BP, Kerviel, Madoff, Transocean, J&J in Court News

BP Plc, whose potential liability for the Gulf of Mexico oil spill has lawmakers and analysts raising the specter of bankruptcy, would be unlikely to avoid paying claims by seeking court protection, Bloomberg News’ Margaret Cronin Fisk and Linda Sandler reported after speaking with restructuring experts.

The spill, the worst in U.S. history, threatens wetlands, wildlife, fishing and tourism in five states. BP has spent more than $1.43 billion to stop the leak and clean it up, and to compensate local businesses and residents since the April 20 explosion of the Deepwater Horizon oil rig.

The company faces more than 200 lawsuits, and the U.S. is assessing the cost of restoring natural resources destroyed or fouled by the spill. BP’s liabilities include $37 billion in cleanup and potential litigation expenses, according to a June 2 Credit Suisse report. While a U.S. bankruptcy may halt many claims, it wouldn’t allow BP to avoid paying for most of the cleanup and damages, said New York bankruptcy lawyer Martin Bienenstock of Dewey & LeBoeuf LLP.

“It’s highly unlikely the claims would be so large that BP would pay any valid claims less than in full,” said Bienenstock, who advised General Motors Co. and Chrysler Financial Corp. in their bankruptcies. “The environmental claims and other claims would all ride through bankruptcy and be paid in the normal course.”

BP said it won’t seek court protection. “We categorically deny those rumors,” said David Nicholas, a company spokesman.

“The bankruptcy option is clearly there,” said John Olson, managing partner of Houston Energy Partners, a hedge fund unit of Sanders Morris Harris Group Inc. “BP’s board and CEO can say they’ve ruled it out, but you can’t rule it out, realistically.” Olson doesn’t hold any BP shares.

On June 13, White House Adviser David Axelrod called on BP to establish an escrow account for claims tied to the spill. U.S. Senate Majority Leader Harry Reid requested that the London-based company set up a $20 billion fund administered by an independent trustee, according to a letter from his office.

The Obama administration should consider placing the company in receivership to preserve its assets because BP is likely to end up in bankruptcy, said Representative Steve Cohen, a Tennessee Democrat. Louisiana State Treasurer John Kennedy agreed, saying bankruptcy is a possibility and state and federal governments need to plan for it. The spill has sullied or threatened the coastlines of Louisiana, Alabama, Mississippi, Florida and Texas.

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Trials/Appeals

Kerviel Tells Court He Didn’t Try to Evade SocGen Trade Limits

Jerome Kerviel told a Paris court that he didn’t try to evade controls at Societe Generale SA during a trial over his role in unauthorized trades that cost the bank 4.9 billion euros ($6 billion).

Kerviel said his objective in faking hedges was to carry his real positions forward, “to be able to realize a gain for the bank.” Kerviel, 33, is charged with falsifying documents, computer hacking and abuse of trust in connection with the 2008 trading loss at France’s second-largest bank by market value.

Judge Dominique Pauthe read a series of Kerviel’s trades indicating that his positions rose from 2.4 billion euros in April 2007 to 14.4 billion euros in November of that year. While he said he never explicitly told his supervisors about the trades, Kerviel said the scope of his trades bolstered his claims that the bank knew about his activities.

“Did I get up one day and say I’ll go see a manager and tell him I’ve got 30 billion euros? The answer’s no,” Kerviel said.

As his positions grew larger, Kerviel said he was in a “spiral” and changed records on bank computers.

Kerviel testified he entered the bank’s computerized control systems to alter details of some transactions, saying he did so to be sure the risk for each was accurately recorded. He denied that he altered data in another system, saying he didn’t have the log in information.

“A lot of false things have been said,” Kerviel testified. “Traders didn’t have access to the back office control system.”

Claire Dumas, a risk controller who is testifying on behalf of the bank, said Kerviel used friendships he made during the years he worked with the compliance and control group to avoid closer review of his actions.

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Qatari Diar Hid E-Mails, Let Witnesses Lie, CPC Says

Qatari Diar Real Estate Investment Co., part of the emirate’s sovereign-wealth fund, deleted e-mail evidence and let witnesses lie during a trial over a botched deal to build luxury apartments at London’s Chelsea Barracks, U.K. developer CPC Group Ltd. told a judge.

