Federal Reserve, Lehman, Disney, Apple, JPMorgan, Wesleyan in Court News

An appeals court refused to reconsider a decision compelling the Federal Reserve Board to release documents identifying banks that might have failed without the U.S. government bailout.

The full U.S. Court of Appeals in New York, denied a May 4 request by the Fed to review a three-judge panel’s unanimous March 19 decision requiring the agency to release records of the unprecedented $2 trillion U.S. loan program. The full court’s ruling was contained in a docket entry dated Aug. 20,

Unless the court stays its decision, the Fed will have seven days to disclose the documents. In the event of a stay, the central bank and the Clearing House Association LLC, an organization of 20 commercial banks that joined the Fed in defense of the lawsuit, will have 90 days to petition the U.S. Supreme Court to consider their appeal. The Clearing House has already said it will ask the high court to rule on the case.

“We are reviewing the decision and considering our options for appeal,” said David Skidmore, a Fed spokesman.

At issue are 231 “term sheets” documenting Fed loans to financial firms during 2008. The records, which include the banks’ names, the amounts borrowed and the collateral posted in return, were originally requested by late Bloomberg News reporter Mark Pittman through the Freedom of Information Act, which allows citizens access to government papers.

The March appeals court ruling upheld a decision of a lower-court judge in Manhattan who in August 2009 ordered that the information be released.

The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 09-04083, 2nd U.S. Circuit Court of Appeals (New York).

For more, click here.

Lehman Made ‘Best Deal It Could’ in Barclays Brokerage Sale

Lehman Brothers Holdings Inc. made “the best deal it could” when it sold its brokerage to Barclays Plc in “one of the most uncertain weeks in financial market history,” a former Lehman restructuring executive told a judge.

“Lehman was the largest broker-dealer to go bankrupt in history,” said Mark Shapiro, who worked on the deal with former Lehman President Herbert “Bart” McDade. “The absence of a sale would have led to near-term liquidation and a piecemeal sale for much less.”

Shapiro, now a Barclays restructuring executive, was yesterday’s first witness in U.S. Bankruptcy Court in Manhattan as the London-based bank defended itself against Lehman’s claim that it should pay as much as $11 billion for an allegedly undisclosed “windfall” on the defunct brokerage. The deal, approved by U.S. Bankruptcy Judge James Peck, closed a week after Lehman’s Sept. 15, 2008, bankruptcy, the biggest in U.S. history.

The nonjury trial, which resumed yesterday after a summer holiday, pits the U.K.’s third-biggest bank, represented by lawyer David Boies, against Lehman, which wants money from Barclays to pay creditors.

The money would help Lehman creditors, who may recoup only 15 cents to 44 cents on the dollar, Lehman has said, and hurt Barclays, which made 2.4 billion pounds ($3.7 billion) in the first half.

Shapiro told the judge that Lehman, in the days before the bankruptcy filing, focused on listing assets it “had to sell” as part of the brokerage business. Lehman fought with Barclays over the price for its New York headquarters building, boosting it to about $1 billion, and slashed a $250 million breakup fee demanded by Barclays in case the deal fell apart.

Many Lehman assets had no fixed valuations as the markets declined, Shapiro said. Preparing to sell a portfolio of securities to Barclays, Lehman wasn’t even sure what it could deliver as lenders seized collateral and trading partners closed out trades.

Other assets Barclays bought, such as intellectual property and securities indexes, had only “scrap value” to Lehman as a liquidating firm, although they could be valuable to Barclays as an operating business, Shapiro said. Liabilities that Barclays assumed, such as contracts, also couldn’t be fixed, he said.

“We didn’t have precise numbers,” Shapiro said under questioning by Boies. “We categorized things but we had no specific numbers for many things.”

The cases are In re Lehman Brothers Holdings Inc., 08- 13555, and Giddens v. Barclays Capital Inc., 09-01732, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

For more, click here.

