Barclays, McKinsey, DLA Piper, Citigroup, Cerberus, Lehman in Court News

Citigroup Inc. failed yesterday to win a judge’s approval to pay $75 million to settle with the U.S. Securities and Exchange Commission over claims the bank misled investors by understating subprime-related holdings.

U.S. Judge Ellen Huvelle wasn’t satisfied with the written proposal and wants more information, said Matthew Miller, an attorney for a Citigroup shareholder. Attorneys are to submit a new round of court filings starting Sept. 8.

The company made misstatements on earnings calls and in financial filings about assets tied to subprime loans as the housing crisis unfolded in 2007, the SEC said July 29 in a complaint filed in federal court in Washington. Some disclosures omitted more than $40 billion in investments, the SEC said.

SEC spokesman Kevin Callahan said the agency “will provide the court with additional information requested.”

Shannon Bell, a Citigroup spokeswoman, said the bank “will answer all the judge’s questions concerning this matter.”

Former Chief Financial Officer Gary Crittenden, who left Citigroup last year, agreed to pay $100,000 to settle claims he didn’t disclose the risk after getting internal briefings. Arthur Tildesley, Citigroup’s former head of investor relations, will pay $80,000 to settle claims that he helped draft disclosures that misled investors, the SEC said. Tildesley now heads cross-marketing at Citigroup, according to the agency.

Citigroup, Crittenden and Tildesley agreed to settle the case without admitting or denying the SEC’s allegations.

The case is Securities and Exchange Commission v. Citigroup Inc., 10cv1277, U.S. District Court, District of Columbia (Washington).

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Facebook Claimant Says He Has Copy of Check to Mark Zuckerberg

Paul Ceglia, the western New York man who claims he owns 84 percent of Facebook Inc., has obtained a copy of a seven-year- old cashier’s check for $3,000 that his lawyer claims supports his lawsuit.

The purported 2003 check is made out to Facebook Chief Executive Officer Mark Zuckerberg and dated three days before Ceglia claims the two men signed a contract, according to the attorney. That agreement, Ceglia said in court papers, entitles him to control of the world’s biggest social networking website.

A copy of the check was turned over by a Wellsville, New York, branch of Community Bank N.A. last week, according to Terrence Connors, a lawyer for Ceglia. The Wellsville Daily Reporter published what appears to be a cashier’s check on its website.

The check is the first independently produced evidence to be made public seeking to prove Ceglia’s allegations that he had a contractual relationship with Zuckerberg. Connors said the copy of the check is among bank records he obtained as evidence in the case, now pending in federal court in Buffalo, New York.

Ceglia, 37, said in his June 30 lawsuit that he and Zuckerberg signed a “work for hire” contract in 2003, when the Facebook CEO was an 18-year-old Harvard University freshman. The agreement called for Zuckerberg to do computer coding work and provided for a $1,000 investment by Ceglia in a project called “The Face Book,” in exchange for a 50 percent stake, Ceglia claimed.

A clause in the contract gave Ceglia an additional 34 percent for delays in the launching of the site, he claimed in court papers.

Lawyers for Zuckerberg said the Facebook CEO once worked for Ceglia, though they denied he signed away any right to control his Palo Alto, California-based company.

“We have never disputed that Mark did some work for Ceglia,” Facebook spokesman Andrew Noyes said in an e-mail yesterday in response to questions about the check. “Everything else asserted by the plaintiff is false and his lawsuit is frivolous, if not outright fraudulent.”

The case is Ceglia v. Zuckerberg, 10-CV-00569, U.S. District Court, Western District of New York (Buffalo).

New Orleans Judge Must Review Drill Bans, Court Rules

A New Orleans federal judge must hold hearings on the legality of both oil drilling bans issued by the Obama administration in the wake of the BP Plc oil spill in the Gulf of Mexico, a U.S. appeals court ruled.

On June 22, U.S. District Judge Martin Feldman scrapped a six-month ban on drilling in waters deeper than 500 feet, imposed May 28 after the sinking of the Deepwater Horizon rig. He sided with offshore oil-service firms, saying the ban was overly broad.