Qatari Diar “deliberately destroyed” relevant e-mails while its law firm, Herbert Smith, failed before last month’s trial to search a server in London that held messages deleted from one in Doha, CPC lawyer Anthony Stephen Grabiner said. The new messages support CPC’s claim that Qatari Diar isn’t being truthful about why it abandoned the luxury development, he said at a hearing yesterday at the High Court in London.

“All these witnesses lied to you and I when they gave evidence,” and were motivated by a need to conceal the true reason for backing out of the real-estate deal, Grabiner said at the hearing. CPC, controlled by real-estate entrepreneur Christian Candy, claims the emir of Qatar instructed the company to abandon the development.

CPC sued for breach of contract in November claiming Qatari Diar must pay as much as 81 million pounds ($119.8 million) for backing out of the deal. Qatari Diar claims it owes nothing because no value was created at the site.

Judge Peter Smith said yesterday the new e-mails wouldn’t prevent him from reaching a judgment before the end of July.

Joe Smouha, Qatari Diar’s lawyer from Essex Court Chambers, said in a June 9 court filing that the rapid pace of the trial led to the late discovery of the e-mails.

Herbert Smith declined to comment on the Qatari case.

The case is CPC Group Ltd. v. Qatari Diar Real Estate Investment Company, case no. 4260/09, High Court of Justice, Chancery Division (London).

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Investor Suits Against Drugmakers Get Court Scrutiny

The U.S. Supreme Court said it will consider tightening the requirements for lawsuits that accuse drugmakers of failing to tell investors about indications that top-selling drugs have dangerous side effects.

The justices yesterday said they will hear an appeal from Matrixx Initiatives Inc., a drugmaker accused in a suit of not disclosing evidence that its now-withdrawn Zicam cold remedy could cause users to lose their sense of smell. The Scottsdale, Arizona, company argues that drugmakers don’t have a duty to disclose reports of side effects until those reports become statistically significant.

A federal appeals court let the lawsuit against Matrixx go forward, saying statistical significance isn’t an absolute requirement for filing a suit against a drugmaker under the federal securities laws. Matrixx stopped selling its Zicam nasal spray and gel in June 2009 after the Food and Drug Administration warned consumers the treatments may cause a loss of smell.

The suit contends that the company had indications of a problem years earlier, including lawsuits filed on behalf of nine people from October 2003 to January 2004. The investor suit seeks class-action status on behalf of people who bought Zicam from Oct. 22, 2003, to Feb. 6, 2004.

The justices will hear arguments in their 2010-11 term, which starts in October.

The case is Matrixx Initiatives v. Siracusano, 09-1156. U.S. Supreme Court Washington).

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Lawsuits/Pretrial

Madoff Feeder Fund Claims Should Be Denied, SIPC Tells Court

Investors who put money in hedge funds that fed money to Bernard Madoff’s business should be denied claims for repayment because they weren’t direct customers of the con man’s firm, the Securities Investor Protection Corp. said in a bankruptcy court filing.

The government-chartered agency overseeing the liquidation of Madoff’s business asked a U.S. Bankruptcy judge in Manhattan to uphold the decision of trustee Irving Picard to deny claims by investors in 16 funds.

Almost 8,500 investors whose money was placed with Madoff indirectly through so-called feeder funds had their claims for repayment denied by Picard in December because they weren’t linked to Madoff accounts. Those victims, who invested in funds run by New York-based Fairfield Greenwich Group, investment manager J. Ezra Merkin’s Gabriel Capital Corp., and Bermuda- based Kingate Management Ltd., among others, objected to the ruling.

“The hedge funds, not the claimants, were the customers of Bernard L. Madoff Investment Securities,” lawyers for SIPC said in the June 11 filing.

Madoff, 72, pleaded guilty in March and is serving a 150- year sentence for running the world’s biggest Ponzi scheme.

David Molton, an attorney for the liquidator of Fairfield Lambda Ltd., a shareholder of Fairfield Sentry Ltd., which was a direct customer of Madoff, didn’t return a call seeking comment after regular business hours yesterday.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Transocean Can’t Stall U.S. Spill Claims, Judge Says

Transocean Ltd. can’t use a 159-year-old law to stall claims by the U.S. or state governments over the Deepwater Horizon oil spill, a federal judge in Houston said.

Transocean asked U.S. District Judge Keith Ellison in May to limit its liability for damages caused by the spill in the Gulf of Mexico to the value of the rig’s unpaid drilling rental fees, about $27 million. Ellison ordered a stay on claims against Transocean, owner of the Deepwater Horizon, until after he ruled on the company’s cap request.

