JPMorgan, BP, IRS-Flatotel, AIG, Bumi, Disney, Drydocks, Ambac: Court News

Lehman Brothers Holdings Inc. sued JPMorgan Chase & Co. to recover tens of billions of dollars in “lost value,” accusing the bank of precipitating its downfall and preventing it from winding down in an orderly fashion.

JPMorgan, which was Lehman’s main short-term lender before its September 2008 bankruptcy, helped cause the failure by demanding $8.6 billion of collateral as credit markets tightened during the financial crisis, Lehman said in a complaint filed yesterday in U.S. Bankruptcy Court in New York.

“On the brink of LBHI’s bankruptcy, JPMorgan leveraged its life and death power as the brokerage firm’s primary clearing bank to force LBHI into a series of one-sided agreements and to siphon billions of dollars in critically needed assets,” Lehman said in the complaint.

Lehman, once the fourth-biggest investment bank, has said it may spend another five years selling assets to pay unsecured creditors as little as 14.7 cents on the dollar. Any money recovered through lawsuits may increase the payout.

“The lawsuit is ill conceived, and the costly litigation will cause a further drain on the limited resources available to the Lehman bankruptcy estate,” said Joe Evangelisti, a JPMorgan spokesman.

The lawsuit follows a report by Lehman examiner Anton Valukas, who said in March that Lehman might have grounds for suing JPMorgan and other banks.

Lehman said JPMorgan’s top managers took advantage of privileged information they gained as Lehman’s primary clearing bank to “capitalize” on a Lehman bankruptcy.

JPMorgan Chairman Jamie Dimon knew from meetings in Washington with Federal Reserve Chairman Ben Bernanke and former U.S. Treasury Secretary Henry Paulson that the U.S. wouldn’t rescue Lehman and decided to “accelerate” the bank’s efforts to gain more collateral from Lehman, according to the complaint.

JPMorgan gained extra collateral from Lehman in part by threatening to stop providing clearing services that were the “lifeblood” of the Lehman brokerage and other affiliates, according to the lawsuit. Lehman said JPMorgan put a “financial gun” to its head and gave the already insolvent investment bank nothing in return for the collateral.

“As the examiner’s report makes clear, it was the ill- advised decisions of Lehman itself and its principals to take on perilous leverage and to double down on subprime mortgages and overpriced commercial real estate, and not any conduct by JPMorgan, that led to Lehman’s demise and the enormous losses to its various constituents,” Evangelisti said.

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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BP to Appoint Independent Mediator for Claims Process

BP Plc said it will appoint an independent mediator to review and assist in the claims-payment process for damages caused by the Gulf of Mexico oil spill.

BP will “promptly” pay legitimate claims for loss and damage caused by the spill resulting from the sinking of the Deepwater Horizon drilling rig off the Louisiana coast last month, the company said in an e-mailed statement,

“We are absolutely committed to a simple, fair claims process that gets funds to people who have been hurt by this disaster as quickly as possible,” Tony Hayward, BP’s chief executive, said in the statement.

To date, more than 26,000 claims have been submitted, resulting in payments of more than $36 million, BP said.

These claims are separate from the more than 130 lawsuits that have been filed across the Gulf Coast on behalf of thousands of commercial fishermen, property owners and coastal business-owners claiming damage from the drifting oil. Lawyers packed into New Orleans federal court last week to ask a U.S. judge to appoint a special master to oversee problems that had developed with BP’s claims process. Lawyers for BP urged the judge not to intervene and to give the process a chance to work.

“The claims process is designed to be free of judges and lawyers,” BP’s lawyer Don Haycraft told U.S. District Judge Carl Barbier at the hearing. “We need to give the process a little more time to let the dust settle.”

Barbier ordered BP and lawyers for spill victims to return for another hearing on the matter in his New Orleans courtroom today.

BP has established more than 400 claims centers across the Gulf Coast to assist individuals damaged by the spill, according to the company. Victims can also submit claims through BP’s website and through a toll free number.