Last month, lawyers for U.S. Secretary of the Interior Kenneth Salazar asked Feldman to dismiss the industry lawsuit, arguing it was rendered moot by new rules suspending drilling announced July 12. The U.S. Court of Appeals in New Orleans yesterday ruled the judge must consider both bans, calling witnesses as necessary, and return the moratorium issue to the appeals court for a final decision.

Feldman is to determine “with respect to the scope and substance of the May 28 moratorium and the July 12 moratorium, what are the differences, if any,” a three-judge appellate panel said in an order posted yesterday on the court’s website.

Opponents of the moratorium, including Louisiana Governor Bobby Jindal, have said the ban unnecessarily damages the Gulf Coast economy.

The current ban is “still a blanket, punitive moratorium on deep-water drilling,” Carl Rosenblum, an attorney for Hornbeck Offshore Services Inc., told Feldman at a hearing last week.

The new rules addressed Feldman’s concerns about the original ban, the government has said. The regulations suspend deep-water drilling until Nov. 30 at the latest. Regulators may lift the ban earlier if officials determine such operations may safely resume.

The appeals court ordered Feldman to investigate whether Salazar based his second drilling moratorium on a new rationale and evidence.

The panel also asked Feldman to “issue findings of fact and conclusions of law” on whether Salazar has the legal authority to withdraw the first moratorium after Feldman sided with the industry and issued a preliminary injunction blocking regulators from enforcing the ban.

Department of Interior spokesman Matt Lee-Ashley declined to comment.

Hornbeck lawyer Rosenblum and Kendra Barkoff, a spokeswoman for Salazar, didn’t respond to e-mails seeking comment.

The case is Hornbeck Offshore Services LLC v. Salazar, 10- 01663, U.S. District Court, Eastern District of Louisiana (New Orleans). The appeal case is 10-30585, U.S. Court of Appeals for the Fifth Circuit (New Orleans).

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HP Board Said to Turn Against Hurd After Surprise Settlement

Hewlett-Packard Co.’s Mark Hurd surprised the board by settling a sexual-harassment claim before directors could learn more about the incident, Bloomberg’s Aaron Ricadela and Nick Turner report. That was a final breach of trust that contributed to his ouster as chief executive officer, two people familiar with the decision said.

Hurd, who stepped down on Aug. 6, was scheduled to join a mediation session the previous day to deal with the harassment claim, the people said. Instead, Hurd settled the complaint and the meeting never happened, they said. The board’s trust in Hurd also was undermined after a probe found he tried to conceal a relationship with his accuser, a former actress named Jodie Fisher who worked for HP as an event organizer, said the people, who asked not to be named because the information is private.

The handling of Hurd’s departure has drawn a shareholder lawsuit and a rebuke from Oracle Corp. CEO Larry Ellison, who compared the move to the firing of Apple Inc.’s Steve Jobs in the 1980s. The suit, filed Aug. 10 by a Massachusetts pension fund, says that mishandling the matter contributed to the plunge in HP’s stock last week, erasing $9 billion in value.

A person familiar with Hurd’s thinking said HP knew he was trying to settle with Fisher, and had encouraged him to do so. Also, the mediation session wouldn’t have presented new evidence or allegations, the person said. HP’s lawyers thanked Hurd for settling the complaint, according to the person.

On the day Hurd left, HP said he had violated its standards of business conduct by concealing a relationship with a contract employee and falsifying expense reports. The company disclosed the sexual-harassment complaint, saying it didn’t find that Hurd broke its harassment policy.

Fisher’s lawyer, Gloria Allred, and Hani Durzy, a spokesman for Palo Alto, California-based Hewlett-Packard, declined to comment.

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Barclays Settles U.S. Trade Claims for $298 Million

Barclays Plc agreed to pay $298 million to settle claims it violated trade laws by facilitating transactions involving banks from countries under U.S. sanctions.

Under a deferred-prosecution agreement filed yesterday in federal court in Washington, the London-based bank agreed to pay $149 million to the U.S. and another $149 million to New York state.

Barclays was accused of violating U.S. financial sanctions against Cuba, Iran, Libya, Sudan and Burma from about March 1995 through September 2006. Barclays followed the directions of banks in those countries to omit their names in payment messages sent to the New York branch and to other financial institutions, according to court papers.