The stay doesn’t apply to claims by the U.S., state or tribal governments brought under the federal Oil Pollution Act or to U.S. claims under other federal environmental laws, Ellison said yesterday.

The U.S. asked Ellison June 1 to rule the cap, stemming from the Limitation of Liability Act of 1851, didn’t apply to government claims. That law is pre-empted by the Oil Pollution Act of 1990, the U.S. said. Transocean last week agreed that the requested cap in the 1851 law wouldn’t apply to environmental losses by the U.S. and Gulf Coast states.

The case is In Re the Complaint and Petition of Triton Asset Leasing GmbH, Transocean Holdings LLC, 10-01721, U.S. District Court, Southern District of Texas (Houston).

Ex-Hevesi Adviser Got $19 Million in Fees, Cuomo Says

The indicted chief political adviser to ex-New York state Comptroller Alan Hevesi pushed $5 billion in state pension-fund transactions to make $19 million in fees for himself, said New York Attorney General Andrew Cuomo.

Cuomo made the statement in a court filing in reply to Henry “Hank” Morris’s bid to dismiss a 2009 indictment charging him with securities fraud and grand larceny in connection with corruption at the state pension fund. Morris said in his March motion to throw out the charges that his use of access and influence didn’t constitute a crime.

Morris’s “scheme was not just about obtaining access and influence,” Cuomo said in his 206-page response in New York State Supreme Court. “Rather, he used lies, deceit and self- dealing to promote more than five billion dollars worth of public pension fund securities transactions that would line his own pockets with $19 million in fees.”

Morris reaped the $19 million through 23 state pension-fund investments for which he acted as an undisclosed placement agent, or middleman, Cuomo said. The proceeds from the scheme exceeded $35 million, including amounts received by associates, Cuomo said. The scheme was maintained through hundreds of thousands of dollars in bribes and rewards for public officials and their friends, Cuomo said.

Six people have pleaded guilty to criminal charges in the probe, including Morris’s co-defendant, David Loglisci, former chief investment officer at the pension fund. Fifteen firms have settled and agreed to a code of conduct drafted by Cuomo that bans so-called placement agents from obtaining investments from public pension funds and limits campaign contributions to those with the power to assign investment business.

Morris is accused by Cuomo of corrupting the investment process at the pension fund to favor deals for which he and associates would earn fees and those who made campaign contributions to Hevesi. He allegedly concealed from key decision makers that he was receiving fees on proposed deals. Loglisci acknowledged in his guilty plea that he ceded control of the fund’s alternative investments to Morris.

Morris’s lawyer, William Schwartz, was unavailable for comment.

Hevesi hasn’t been accused of any wrongdoing in the case.

People v. Morris, 0025/2009, New York State Supreme Court, New York County (Manhattan).

J&J Wins Dismissal of Pennsylvania’s Risperdal Case

Johnson & Johnson persuaded a judge to throw out the state of Pennsylvania’s suit alleging the drugmaker hid health risks of its Risperdal antipsychotic drug and duped regulators into paying millions more than they should have for the medicine, a company official said.

Judge Frederica Massiah-Jackson in Philadelphia yesterday granted Johnson & Johnson’s request to throw out the suit after finding the state’s lawyers hadn’t produced enough evidence the company improperly marketed Risperdal to continue a trial over the claims, Greg Panico, a company spokesman, said in a telephone interview. The state’s lawyers presented a week’s worth of testimony to jurors before Massiah-Jackson halted the trial.

“We are pleased with the judge’s decision that the evidence presented failed to show” a unit of New Brunswick, New Jersey-based J&J defrauded the state in connection with Risperdal sales, Panico said.

The Pennsylvania case was the first of 10 lawsuits over J&J’s Risperdal marketing practices filed by states to go before a jury.

Attorneys for the state are still studying Massiah- Jackson’s ruling, Camp Bailey, one of the lawyers representing Pennsylvania, said in an e-mailed statement. “It’s likely we will file an appeal,” he added.

The case is Commonwealth of Pennsylvania v. Janssen Pharmaceutica Inc., 002181, Philadelphia Court of Common Pleas (Philadelphia).