Lawyers for spill victims complained BP’s claims-payment process wasn’t working as designed. They told Barbier last week that fishermen and business owners suffering severe economic effects from the spill were being given confusing and conflicting instructions by BP.

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Judge Refuses to Delay Oil Spill Lawsuit Against BP

An Alabama federal judge denied BP Plc’s request to stay one of more than 130 lawsuits brought by fishermen, property owners and coastal businesses harmed by the Gulf of Mexico oil spill until a judicial panel decides whether to combine the cases into a single multidistrict proceeding.

In an order handed down late yesterday, Chief U.S. District Judge William H. Steele of Alabama called BP’s request to halt the litigation “premature.”

“There is no reason why this action cannot move forward with preliminary steps” before the judicial panel acts on BP’s request to combine all oil spill litigation into one massive case at a hearing in July, Steele said.

“Entering a stay at this juncture and under these circumstances would not rescue defendants from material hardship or the risk of inconsistent adjudications, after all, they must answer the complaint anyway,” Steele ruled.

BP has filed motions in courts across five Gulf Coast states seeking to stay litigation resulting from the growing oil spill, caused by the explosion and sinking of the Deepwater Horizon off the coast of Louisiana last month. BP, as owner of the offshore lease where the damaged well is located, has primary responsibility for claims from people and businesses harmed by the drifting oil.

The case is Billy’s Seafood Inc. v. Transocean et al, 1:10- cv-00215, U.S. District Court, Southern District of Alabama.

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Miami Beach Hotel Developers Indicted on Tax Charges

Two Miami Beach hotel developers were charged with hiding more than $150 million in assets from the Internal Revenue Service, including real estate, luxury cars and a helicopter.

Prosecutors in an indictment released yesterday expanded charges against Mauricio Cohen Assor, 76, and his son Leon Cohen Levy, 46, who have been in custody since their April 15 arrest. They face as long as 14 years in prison if convicted of conspiracy and filing false tax returns.

The indictment by a grand jury in Fort Lauderdale, Florida, accuses them of failing to declare a $45 million investment portfolio, $55 million in commercial properties in Miami Beach, homes in New York and Florida, and cars including a Rolls-Royce Phantom, a Porsche Carrera GT and Ferrari Testarossa.

Cohen Assor and Cohen Levy placed “personal residences and luxury vehicles in the name of shell companies and nominees to conceal the defendants’ ownership and control of assets and income from the IRS,” according to the seven-count defendant.

Cohen Assor, a Spanish citizen, developed high-end hotels under the name Flatotel International in Paris, Brussels, the French Riviera and Marbella, Spain. Cohen Levy, a computer software developer, worked with his father in real estate.

The men have been involved in extensive litigation with CDR Creances SA, a company set up by the French government to sell unprofitable businesses of Credit Lyonnais SA, over the sale.

An attorney for the men, Michael Pasano of the law firm Carlton Fields in Miami, denied the charges.

“The government indictment merely retells the same story CDR Bank has been trying to sell for years,” Pasano said in an e-mailed statement. “That story is not accurate and we look forward to demonstrating the Cohens’ innocence in court.”

The case is USA v. Assor, 10-cr-60159, U.S. District Court, Southern District of Florida (Fort Lauderdale).

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U.K. Prosecutors Will Drop AIG Financial Unit Probe

U.K. prosecutors are dropping their investigation into American International Group Inc.’s financial-products unit less than a week after the U.S. Department of Justice closed a similar probe.

“We have carried out a thorough review of the issues relevant to the U.K. and this has not revealed any criminal charges we could bring,” Serious Fraud Office spokesman Sam Jaffa said yesterday.

The Justice Department last week decided to end its two- year investigation into Joseph Cassano, the former chief executive officer of AIG’s Financial Products division, because there was insufficient evidence, a person familiar with the investigation said. The unit brought the company to the verge of collapse in 2008 with bad bets on credit-default swaps, forcing the U.S. government to bail out the insurer.