In addition, Barclays amended payment messages to remove information identifying links to the sanctioned companies, prosecutors said.

“Barclays accepts and acknowledges responsibility for its conduct and that of its employees,” according to the deferred prosecution agreement filed with the court yesterday. The accord requires the bank to voluntarily cooperate with investigators for two years, and then the criminal charges will be dismissed.

The company confirmed in a statement it is seeking court approval for the deferred prosecution for payments made between Jan. 2000 and July 2007, though Americas Barclays Capital spokesman Michael O’Looney declined further comment.

The case is U.S. v. Barclays Bank Plc, 10cr218, U.S. District Court for the District of Columbia (Washington).

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Ex-McKinsey Consultant Gets 2 1/2 Years in Iran Case

Former McKinsey & Co. consultant Mahmoud Reza Banki was sentenced to 2 1/2 years in prison for violating the Iran trade embargo and running an unlicensed money-transfer business.

Banki, a naturalized U.S. citizen born in Iran, was accused of running a “value-transfer” business that essentially moved money to residents of Iran from 2006 to 2009 in violation of the U.S. embargo. Banki received about $4.7 million as part of the transfer process and used the money to buy a $2.4 million condominium, invest in securities and pay credit-card bills, the government charged.

“I deeply regret everything that has happened,” Banki told U.S. District Judge John Keenan before his sentencing. “I will learn from it and be a better man.”

Keenan said sentencing guidelines called for 63 to 78 months, which he said was too long. He called Banki “a highly educated young man” who was unlikely to return to criminal activity. Banki, 35, has a doctorate in chemical engineering from Princeton.

A federal jury in New York convicted Banki in June of all five charges against him. Banki has been in custody since his arrest in January.

Defense lawyers told the jury during the trial that Banki got the money from his family and reported the funds to the government.

The case is U.S. v. Banki, 1:10-CR-00008, U.S. District Court, Southern District of New York (Manhattan).

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Ex-DLA Lawyer’s Prison Term for Forging Pay Slip Cut to One Day

DLA Piper LLP’s former Singapore partner Rudy Lim had his jail term for forging a pay slip cut by an appeals judge to one day, from two months. Lim was also fined S$10,000 ($7,340).

Lim has been “dealt the ultimate professional punishment” by being disbarred in the U.K., Singapore High Court Justice Tay Yong Kwang said following a hearing yesterday. Lim declined to comment after the decision.

Lim, 38, was sentenced in March to two months in jail for the forgery, in which he boosted his monthly pay to S$65,000 from S$25,000. The former head of DLA’s Indonesia law practice has said he lied about his compensation because didn’t want “to lose face” as he was underpaid at New York-based DLA and was moving to a leadership role at Duane Morris. Lim was offered $40,417 per month to help Duane Morris, based in Philadelphia, start its Singapore office in 2007.

“I did not want to go into my entire situation at DLA, having to badmouth my previous employers in front of my prospective employers,” Lim said in earlier court documents. “To save that embarrassment and the potential discussion about it, I created that false pay slip.”

Eduardo Ramos-Gomez, managing partner at Duane Morris’s Singapore office, said Lim’s lapse of judgment in creating the forged pay slip was done by a “young and greedy person.”

The case is Rudy Lim v Public Prosecutor MA122/2010 in the Singapore High Court.

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Citigroup Broker’s Ban for Insider Tips Upheld by Perth Court

A Citigroup Inc. Australian broker’s five-year ban on providing financial services for tipping clients with inside information on a takeover was upheld by the Federal Court in Perth, Australia’s stock market regulator said.

Roberto Catena of Osborne Park, Western Australia, then a broker with Citigroup Wealth Advisors Ltd., told six clients about the possible takeover of Vision Systems Ltd. between July 19, 2006, and Aug. 4, 2006, the Australian Securities & Investments Commission said yesterday.