U.S. Funding of Embryonic Stem Cell Research Halted

A federal judge yesterday halted U.S. funding of embryonic stem cell research approved by President Barack Obama. U.S. District Judge Royce Lamberth in Washington ruled that the work violates a law passed to bar the destruction of human embryos.

The judge issued an order temporarily stopping the U.S. Health & Human Services Department and the National Institutes for Health from conducting the studies. The judge cited the still-in-force 1996 Dickey-Wicker Amendment.

“The language of the statute reflects the unambiguous intent of Congress to enact a broad prohibition of funding research in which a human embryo is destroyed,” Lamberth said in a 15-page decision.

Obama in March 2009 reversed an executive order of former President George W. Bush that limited stem cell research to about 20 existing lines of embryonic cells. Obama’s order allowed research on cells derived from embryos that would otherwise be disposed of after in vitro fertilization procedures. Lamberth said the administration was attempting to separate the derivation of the embryonic stem cells from research on them, and “the two cannot be separated.”

“Simply because embryonic stem cell research involves multiple steps does not mean that each step is a separate ‘piece of research’ that may be federally funded,” Lamberth wrote. “If one step or ‘piece of research’ of an embryonic stem cell research project results in the destruction of an embryo, the entire project” is barred from getting federal funds, he said.

Obama’s directive said the National Institutes of Health could “support and conduct responsible, scientifically worthy human stem cell research” using embryonic cells.

The case is Sherely v. Sebelius, 09-cv-1575, U.S. District Court for the District of Columbia (Washington).

GE Fails to Get Mitsubishi Antitrust Claims Dismissed

General Electric Co. failed to win dismissal of allegations brought by Mitsubishi Heavy Industries Ltd. that it seeks to monopolize U.S. sales of wind turbines through litigation, intimidation and fraud.

U.S. District Judge J. Leon Holmes in Fayetteville, Arkansas, yesterday denied GE’s request to dismiss the antitrust lawsuit. The judge granted GE’s request to halt the case until the company’s patent-infringement claims against Mitsubishi, which the Japanese company has characterized as “sham” litigation, have been resolved.

“If GE prevails in any of the infringement actions, then Mitsubishi’s claims in this action will be moot because GE will have the right to exclude Mitsubishi from the market,” Holmes said in his decision.

Mitsubishi is seeking damages that might exceed $1 billion in the lawsuit filed in May. The Tokyo-based company accuses GE of embarking on an anticompetitive scheme to drive Mitsubishi’s suppliers out of the U.S. market. The lawsuit, which focuses on patent claims that GE first lodged against Mitsubishi in 2008, escalated a dispute between the two industrial companies over the growing U.S. market for wind turbines.

Mitsubishi is planning to build a turbine-assembly factory in Fort Smith, Arkansas.

“The judge did decide to stay discovery for the present,” Sonia Williams, a spokeswoman for Mitsubishi Power Systems America, said in a statement. “Nevertheless, we are heartened by his suggestion that he may terminate the stay if he finds appropriate circumstances.”

Dan Nelson, a spokesman for Fairfield, Connecticut-based GE, said in an e-mailed statement that the company strongly disagrees with allegations it has monopolized any market.

“The court found it inappropriate to go forward with the case and therefore stayed the case pending the outcome of GE’s patent infringement cases,” Nelson said. “GE is confident that the outcome of those cases will remove any doubts about the meritless nature of MHI’s claims.”

The case is Mitsubishi Heavy Industries Ltd. v. General Electric Co., 10-05087, U.S. District Court, Western District of Arkansas (Fayetteville).

Sebbag, Who Leaked Disney Earnings, Pleads Guilty to Conspiracy

A California man accused of leaking Walt Disney Co.’s earnings information pleaded guilty to conspiracy and wire fraud in Manhattan federal court.

Yonni Sebbag, 30, and his girlfriend, Bonnie Hoxie, the former assistant to Disney corporate communications chief Zenia Mucha, were arrested in California on May 26 for leaking confidential stock tips about the entertainment company’s earnings. Sebbag has been jailed since his arrest.