Investigators were examining comments made in 2007 by Cassano and other AIG executives to determine whether executives misrepresented the value of AIG’s portfolio of “super senior” credit-default swaps, which insured bond losses tied to the U.S. housing market. The SFO opened its investigation into the unit in February 2009.

The decision to drop the AIG probe wasn’t related to U.S. prosecutors’ move to end their investigation, Jaffa said.

Cassano, who was based in London and Connecticut, stepped down as president and CEO of the financial products unit in 2008, a day after AIG posted what was then its biggest quarterly loss, writing down $11.1 billion on swaps the unit managed.

“We welcome the Serious Fraud Office’s decision, and we continue to cooperate with other authorities on their assessment of these events as we focus on strengthening our businesses and repaying American taxpayers,” AIG spokesman Mark Herr said.

Indonesian Supreme Court Backs Bumi Unit in Tax Case

Indonesia’s Supreme Court rejected a government appeal against a lower court ruling that denied preliminary evidence in a tax investigation of PT Kaltim Prima Coal, or KPC, a unit of coal producer PT Bumi Resources.

Indonesia’s tax office filed an appeal to the Supreme Court on March 29, asking the country’s highest legal body to dismiss a December 2009 ruling by the Jakarta-based tax court that faulted the steps taken in getting the preliminary evidence related to suspicions that KPC underreported its tax obligations. A panel of three judges turned down that appeal on May 24, the Supreme Court said in a statement on its website.

“The Directorate General of Taxation needs to obey the ruling and halt the investigation against KPC,” Aji Wijaya, a lawyer for the Bumi unit said in a text message yesterday, adding KPC “didn’t carry out tax irregularities.” If the tax office keeps probing, “it will further distress taxpayers,” he said.

President Susilo Bambang Yudhoyono was elected for a second term last year in part because of successes fighting corruption in state agencies and reforming the bureaucracy, including the tax office. While Finance Minister Agus Martowardojo last week promised further reforms, he said collecting tax shouldn’t only mean chasing “tax evaders but also ensuring businesses can have a healthy investment climate” to boost trust in the government.

Neither KPC nor the tax office has received a copy of the ruling. Tax office spokesman Iqbal Alamsjah said because of that, it was too early to comment and the office would only make a response after receiving the copy.

Carl Icahn Wins Dismissal of Delaware XO Stock Case

Billionaire investor Carl Icahn won a dismissal of a Delaware lawsuit over preferred stock of telecommunications company XO Holdings Inc., while a parallel case in New York will continue.

XO shareholder Donald Hillenmeyer Jr. sued directors of the Herndon, Virginia-based company, including Chairman Icahn, seeking damages for XO after Icahn was issued $780 million in Class B and Class C shares, according to court papers.

“I don’t believe in duplicative proceedings,” Delaware Chancery Court Judge Leo Strine Jr. told lawyers at a hearing in Wilmington yesterday. “It’s injurious to investors to have identical issues pending in multiple forums.”

Hillenmeyer’s lawyers alleged that Icahn, as controlling shareholder, used directors and officers “as puppets,” according to an amended complaint filed in February.

“Icahn employed his control of XO to carry out a series of actions designed to benefit himself at the expense of the company” and investors, according to the complaint.

Board lawyers convinced Strine that a similar action filed 12 weeks before the Delaware case in Supreme Court of New York by 9 percent stakeholder R2 Investments should take precedence.

Icahn wasn’t in his New York office and didn’t return a call seeking comment on the decision.

The Delaware case is Donald J. Hillenmeyer Jr. v. Carl C. Icahn, CA4749, Delaware Chancery Court (Wilmington). The New York case is R2 Investments LDC v. Carl Icahn, 601296-2009, Supreme Court of the State of New York (Manhattan).

For the latest lawsuits news, click here.

New Suits

Disney Assistant Accused of Plot to Sell Stock Tips Wins Bail

A Los Angeles federal judge granted $50,000 bail to an assistant to Walt Disney Co.’s head of corporate communications accused of leaking confidential stock tips about the entertainment company’s earnings.