Ex-Deutsche Telekom Officials Not Charged in Spy Case

Former Deutsche Telekom AG Chairman Klaus Zumwinkel and former Chief Executive Officer Kai-Uwe Ricke won’t be charged in a probe over spying on journalists and board members at Europe’s largest phone company.

Prosecutors in Bonn don’t have enough evidence to prove Ricke and Zumwinkel’s knew about reviews of phone data at Deutsche Telekom at the time they took place, Friedrich Apostel, a spokesman for prosecutors, said yesterday. Charges will be filed against four people, including a former security manager at Deutsche Telekom and the head of a private security company.

“People will say that we are hanging the small guys here and allowing the big ones to go free,” said Apostel. “That’s totally inappropriate. The law requires us for good reason to exactly prove any allegation or drop the case.”

Prosecutors have been looking into allegations that Deutsche Telekom hired a company to study phone records of journalists, executives and supervisory board members to find the sources of news leaks. Prosecutors searched offices of Deutsche Telekom and its T-Mobile unit in May 2008. The homes of Ricke and Zumwinkel were raided 10 months later.

The decision to drop the case is “delightful,” Zumwinkel said in a statement. The decision was expected, Ricke said in a separate statement. He said he never knew that illicit methods were used and he never asked anyone to employ such methods.

Deutsche Telekom, which is seeking damages of 1 million euros ($1.2 million) each from Ricke and Zumwinkel, “has to accept the decision,” said Mark Nierwetberg, a spokesman for the Bonn-based company.

Reinhard Kowalewsky, one of the journalists who was spied on, said he may appeal yesterday’s decision.

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New Suits

Aeropostale Ex-Merchandising Chief Charged With Fraud

Aeropostale Inc.’s former merchandising chief, Christopher Finazzo, was accused by federal prosecutors of conspiring to overcharge the teen clothing retailer on purchases from a vendor and sharing in the proceeds.

Finazzo, 54, acted with Douglas Dey, the owner of South Bay Apparel Inc., a company based in Calverton, New York that sold clothing to Aeropostale, according to an indictment by the U.S. attorney in Brooklyn, New York. They were charged with mail and wire fraud and money laundering conspiracy. Finazzo was also charged with making a false statement in a regulatory filing.

Aeropostale had no knowledge of the scheme, according to the indictment, which was unsealed June 11 and made public yesterday.

“Finazzo’s lies and material omissions prevented the SEC and Aeropostale’s shareholders from learning the full extent of Finazzo’s compensation from the undisclosed related party transactions,” according to the indictment.

Finazzo pleaded not guilty to the charges on June 11 and was released on $3 million bail, his attorney Robert Zito said in a telephone interview. “We are hoping to get a speedy resolution with the government,” he said.

A lawyer for Dey couldn’t be reached for comment.

Aeropostale said it fired Finazzo in November 2006 for violating his employment contract and the company’s code of ethics by not disclosing his affiliations with South Bay.

Aeropostale spokesman Kenneth Ohashi didn’t return a call and e-mail seeking comment.

The case is U.S. v. Finazzo, 10cr00457, U.S. District Court, Eastern District of New York (Brooklyn).

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Litigation Departments

Cuomo, Would-Be Governor, Gets Tough When Foes Say No

New York Attorney General Andrew Cuomo, the Democratic candidate for governor who has challenged legislators to join his plan to clean up state government, has a history of getting what he wants.

Quadrangle Group LLC, the New York-based money management firm co-founded by Steven Rattner, was among the latest to experience Cuomo’s style of conflict resolution. When Rattner declined to settle on Cuomo’s terms in the probe of his role in state pension fund corruption, the would-be governor made Rattner pay a price.

The settlement, publicly announced on April 15, included a statement by Quadrangle disavowing its former leader and asserting that Rattner’s conduct in gaining $100 million in fund business was “inappropriate, wrong and unethical.” The statement originated with Cuomo’s office, which required New York-based Quadrangle to make it in order to settle, according to two people familiar with the matter.

Voters have made Cuomo the frontrunner for governor in the latest polls, embracing such tough tactics, which some legal ethics experts have criticized.

Cuomo spokesman John Milgrim declined to comment on the Rattner probe because it’s still active. Andy Merrill, a spokesman for Quadrangle, which didn’t admit wrongdoing, declined to comment. Rattner, who resigned during Cuomo’s probe as the Obama administration’s chief adviser on restructuring the auto industry, declined to comment.

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To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York, at eamon2@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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