“From March 2010 to May 26, 2010, I agreed with others to commit securities fraud and wire fraud,” Sebbag told U.S. Magistrate Judge James Cott in Manhattan yesterday. “I disclosed material, non-public information about the Walt Disney Co. to outside investors,” he said, adding later, “I transmitted via electronic mail that material, non-public information.”

Sebbag, who is a Moroccan citizen, faces deportation and a prison term of as long as 33 months in prison when he is sentenced by U.S. District Judge Barbara Jones, Cott said.

Prosecutors say Sebbag sent letters in March to at least 33 investment companies, including hedge funds, offering to sell confidential information about Burbank, California-based Disney.

On March 11, an undercover agent with the Federal Bureau of Investigation began reaching out to the pair, according to a criminal information filed in New York. On May 8, the two gave undercover FBI agents internal Disney documents, according to the filing.

None of the funds acted on the tips, a person familiar with the matter said. Disney said it cooperated with prosecutors.

The charge of wire fraud carries a statutory term of as long as 20 years in prison, Cott said yesterday. As part of his guilty plea, Sebbag also agreed to forfeit the $15,000 he received from the undercover FBI agent as part of a scheme. The government said the evidence against Sebbag included audiotape and videotaped evidence of Sebbag soliciting the FBI agent who was posing as a hedge fund manager.

His lawyer, Steven Kartagener, said his client isn’t cooperating with prosecutors.

“Mr. Sebbag has come forward and accepted full responsibility for his misconduct,” Kartagener said in an interview after court. “The foundation of this guilty plea was a fair basis to go forward and ultimately resolve this matter.”

Cott set a Nov. 16 court date in the case. No sentencing date has been set by Judge Jones, Cott said.

Criminal charges are pending are pending against Hoxie, who remains free on bail. Her lawyer, Robert Baum, couldn’t be immediately reached for comment.

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

Capitol Investments Ex-Owner to Plead Guilty in Fraud Scheme

Nevin Shapiro, the former owner of Capitol Investments USA Inc. accused of leading an $880 million Ponzi scheme, is to plead guilty, court papers showed.

Shapiro, 41, of Miami Beach, Florida, is charged with defrauding more than 60 investors in his bogus wholesale grocery distribution business. He is accused of using new investors’ money to pay earlier ones, as well as to fund his lavish lifestyle.

Prosecutors said Shapiro stole $35 million to pay illegal gambling debts and make payments on a $5.3 million house, a $1.5 million yacht, a Mercedes-Benz and seats to Miami Heat basketball games. He also bought a pair of diamond-studded handcuffs to give to a prominent professional athlete and donated $150,000 to the University of Miami for an athletic lounge, prosecutors said.

Shapiro, who pleaded not guilty on July 22, is scheduled for a “plea agreement hearing” on Sept. 15 in federal court in Newark, New Jersey, where he was indicted, according to an Aug. 20 court docket entry. The entry doesn’t specify what charges Shapiro will admit.

Rebekah Carmichael, a spokeswoman for U.S. Attorney Paul Fishman, declined to comment. Shapiro’s attorney, Maria E. Perez, didn’t immediately return a call seeking comment.

Shapiro was accused in a July 14 indictment of conspiracy, securities fraud, two counts of wire fraud and two counts of money laundering. The securities and wire fraud counts each carry prison terms of as long as 20 years.

Shapiro and his co-conspirators promised investors from January 2005 to November 2009 that their money would fund his grocery distribution business, according to the indictment.

The U.S. Securities and Exchange Commission also sued Shapiro. The agency, which estimated Shapiro raised about $900 million, said he used $769 million of incoming funds to pay returns to earlier investors. The SEC wants him to forfeit ill- gotten gains and pay unspecified fines.

Shapiro also paid $13 million in undisclosed commissions and fees to individuals who attracted other investors, according to the SEC.

