Disney `Millionaire', Marsh, First Republic, HSBC, Carlyle in Court News

Walt Disney Co. was found liable for not paying the U.K. creators of “Who Wants to Be a Millionaire” their share of profits from the quiz show broadcast on Disney’s ABC network.

A federal court jury in Riverside, California, yesterday awarded $269.4 million in damages to Celador International Ltd. The jurors agreed that Disney’s Buena Vista Television and ABC breached an agreement that entitled Celador to 50 percent of the profits from the show, which first aired in the U.S. in 1999 and helped lift the network to first place from third in audience ratings.

“We believe this verdict is fundamentally wrong and will aggressively seek to have it reversed,” Disney said in an e- mailed statement.

Closely held Celador sued Disney in 2004, claiming Buena Vista and ABC “through a complex web of self-dealing transactions” allowed ABC to keep the advertising revenue and pay Buena Vista only a licensing fee equal to the cost of producing the show. That kept Buena Vista from earning a profit from “Millionaire” that it would have had to share, Celador said.

Disney, based in Burbank, California, argued that the creators, who received a flat producers’ fee for each episode, knew that the network run of “Millionaire” wouldn’t generate a profit. There wasn’t anything unusual or secret about the way Buena Vista and ABC, which took all the financial risks, divided the rights, said Disney lawyer Martin Katz during the trial.

The case is Celador International Ltd. v. Walt Disney Co. 04-03541, U.S. District Court, Central District of California (Riverside.)

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Trials/Appeals

Two Former Marsh Executives’ Convictions Tossed in Bid-Rig Case

A New York judge threw out the criminal convictions against two former Marsh & McLennan Cos. executives whom he found guilty of restraint of trade in 2008.

State Supreme Court Justice James Yates in Manhattan tossed the convictions against William Gilman and Edward McNenney, former managing directors at Marsh, in a July 2 written decision. The pair were accused of fixing prices to steer business to insurers that paid Marsh hidden fees from November 1998 to September 2004.

The decision was the latest loss for the New York Attorney General’s office in its six-year probe of anti-competitive sales practices in the insurance industry. The case, begun under former state Attorney General Eliot Spitzer, was tried under his successor, Andrew Cuomo.

Failures by prosecutors, including “newly discovered contradictory evidence, undermines the court’s confidence in the verdict,” Yates wrote in his decision.

Yates found the two men guilty in February 2008 of a single count of restraint of trade under New York’s antitrust statutes after a 10-month trial.

“We are reviewing the decision and contemplating an appeal,” Richard Bamberger, a spokesman for Cuomo, said in an e-mailed statement.

The attorney general’s office, following a 2004 probe, alleged that McNenney, Gilman and six other Marsh Global Broking Inc. brokers took part in a conspiracy to fraudulently obtain millions of dollars for Marsh and its accomplice companies by rigging the market for excess casualty insurance, according to a redacted copy of the 25-page decision.

Gilman, formerly Marsh’s executive marketing director and managing director, and McNenney, the former global placement director and managing director, worked in the Excess Casualty Unit of Marsh Global Broking, a Marsh Inc. unit.

In January, Yates allowed former Marsh employees Robert Stearns and Kathryn Winter and former Zurich Financial Services AG employee James Spiegel to withdraw their guilty pleas to felony charges of participating in a scheme to defraud. The judge agreed to reduce the charges to misdemeanors and said he would dismiss the charges if the three abided by plea agreements. Yates also dismissed charges against six people who previously pleaded guilty to misdemeanor charges related to alleged bid-rigging.

The case is People of the State of New York v. Doherty, 04800-2005, New York State Supreme Court, County of New York (Manhattan).

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Stanford Professor Stung by Fund Wins $2.2 Million From Bank

A First Republic Bank unit was ordered to pay a retired Stanford University professor and his wife $2.18 million after arbitrators found the firm gave them only a “fleeting and slapdash” explanation of a municipal bond fund that imploded during the credit crisis in 2008.

Eight months after Elliott and Rhoda Levinthal entrusted $3 million to a leveraged investment vehicle called TW Tax Advantaged Fund LLC, it collapsed, an American Arbitration Association panel wrote in a July 2 ruling. Evidence shows workers at First Republic didn’t try to fully grasp risks in the fund they designed, the panel found. The firm also inadequately trained a saleswoman who dealt with the Levinthals, and didn’t ensure they understood the investment.

The education offered to the Levinthals “was fleeting and slapdash,” arbitrators wrote. “An investment in a highly complex and concededly risky product like the fund, sold in this fashion, is by definition unsuitable” for someone with their experience and objectives.

Greg Berardi, a spokesman for the San Francisco-based company, declined to comment. Bank of America Corp. acquired First Republic Bank while buying Merrill Lynch & Co. last year, and sold it last week to an investor group that included founder James H. Herbert II.