Shares of Vision Systems surged when it became a target of a three-way takeover fight amongst Danaher Corp., the maker of Craftsman tools, Tuscon, Arizona-based Ventana Medical Systems Inc. and Cytyc Corp., of Marlborough, Massachusetts. Vision Systems shares rose 80 percent between Sept. 4, 2006, and Oct. 9, 2006, as the companies battled for control. Danaher agreed to buy the company Nov. 8, 2006, for $515 million.

Catena advised his clients to buy the shares between July 19, 2006, and Aug. 9, 2006, ASIC said.

He had appealed the ASIC-imposed ban to the federal court.

Colin Hebbard, a broker with Citi Smith Barney Ltd., and Mark McKenzie, a broker with Citigroup Wealth Advisors, were banned from providing financial services for five and three years respectively for also having had revealed information about the possible takeover to their clients, ASIC said.

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New Suits

BlueLinx Investor Suit Claims Cerberus Bid Too Low

A BlueLinx Holdings Inc. investor sued the company’s directors, saying the $3.40 a share bid by Cerberus Capital Management LP for the 45 percent of the stock it doesn’t already own is too low.

Directors of BlueLinx, an Atlanta-based distributor of building supplies, have a duty to get the best price for shareholders, and the stock is worth more than Cerberus’s offer, investor Kyle Habiniak said in a Delaware Chancery Court complaint made public yesterday in Wilmington.

Habiniak called the tender offer “fundamentally inadequate” in court papers and said it was an effort “to squeeze out BlueLinx’s shareholders upon a downturn in BlueLinx’s share price.”

Cerberus, the New York-based private investment firm led by Chief Executive Officer Stephen A. Feinberg, said in a statement July 22 that it would buy the outstanding public shares of BlueLinx for about $49.6 million. The shares, which had declined 28 percent in the previous 12 months, soared 46 percent on the New York Stock Exchange the day of the announcement.

Doug Goforth, chief financial officer of BlueLinx, didn’t return a call seeking comment on the lawsuit. The company said in a statement Aug. 13 that it was still evaluating the offer. BlueLinx reported a $61.5 million net loss on $1.65 billion in revenue last year.

The case is Habiniak v. Cohen, CA5720, Delaware Chancery Court (Wilmington).

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Black, U.S. Clash Over 2007 Criminal Fraud Conviction

Conrad Black’s criminal conviction for fraud and obstructing justice should stand, U.S. prosecutors told a federal appeals court. Defense lawyers, in a simultaneous filing, argued that the verdict should be struck down.

The U.S. Supreme Court had asked the appellate panel in Chicago to reconsider the 2007 jury finding in light of the high court’s June decision to limit the federal “honest services” fraud statute to instances of bribery and kickbacks not present in the Black case.

Black, the former Hollinger International Inc. chairman, was tried and convicted with three other company executives, after the jury was told it could find them guilty of honest- services fraud or conventional money-and-property fraud without having to reveal which theory they embraced.

“The erroneous honest services instruction was harmless beyond a reasonable doubt,” prosecutors said in the 28-page brief submitted to the court yesterday, arguing there was sufficient proof to find him guilty on the alternate grounds.

He and the other men were convicted for stealing $6.1 million from the Chicago-based newspaper publisher as they engineered its sale of assets.

“The honest-services theory provided the easiest route to conviction,” lawyers for Black and his three co-defendants told the appeals court in a filing yesterday asking the panel to throw out the verdict in its entirety.

Black, 65, was freed from a federal prison in Florida on July 21 after serving more than two years and four months of a 6 1/2 year sentence imposed by U.S. District Judge Amy J. St. Eve, who had presided over the trial.

The trial court case is U.S. v. Black, 05-cr-00727, U.S. District Court, Northern District of Illinois (Chicago). The appellate case is U.S. v. Black, 07-4080, 7th U.S. Circuit Court of Appeals (Chicago).

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Breaking Up Easier as New York Law Ends Need to Lie

New York just made breaking up easier to do, passing a no- fault divorce law that stands to reduce long, cutthroat court battles over who’s to blame when marriages fail, Bloomberg News’ Carlyn Kolker and Patricia Hurtado report.

The new law permits couples to split without assigning blame for the marriage’s collapse.