The criminal case is U.S. v. Shapiro, 10-cr-00471, U.S. District Court, District of New Jersey (Newark). The SEC case is Securities and Exchange Commission v. Nevin K. Shapiro, 10-cv- 21281, U.S. District Court, Southern District of Florida (Miami).

For more, click here.

Jailed Apple Manager Devine Must Post $600,000 Bail, Judge Says

Paul Devine, the Apple Inc. manager jailed on charges that he took kickbacks in exchange for company secrets, won’t be released until he posts a bond of $600,000 and signs over funds in his foreign accounts, a judge ruled.

U.S. Magistrate Judge Howard Lloyd in San Jose, California, said the unknown total of funds in foreign accounts makes him “uneasy.” Lloyd also said Devine must grant the government access to two safe deposit boxes after Assistant U.S. Attorney Michelle Kane said they may contain “proceeds of the fraud.”

Kane told the judge agents found $150,000 in cash, including some foreign notes, in shoeboxes during a search of Devine’s home, and that the government wants to know what’s in the security boxes before agreeing to his release on bond.

“We know about some accounts and some statements but not statements for all the accounts we believe are out there,” Kane told the judge, referring to bank statements found during the search. “We’d ask that we be allowed to see what’s in those safe deposit boxes.”

The prosecutor and the judge agreed to Devine’s pledge that the foreign funds will be transferred to a trust account for his lawyers’ firm, Berkeley, California-based Arguedas, Cassman & Headley, and then posted to the court. Lloyd said Devine’s bail must be secured by his and his mother’s homes and that his brother will be responsible for $50,000 of the $600,000 bail.

Devine, 37, a global-supply manager, was accused of money laundering and wire fraud in a 23-count indictment unsealed Aug. 13. He has pleaded not guilty to charges that he took at least $1 million in kickbacks from Asian suppliers. Prosecutors objected to his release on bail, arguing he is a flight risk, which Devine denies.

Devine gave the suppliers of iPhone and iPod accessories confidential data that helped them win better contracts from Cupertino, California-based Apple in exchange for payments, according to the indictment. Each count of wire fraud, wire fraud conspiracy, and money laundering may bring a 20-year prison sentence, prosecutors said.

Apple hasn’t provided information on Devine’s employment status since his arrest.

Jack Gillund, a spokesman for the U.S. Attorney’s office in San Francisco, and Devine’s lawyer, Raphael Goldman, declined to comment yesterday.

The case is U.S. v. Devine, 10-cr-603, U.S. District Court, Northern District of California (San Jose).

For the latest lawsuits news, click here. For the latest trial and appeals news, click here.

Settlements

Jefferson County to Get $25 Million From JPMorgan Settlement

Jefferson County, Alabama, will receive $25 million from a fund set up by the Securities and Exchange Commission after it settled last year with JPMorgan Chase & Co. in a probe of derivatives sales to local officials.

Under the terms of the settlement, JPMorgan agreed to pay the county $50 million and wipe out $647 million in termination fees it claimed the county owed in swap transactions. The additional $25 million penalty paid by the bank, which has been invested in short-term U.S. Treasury bills, was intended to compensate “harmed investors and the county.”

The SEC said last week that Jefferson County suffered “direct economic harm” and therefore should receive all of the funds.

The commission alleged that JPMorgan, through former managers Charles LeCroy and Douglas MacFaddin, paid $8.2 million to local firms in exchange for naming JPMorgan to underwrite bonds and engineer swap agreements awarded by the county in 2002 and 2003 to refinance debt on reconstruction and expansion of its sewer system.

JPMorgan neither admitted nor denied the allegations. The $3.2 billion debt incurred for repair of the sewer system has put Alabama’s most populous county on the brink of bankruptcy.

In awarding the money only to the county, the SEC determined that the interest rates the original bondholders received weren’t affected by the payment scheme, and that harm suffered by the investors was due to failure in the markets unrelated to the bank’s actions.

