the former chairman of FL Group hf, and two other people connected with the investment company that controlled failed lender Glitnir Bank hf.
The Customs Directorate asked the Reykjavik magistrate to freeze 245 million krona ($1.9 million) of Johannesson’s assets to cover potential fines, though investigators found only 152 million krona, according to court documents. Authorities also targeted the assets of former board member Skarphedinn Berg Steinarsson and Jon Sigurdsson, who is chief executive officer of the company now known as Stodir hf.
Steinarsson, reached by telephone yesterday, said he has objected to the freeze. The Reykjavik-based website Visir reported the story yesterday.
FL Group was among the Icelandic investment companies that expanded overseas in the last decade as they sought to escape the bonds of an island nation of 320,000 people. Glitnir, Kaupthing Bank hf and Landsbanki Islands hf helped finance the boom, amassing $61 billion of debt, equivalent to 12 times Iceland’s gross domestic product, before they collapsed in October 2008.
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Burlington Northern Loses Appeal on Overcharging
Burlington Northern Santa Fe Corp., the railroad owned by Warren Buffett’s Berkshire Hathaway Inc., lost an appeal of an agency ruling that its rates were too high.
The U.S. Court of Appeals for the District of Columbia rejected Burlington Northern’s challenge to a decision by the Surface Transportation Board that the railroad overcharged for hauling coal from mines in Wyoming.
The decision may force the railroad to return hundreds of millions of dollars in overcharges and require rate cuts to two utility companies.
While affirming the majority of the board’s ruling, the appeals court sent back to the board Burlington Northern’s assertion of bias in connection with a cost methodology used to determine how much the railroad owes.
Burlington Northern is reviewing the decision, said Steve Forsberg, a company spokesman. The company has the right to seek a rehearing of the case by the full appeals court.
The case is BNSF Railway Co. v. Surface Transportation Board, 09-1092, U.S. Court of Appeals for the District of Columbia.
New Castle’s Kurland Seeks Probation in Galleon Case
Mark Kurland, a co-founder of New Castle Funds LLC, asked a judge to give him probation when he becomes the first defendant sentenced in the Galleon Group LLC insider-trading case that snared Raj Rajaratnam.
Kurland, 51, pleaded guilty on Jan. 27 and is scheduled to learn his fate May 27. Unlike most others who have pleaded guilty in the case, he isn’t cooperating with prosecutors.
A brief written by Kurland’s defense attorney, Patrick Smith, was made public yesterday in federal court in Manhattan. Noting that Kurland “made the worst decision of his life,” and “destroyed his career” by allowing the funds he managed “to trade while he had inside information about three companies,” Smith asked the court to disregard federal sentencing guidelines because Kurland played a “minor role” in the scheme.
Federal sentencing guidelines recommend 24 to 30 months of prison because one of the three illegal trades generated a $900,000 profit, according to Smith’s brief. The two other trades ended in losses.
The case is U.S. v. Kurland, 10-cr-69, U.S. District Court, Southern District of New York (Manhattan).
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Wal-Mart to Pay $86 Million for Wage Claims, Lawyers Say
Wal-Mart Stores Inc. agreed to pay as much as $86 million to settle a class-action lawsuit claiming it failed to pay vacation and other wages owed to thousands of California employees when they left the company, lawyers for the former workers said in a court filing.
Wal-Mart didn’t concede in the settlement that any wages hadn’t been paid, according to court filings yesterday by attorneys for the workers. About 232,000 former employees will share in the settlement, the lawyers said.
The former workers claimed that, after they left the company, Wal-Mart didn’t pay them their holiday or overtime wages or failed to pay the earnings within the time specified by state law, according to a 2006 complaint filed in federal court in Oakland, California.
Greg Rossiter, a spokesman for Wal-Mart, had no immediate comment on yesterday’s filings. Bentonville, Arkansas-based Wal- Mart is the world’s largest retailer.
Wal-Mart, the largest U.S. private employer with 1.4 million workers, agreed in 2008 to pay as much $640 million to settle 63 federal and state class-action lawsuits claiming employees were cheated out of wages.