“There is a human cost and a financial cost” to a system demanding fault-finding, Robert Ross, supervising judge of the matrimonial division in Nassau County, New York, on Long Island, said before the bill became law. “It’s hard to know what impact a new law will have, but we do know that a grounds trial, and the expense and delay associated with it, is not a good thing.”

The passage of a bill July 1 by the state assembly sent the measure to Governor David Paterson, who signed it Aug. 15, according his office’s website.

The measure will take effect in 60 days and will govern divorces filed then or later.

Of 56,937 divorce filings in New York State last year, 43,724 were uncontested and 13,213, or 23 percent, were contested, according to state court system data.

Contested divorces created the possibility of trials, with witnesses testifying on alleged wrongdoing and lawyers attacking the other sides’ credibility.

“By removing the requirement to prove fault, divorcing couples and the courts will no longer have to waste resources litigating on whether a marriage should end, but will be able to better focus on issues such as the welfare of the children, fair division of marital assets and other economic concerns,” New York State Bar Association President Stephen Younger said yesterday in a statement.

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Blagojevich Jury Seeks Witness Testimony Transcript

The jury considering corruption charges against former Illinois Governor Rod Blagojevich, in its 13th day of deliberations, asked the court for a transcript of testimony by former gubernatorial staff member Bradley Tusk.

U.S. District Judge James Zagel in Chicago yesterday told lawyers for both sides the jury could see an edited version of that transcript in which portions of the proceedings that took place outside the jurors’ presence would be blacked out.

Tusk served as deputy governor for Blagojevich during his first term in office, starting in 2003. He later served as a campaign manager for New York City Mayor Michael R. Bloomberg, founder of Bloomberg LP, parent company of Bloomberg News.

Blagojevich faces 24 criminal counts including the allegation he tried to trade his power to appoint a U.S. senator to replace President Barack Obama, for campaign cash or personal favors.

Tusk, in June, told the jury that the former governor planned to hold up a $2 million grant to a Chicago school within the district of then-U.S. Representative Rahm Emanuel, until his brother, Hollywood agent Ari Emanuel, held a fundraiser for him, the Associated Press reported.

The ex-aide told the court he ignored the request because he believed it was “illegal and unethical,” according to the AP report.

Blagojevich faces as many as 20 years imprisonment if convicted on the most serious charges, including attempted extortion in connection with the Emanuel incident.

The case is U.S. v. Blagojevich, 08cr888, Northern District of Illinois, Eastern Division (Chicago).

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Litigation Departments

Lehman Adviser Fees Reach $918 Million in 22 Months

Lehman Brothers Holdings Inc. paid its lawyers and managers $44.5 million last month, bringing the investment bank’s total adviser fees to $917.6 million after 22 1/2 months in bankruptcy, a regulatory filing shows.

Restructuring firm Alvarez & Marsal LLC, which provided Lehman with its current chief executive officer, Bryan Marsal, led recipients with $326 million in fees for “interim management,” according to an Aug. 13 filing with the U.S. Securities and Exchange Commission.

Weil Gotshal & Manges LLP of New York has collected $212.3 million for acting as the investment bank’s lead bankruptcy law firm. Milbank Tweed Hadley & McCloy LLP got $61.1 million for advising Lehman’s creditors’ committee.

“The judge can always claw back fees at the end of the case, when he’ll have a better perspective on the value of the fees,” said Stephen Lubben, a bankruptcy law professor at Seton Hall University School of Law in Newark, New Jersey, in an e- mail yesterday.

Kimberly Macleod, a Lehman spokeswoman, had no immediate comment. Bryan Marsal has said he expects to recover many times more money for creditors than the amount paid in fees.

By July 31, Lehman and its affiliates had cash and investments of $19.3 billion to liquidate and pay creditors, up from $18.9 billion at the start of the month, according to the filing. Lehman has said creditors’ allowable claims may total $260 billion, compared with the $1 trillion originally filed.

Lehman filed the biggest U.S. bankruptcy in September 2008 with assets of $639 billion. Creditors include Goldman Sachs Group Inc., UBS AG, the New York Giants professional football team and Abu Dhabi Investment Authority as well as individuals who hold Lehman bonds.

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

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