The money will be awarded after a 30-day period for public comment, the SEC said.

URS Pays $52 Million to Settle Minnesota Bridge-Collapse Suit

URS Corp., an engineering and construction company, agreed to pay more than $52 million to settle claims that it failed to spot problems with a Minnesota bridge that collapsed and killed 13 people three years ago.

The company’s insurers will pay the settlement, which covers 145 people injured in the collapse of the Interstate 35W bridge outside Minneapolis along with the families of those killed, San Francisco-based URS officials said in a statement.

“I’m happy that the lawsuit has reached this conclusion, but there’s no doubt in my mind that any of us would trade this settlement for a bridge that was structurally safe in the first place,” Garrett Ebling, a survivor of the collapse, said at a news conference yesterday.

The August 2007 collapse of the 40-year-old bridge was one of the worst U.S. bridge failures in the past 30 years, according to environmentalgraffiti.com, which tracks such disasters. The failure led to widespread concern over the safety of U.S. bridges.

URS officials, hired by the state of Minnesota to assess the safety of its bridges, didn’t know about a design flaw in the structure that left it vulnerable to collapse, the company said in the e-mailed statement. National Transportation Safety Board officials found in 2008 that the bridge’s steel plates weren’t hardy enough to handle traffic flow on the structure.

“We believe we have exposed exactly why the bridge fell,” said Chris Messerly, a Minneapolis-based lawyer for the bridge victims. He said victims are holding URS responsible for its role in the collapse through the settlement.

“We can’t directly change how corporate America conducts its business and treats people,” Messerly said in an interview yesterday.

URS officials said the settlement wasn’t an “admission of liability or fault” on behalf of the engineering firm.

“URS believes it is in the best interest of the company and its shareholders to resolve this matter and avoid the cost and distraction of protracted litigation,” officials said in the release.

Victims sued URS in state court in Minneapolis in 2009. The case was set for trial in April. In March, URS agreed to pay $5 million to the state of Minnesota over its claims.

Messerly said Judge Deborah Hedlund gave final approval to the settlement Aug. 14 after the parties concluded negotiations.

The case is In re I-35W Bridge Collapse Litigation, 27-cv- 09-16985, District Court of Hennepin County, Minnesota (Minneapolis).

Xe Services to Pay $42 Million to Settle U.S. Export Claims

The U.S. security company once known as Blackwater Worldwide will pay the U.S. State Department $42 million to settle claims about illegal weapons exports.

Xe Services LLC, based in Moyock, North Carolina, supplies guards and trainers in areas of armed conflict. The company was accused of 288 violations involving the unauthorized export of defense articles and services to foreign end-users between 2003 and 2009, the State Department said yesterday in an e-mailed statement.

The alleged violations didn’t involve sensitive technologies or cause a known harm to national security, the State Department said.

New Suits

Former Wesleyan Investment Chief Sued by Connecticut

Thomas Kannam, the former Wesleyan University Chief Investment Officer was sued by Connecticut over using endowment assets to benefit private investment groups he had ties with, the state attorney general said in an e-mailed statement.

Kannam didn’t disclose links to firms including Belstar Group LLC, Vietnam Capital Partners LLC and Advanced Device Technology Inc., Richard Blumenthal said yesterday in the statement. Kannam “misused, at a minimum, tens of thousands of dollars in university assets,” according to Blumenthal’s office.

Wesleyan, ranked the 12th-best liberal-arts college in the country by U.S. News & World Report magazine, sued Kannam in Connecticut Superior Court on Nov. 24, saying he “defrauded the university of thousands of dollars” and “engaged in outside employment in breach of his duty of loyalty, his employment agreement and the university’s conflict of interest policy.” The Middletown, Connecticut, school, fired him in October.

Wesleyan’s claims against Kannam are being heard by an arbitrator, consistent with his employment agreement with the school, his lawyer, Stephen Fitzgerald, said yesterday in a phone interview.