Elliott Levinthal, 88, is a professor emeritus of mechanical engineering at Stanford. He and his wife endowed Levinthal Hall, a lecture hall at the Stanford Humanities Center.

The panel ordered First Republic Securities to pay the couple and their trust $2.1 million in compensatory damages, plus $78,153 in fees and expenses.

About 35 retail mutual funds marketed as leveraged municipal arbitrage strategies have failed in recent years, said Craig McCann of the Securities and Litigation Consulting Group Inc., a Virginia consulting firm that testified for the Levinthals in the arbitration. Brokerage firms sold the funds as “higher-yielding alternatives to conventional municipal bond portfolios with little, if any risk,” he said in a 2009 report.

Skilled Healthcare Falls After $671 Million Verdict

Skilled Healthcare Group Inc. plunged the most since its initial public offering in New York trading after a California jury returned a $671 million jury verdict against the nursing- home operator.

Skilled Healthcare dropped $4.70, or 76 percent, to $1.52 yesterday on the New York Stock Exchange, the largest intraday decline since the shares went on sale in May 2007. They peaked in August 2008 at $17.17.

The plaintiffs accused Skilled Healthcare of improperly staffing 22 California facilities. A Humboldt County jury July 6 found the company liable for $613 million in statutory damages, the maximum allowed by state law, and $58 million for restitution. Skilled Healthcare, based in Foothill Ranch, California, said yesterday it will appeal.

“We strongly disagree with the outcome of this legal matter and we intend to vigorously challenge it,” Chief Executive Officer Boyd Hendrickson said in a statement. The company believes “our facilities are appropriately staffed,” he said.

The verdict is the largest jury award in the U.S. this year, according to data compiled by Bloomberg. Skilled Healthcare said the award exceeds the policy limits of its insurance. The jury will return later to determine punitive damages, said the company, which posted a net loss of $133 million last year on revenue of $759.8 million.

The lawsuit was filed in 2006 on behalf of current and former residents of 22 Skilled Healthcare operations in California, plaintiffs’ attorney Tim Needham said. California law requires nursing homes to maintain staff at a rate of 3.2 nursing hours per patient per day, he said.

The case is Lavender v. Skilled Healthcare Group, DR060264, Superior Court, Humboldt County, California (Eureka).

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Gulf Drilling Ban Should Be Restored, U.S. Argues

A three-judge appeals panel will hear arguments from the U.S. government today on whether a six-month moratorium on deep- water drilling in the Gulf of Mexico should be reinstated after a lower court judge threw out the ban.

The government is seeking to delay an order by U.S. District Judge Martin Feldman that scrapped the six-month drilling moratorium, imposed May 27 after the explosion and sinking of the Deepwater Horizon oil rig in April.

Feldman’s June 22 ruling came in a lawsuit against U.S. regulators by oil service companies claiming the drilling suspension would cause them irreparable economic harm. The ban’s potential economic impact is outweighed by the risk of another spill, lawyers for the Interior Department argued in court papers filed before a hearing set for this afternoon in New Orleans.

“If in Interior’s judgment, drilling poses a threat of serious or irreparable environmental harm, the public interest in avoiding that threat would trump economic considerations in the short term,” the government said in a July 6 filing.

The Interior Department asked the appeals court to stay Feldman’s order and keep the moratorium in place long enough for regulators to appeal.

Hornbeck Offshore Services Inc. and more than a dozen other offshore service and supply companies sued U.S. regulators, including Interior Secretary Kenneth Salazar, last month, seeking to block the moratorium.

The case is Hornbeck Offshore Services LLC v. Salazar, 2:10-cv-01663, U.S. District Court, Eastern District of Louisiana (New Orleans). The appeal case is 10-30585, 5th U.S. Circuit Court of Appeals (New Orleans).

New Suits

HSBC Sued for Fraud Over Credit-Card Protection Plan

Units of HSBC Holdings Plc, Europe’s biggest lender by market value, were sued by U.S. customers who said the bank’s credit-card payment-protection service defrauds disabled, retired and unemployed consumers.

While the service purports to safeguard accounts by suspending or canceling required minimum payments when customers become disabled or unemployed, the circumstances that trigger protection are “varied, complicated and always changing,” according to complaints filed July 2 against HSBC units in federal courts in Philadelphia and Camden, New Jersey.

The bank enrolls people before sending them restrictions in small print that are “incomplete, indecipherable, misleading and obfuscatory,” the complaints said. The plan, which costs $1.35 per $100 of a month-ending credit-card balance, excludes the self-employed, part-time workers, retired people and those who are already unemployed or on disability, the customers said.

Kate Durham, a spokeswoman for London-based HSBC, said the bank doesn’t comment on legal matters.