Bonnie Hoxie, the assistant to Zenia Mucha, was ordered to appear June 3 for a court hearing in New York, while her boyfriend, Yonni Sebbag, was detained without bail. Federal prosecutors in New York charged the pair yesterday with sending letters in March to at least 33 investment companies including hedge funds with offers to sell confidential information about Burbank, California-based Disney.

Magistrate Judge Patrick J. Walsh in Los Angeles rejected a $10,000 bond for Hoxie before setting bail at $50,000, saying “there’s potential for her to be a flight risk.” Walsh said Sebbag “might be inclined to leave the country based on these charges.”

Hoxie, 33, and Sebbag, 29, were arrested yesterday in Los Angeles. The U.S. Securities and Exchange Commission yesterday also sued them.

“Hoxie and Sebbag stole Disney’s confidential pre-release earnings information and put it up for sale,” Robert Khuzami, the SEC’s enforcement director, said in a statement. “Fortunately, multiple hedge funds reported the illicit scheme, and the SEC and criminal law enforcement authorities acted quickly to stop this brazen attempt to establish an ongoing insider-trading business.”

“The Walt Disney Company has been fully cooperating with this investigation,” the company said in a two-sentence statement.

Hoxie and Sebbag were represented by public defenders who weren’t available for comment after the hearing.

The case is U.S. v. Hoxie, 10-mag-01113, U.S. District Court, Southern District of New York (Manhattan).

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Dubai’s Drydocks Sues Singapore Tycoon Over Takeover

Drydocks World LLC, Dubai World’s ship-repair unit, has sued Singaporean tycoon Tan Boy Tee for breaching an agreement tied to a S$2.4 billion ($1.7 billion) takeover deal.

Drydocks sued Tan in the Singapore High Court last month for the profits from buying and selling 11 million shares of Singapore shipbuilder Otto Marine Ltd. No value was cited in Drydocks’ claim. That number of shares is worth about S$4.1 million today.

Tan’s indirect interest in Otto breached a three-year non- compete clause in his agreement to sell Labroy Marine Ltd., a shipyard operator he founded, to Drydock in January 2008, the unit of the Dubai state holding company said in its suit.

In his filing, Tan denied having an interest in the shares bought by his son in late January and sold on Feb. 14. A Feb. 4 Otto statement said Tan had taken a significant stake in the company as part of a share placement that raised S$95 million.

Attempts to reach Tan, whose mobile-phone and home numbers aren’t listed, were unsuccessful. Calls to Tan’s privately held Bestford Capital were directed to a fax machine. A business associate, who asked not to be identified, said Tan won’t comment on the lawsuit.

A Singapore-based spokesman for Drydocks, who declined to be identified because of the company’s policy, said the two sides are holding talks to see if the dispute can be resolved.

Allen & Gledhill LLP is representing Drydocks and Drew & Napier LLC is acting for Tan.

The case is Drydocks World LLC v. Tan Boy Tee OS387/2010 in the Singapore High Court.

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BNY Mellon Claims It Didn’t Know of Sentinel Fraud

Bank of New York Mellon Corp. didn’t know cash management firm Sentinel Management Group Inc. was using investors’ assets as collateral for a $312 million credit line, an attorney for the bank told a federal judge in closing arguments yesterday.

Sentinel liquidation trustee Frederick Grede claims the bank extended the company credit knowing it lacked enough capital to cover the debt, helping its principals finance a heavily leveraged trading portfolio. Grede, claiming the bank enabled Sentinel to deceive its clients, seeks the recovery of about $600 million for Sentinel’s creditors.

“The bank, like so many others, didn’t know that Sentinel was engaged in fraud,” Hector Gonzalez, an attorney for Bank of New York Mellon told U.S. District Judge James B. Zagel. Sentinel’s actions “didn’t amount to a red flag,” he said.