“There’s no need for the attorney general to file this, what I call a ‘me too’ lawsuit, on behalf of an institution as large and powerful as Wesleyan,” Fitzgerald said. “Alumni, faculty and students should also be distressed that the university’s leadership has chosen to spend thousands of dollars in legal fees on a case that will ultimately produce million- dollar counterclaims against the school by those whose reputations have been severely injured by Wesleyan’s reckless allegations.”

Blumenthal, who said in January he planned to review Wesleyan’s complaint, will support Wesleyan’s suit against Kannam, he said in yesterday’s statement. The Connecticut lawsuit will also allow the state to pursue penalties under the Solicitation of Charitable Funds Act, he said.

Wesleyan “shares the concerns expressed by Mr. Blumenthal and we remain ready to help,” said David Pesci, a school spokesman, who declined to comment further.

In June, Wesleyan named Anne Martin of Yale University’s fund as its new chief investment officer. Martin oversaw venture capital, energy and commodities investments at Yale’s fund, in New Haven, Connecticut, according to a June 11 blog post by Michael Roth, Wesleyan’s president. Wesleyan’s fund was valued at $532 million as of March 31.

Lexmark Seeks to Block Imports of Copycat Cartridges

Lexmark International Inc., the maker of laser and inkjet printers, filed a patent-infringement claim with U.S. trade officials to block what it calls copycat toner cartridges.

Lexmark cited 24 companies that it says make and sell unauthorized replacement cartridges overseas. It filed a complaint on Aug. 20 with the U.S. International Trade Commission in Washington, which has the power to block imports of products found to infringe U.S. patents.

Selling printer supplies is Lexmark’s “profit engine,” the Lexington, Kentucky-based company said in its most recent annual report. Laser and inkjet supplies accounted for $2.75 billion in sales last year, or 71 percent of $3.88 billion in revenue.

The company has said that clones, counterfeits and remanufactured cartridges can drive down prices, which may hurt its financial results. Lexmark also filed a civil suit in federal court in Cincinnati seeking cash compensation for the infringement of 15 patents.

Among companies included in the ITC complaint is Ninestar Image International Ltd. of China, which also was named in a patent case filed in June by Lexmark’s rival, Canon Inc., and one filed last year by another competitor, Hewlett-Packard Co.

The Lexmark complaint is In the Matter of Toner Cartridges, 2750, U.S. International Trade Commission (Washington). The civil suit is Lexmark International Inc. v. Ink Technologies Printer Supplies LLC, 10cv564, U.S. District Court, Southern District of Ohio (Cincinnati).

On the Docket

Obama-Poster Copyright-Infringement Trial Is Set for March 21

A March 21 trial is set in the copyright case between artist Shepard Fairey and the Associated Press over an election poster of Barack Obama Fairey made from an AP photo. He will testify, his lawyers said.

U.S. District Judge Alvin Hellerstein in Manhattan yesterday also set a Dec. 17 deadline for Fairey and AP to file motions for summary judgment, which if granted could make a trial unnecessary.

“Fairey will testify how he did it,” his attorney, Geoffrey Stewart, said at a hearing in Manhattan yesterday.

Fairey sued last year seeking a ruling that his Obama Hope poster didn’t infringe AP’s copyright. The news organization countersued. Fairey’s lawyers will try to prove that the poster was a “fair use” of the photograph and thus didn’t infringe a copyright.

The judge asked the lawyers about a court filing Aug. 20 stating that another party in the case, Mannie Garcia, had dropped his lawsuit. Garcia, the photographer who took the photo of Obama for AP, had sued AP and Fairey for illegal use of the picture.

“We’ve all consented to it,” Dale Cendali, a lawyer for AP, said in court yesterday. “Mr. Garcia will be removed from the case.”

The case is Fairey v. Associated Press, 09-cv-01123, U.S. District Court, Southern District of New York (Manhattan).

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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.