The settlement of the case in California isn’t part of the earlier accord, said Louis Marlin, an attorney at Marlin & Saltzman in Irvine, California. He declined to comment further.
The case is Smith v. Wal-Mart, 06-02069, U.S. District Court, Northern District of California (Oakland).
Glaxo Said to Pay $60 Million in Avandia Settlements
GlaxoSmithKline Plc agreed to pay about $60 million in the first settlements of lawsuits alleging the company’s Avandia diabetes drug causes heart attacks and strokes in some users, people familiar with the accords said.
Glaxo, the U.K.’s biggest drugmaker, agreed to resolve more than 700 Avandia suits filed by three attorneys, including Houston-based plaintiffs’ lawyer Mark Lanier and Philadelphia- based litigator Sol Weiss, the people said. The settlements come as Glaxo is scheduled to face its first Avandia trial in state court in Philadelphia in July.
Glaxo officials May 10 declined to comment on the settlements. They said the company continues to prepare for trials over Avandia scheduled for this year. The Food and Drug Administration is reviewing Avandia’s safety profile and will present its findings to an advisory committee in July, officials said in a March 30 letter to two U.S. senators who released a report about the drug.
The case is In Re Avandia Marketing, Sales Practices and Products Liability Litigation, 07-1871, U.S. District Court, Eastern District of Pennsylvania (Philadelphia).
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Barclays Settles Lawsuit Over Merrill Fee, Headhunter Says
Barclays Plc agreed to settle a lawsuit in Singapore with Pagoda Partners Pte. for failing to pay a S$365,000 ($264,000) fee for a banker it hired from Merrill Lynch & Co., according to the recruiter.
Pagoda sued Barclays after the executive search firm sent the bank Timothy Last’s resume in January 2009 and wasn’t paid. Last, Barclays Capital’s head of equity derivatives flow sales for Asia, excluding Japan, was hired as a direct referral after Singapore-based Pagoda failed to set up a meeting, Barclays had said in its court filing, adding that there wasn’t an agreement with the recruitment firm.
Pagoda partner Nick Burnham said yesterday that he was “happy” with the out-of-court settlement, declining to reveal terms because of a confidentiality agreement.
Pagoda filed a notice of discontinuance on May 7, court papers show. Timothy Cuffe, a Hong Kong-based spokesman for the London-based bank, declined to comment.
The case is Pagoda Partners Pte. Ltd. vs. Barclays Bank Plc, S977/2009 in the Singapore High Court.
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Kagan’s ‘Thin’ Record Hints She Will Ally With Court Democrats
Elena Kagan’s supporters say they are confident she will join the U.S. Supreme Court’s liberal wing -- even if she lacks the paper trail to prove their point.
Kagan, the U.S. solicitor general nominated by President Barack Obama May 10 to the high court, would be the first non- judge to join the court in 39 years. With no judicial opinions and only a handful of law review articles to her credit, she has largely avoided taking public positions on high-profile issues.
Supporters and detractors alike are nonetheless seizing on her stints in the Clinton and Obama administrations as evidence that she would largely track the views of the president and retiring Justice John Paul Stevens. They also point to Kagan’s characterization of the military’s anti-gay policy as a “moral injustice of the first order.”
Obama on May 10 made Kagan, 50, his second Supreme Court nominee, potentially giving the court three female members for the first time. The president called Kagan a “trailblazing leader” who became the first woman to lead Harvard Law School and then the first female solicitor general.
Senate Republicans yesterday questioned whether Kagan has enough courtroom experience to serve on the court. Republicans also criticized her for opposing military recruiting on the Harvard campus because of the services’ gay ban.
The Associated Press reported yesterday that Kagan in 1997 advised Clinton to support a Democratic proposal that would have limited late-term abortions. The measure was designed as an alternative to a more restrictive Republican bill, which Clinton eventually vetoed.
Since being nominated as solicitor general, Kagan has disappointed liberals with some of her positions on terrorism. She urged the Supreme Court to block Guantanamo Bay inmates who weren’t considered a threat from being released into the U.S.
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