Sentinel, based in Northbrook, Illinois, filed for bankruptcy in 2007, four days after it froze client accounts citing credit market instability. Customer claims have totaled about $1.2 billion. U.S. Bankruptcy Judge John H. Squires in December 2008 approved a liquidation plan under which investors could be repaid 35 cents on the dollar.

The trustee claims BNY Mellon was only concerned about its own loan.

“They let Sentinel keep going and hoped they would dig themselves out,” trustee lawyer Chris Gair told Zagel. “They clearly had a motive and clearly lied about what they did.”

Zagel told the attorneys he hoped to reach a verdict “before the summer is out.” The trial started in April in federal court in Chicago, though closing arguments were held yesterday in Washington, where Zagel is serving as a visiting judge.

BNY Mellon is seeking enforce its collateralized claim for the $312 million in outstanding credit extended to the firm when it failed, plus accrued interest and attorney fees. Grede wants Zagel to subordinate that lien to the claims of other Sentinel creditors.

The case is Grede v. Bank of New York, 08cv2582, in the Northern District of Illinois (Chicago).

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Ambac Judge Rules Against Mortgage Bond Investors

Ambac Financial Group Inc. clients who purchased protection on residential mortgage-backed securities lost a court bid to halt implementation of a Wisconsin regulator’s plan to wind down the insurer.

Lafayette County Circuit Judge William Johnston made the ruling in state court in Darlington, Wisconsin, according to a statement May 25 from Insurance Commissioner Sean Dilweg’s office.

Finding a compromise with a group of banks, including Deutsche Bank AG and Royal Bank of Scotland Group Plc, was in the financial interest of Ambac and policyholders, and failure to do so may escalate claims by more than $8 billion, according to Dilweg’s statement.

“The steps we’re taking are aimed at avoiding billions of dollars of losses, and will provide the best way toward a durable solution for all policyholders,” Dilweg said in the statement. “There are very real and dramatic risks, if the orderly process we are pursuing is not preserved.”

A call to Ambac spokesman Peter Poillon wasn’t returned.

Investors objected to Dilweg’s plan to create a segregated account for their policies that would pay them 25 cents on the dollar in cash for their claims, in addition to surplus notes that may be redeemed later if Ambac has sufficient funds. Critics of Dilweg’s plan said it favored banks that purchased protection separately for collateralized debt obligations.

Johnston dismissed a motion to enjoin Wisconsin-regulated Ambac Assurance Corp. and the bank group from proceeding with a so-called commutation of guarantees on $16.5 billion of securities backed by mortgages. Certain Ambac-insured bondholders challenged the deal saying it was unfair to all policyholders.

Ambac, the second-largest bond insurer before the onset of the credit crisis, was stripped of its AAA credit ratings in 2008 after losses on securities backed by mortgages surged. In March, Dilweg announced he was splitting Ambac’s insurance unit in two in order to segregate policies on which the bond insurer is expected to pay claims.

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Refco Fraud Victims Get $135 Million From Executives

Refco Inc. fraud victims will receive more than $135 million in funds forfeited by former Chief Executive Officer Phillip Bennett and other executives and insiders, a U.S. Attorney said yesterday.

The distribution of forfeited money, including $92.7 million from Bennett, comes on top of $437 million previously given to victims of the former trading company, U.S. Attorney Preet Bharara said in a statement yesterday in Manhattan.

Once the biggest independent U.S. futures trader, New York- based Refco collapsed in October 2005, two months after raising $670 million in an initial public offering. Bennett, Tone Grant, Santo Maggio, Robert Trosten and others hid trading losses and fraudulently moved expenses off the books to facilitate a 2004 leveraged buyout of Refco and the stock offering in 2005, according to the statement.

Bennett was sentenced to 16 years in prison in 2008 and ordered to pay a total of $2.4 billion in forfeiture money, according to the statement.

The company, which provided clearing and prime-brokerage services, filed for bankruptcy after disclosing that a Bennett- controlled firm owed hundreds of millions of dollars to Refco.

The case is U.S. v. Bennett, 05-CR-1192, U.S. District Court, Southern District of New York (Manhattan).

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To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York, at

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