“The payment protection device is designed to prey on the financially insecure and is virtually worthless because of the numerous restrictions that are imposed,” according to the complaints.

The Camden complaint, brought by Marilyn Rizera, said HSBC Bank USA Inc. and HSBC Card Services Inc. are violating the New Jersey Consumer Fraud Act and engaged in breach of contract. The Philadelphia case, by Edward T. Esslinger, Gloria Glover and Adrath Rogers, said the bank is violating the Pennsylvania Unfair Practices and Consumer Protection Law.Both seek to proceed as group, or class-action, lawsuits.

“Payment Protection is so confusing as to when coverage is triggered, so restricted in terms of the benefits it provides to subscribers, and processing claims is made so difficult by HSBC, that the product is essentially worthless,” according to Rizera’s complaint.

The cases are Rizera v. HSBC Bank USA Inc., 10-cv-3375, U.S. District Court, District of New Jersey (Camden); and Esslinger v. HSBC Bank Services, 10-cv-3213, U.S. District Court, Eastern District of Pennsylvania (Philadelphia).

Carlyle Group Sued by Mortgage Bond Fund Liquidator over Losses

Carlyle Group, the world’s second-largest private-equity firm, was sued by liquidators of the buyout firm’s defunct mortgage bond fund, saying executives lost $945 million in overly risky investments.

Liquidators for Carlyle Capital Corp. Ltd, a Guernsey, Channel Islands-based hedge fund that collapsed in March 2008, contend Carlyle directors turned a blind eye to questionable investments in residential mortgage-backed securities and failed to stop the loss of all the company’s capital, according to a lawsuit filed in Delaware.

“In the short space of eight months, the entirety of CCC’s capital was spectacularly lost under the reckless and grossly negligent direction, supervision, management and advice of the defendants,” the liquidators said in the suit, filed yesterday in Delaware Chancery Court.

Lenders seized Carlyle Capital’s assets after it failed to meet more than $400 million of margin calls on mortgage-backed collateral that had plunged in value. Carlyle Group, co-founded by David Rubenstein, wound up the fund seven months after its initial public offering.

Carlyle Group officials said they’d defend themselves in court over the fund liquidators’ claims. The liquidators also filed suit over the investment losses in state court in Manhattan yesterday.

“We will vigorously contest all claims and are confident we will prevail,” Chris Ullman, a company spokesman, said.

Carlyle Capital raised $945 million in equity funding and sought to generate annual returns of at least 12 percent by investing in residential mortgage backed securities and “leveraged finance assets,” the liquidators’ lawyers said in the suit.

The company’s business model called for leverage equaling 19 times capital, the complaint said, adding that the actual leverage employed exceeded 30 times capital.

Mortgage securities were among the biggest contributors to writedowns and credit losses of almost $1.8 trillion since the start of 2007 at the world’s largest banks, according to data compiled by Bloomberg.

The case is Carlyle Capital Corp. Ltd. v. William Elias Conway Jr., CA5625, Delaware Chancery Court (Wilmington).

Firearms Sellers, CME Trader Sue Chicago Over Gun-Control Law

A Chicago Mercantile Exchange trader and three other people have joined with the Illinois Association of Firearms Retailers to sue the city of Chicago over a restrictive gun law passed by its legislators last week.

The gun-owning plaintiffs, who include a teacher’s aide and a married couple, claim the new ordinance restricting handgun possession to inside the home and mandating firearms training and permitting is unconstitutional.

The measure imposes “new restrictions that have the purpose and effect of preventing plaintiffs and other law- abiding residents of Chicago from exercising their fundamental right to keep and carry firearms for self defense and other lawful purposes,” the plaintiffs said in a complaint filed July 6 in the city’s federal courthouse.

Ruling in a case challenging Chicago’s earlier ban on handgun possession, a divided U.S. Supreme Court on June 28 said the constitutional right to bear arms binds states and municipalities.

Chicago’s new law was passed by the city council 45-0 four days later. Jennifer Hoyle, a spokeswoman for the city’s law department, said in an e-mailed message that the office had just received a copy of the complaint and is reviewing it. She said she couldn’t otherwise immediately comment. The high court decision “effectively overturned” the city’s handgun ban, Mayor Richard M. Daley said in a July 2 press statement announcing the new ordinance. He is a named defendant in the lawsuit.

The retailer’s association, based in Carbondale, Illinois, claims it has members who want to sell guns and operate firing ranges within the city, yet can’t because of the law.

The plaintiffs seek a court order declaring the restrictions unconstitutional.

The case is Benson v. City of Chicago, 10cv4184, U.S. District Court, Northern District of Illinois (Chicago).

To contact the reporter on this story: Ellen Rosen in New York, at erosen14@bloomberg.net.

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