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Moffat, Tribune, EBay, Citi, Moody’s in Court News

Robert Moffat, a former International Business Machines Corp. senior vice president, was sentenced to six months in prison for leaking information to Danielle Chiesi, a consultant for New Castle Funds LLC.

Moffat, 54, admitted in March to giving inside information to Chiesi about IBM, Lenovo Group Ltd. and Advanced Micro Devices Inc. from August to October 2008. He is one of 12 people who have pleaded guilty in two overlapping insider-trading cases related to Galleon Group LLC and New Castle Funds. Nine others still face charges.

U.S. District Judge Deborah Batts in Manhattan pronounced the sentence yesterday, rejecting a defense request for a term of probation for Moffat, who spent more than three decades at IBM, the world’s largest computer-services company.

“Why the defendant betrayed the only employer he has had for his entire career has not been addressed,” Batts said. “His astounding breach of his fiduciary duty to his employer is why he is here.”

At his plea hearing, Moffat admitted to telling Chiesi about disappointing sales of IBM servers, a pending restructuring at chipmaker AMD and earnings at Lenovo, a maker of personal computers. Moffat said he learned the information because he served as a non-voting member of Lenovo’s board and because he knew that Armonk, New York-based IBM had been asked by AMD to use a license as part of its restructuring.

Moffat claimed he had an “intimate relationship” with Chiesi, 44, a former executive at New York-based New Castle Funds who was arrested along with Galleon Group co-founder Raj Rajaratnam. Moffat’s lawyers said Chiesi manipulated their client to obtain the information.

Rajaratnam and Chiesi were indicted for using confidential tips to earn millions of dollars in illegal stock trades. They both deny wrongdoing and are awaiting trial next year.

Moffat, a former Eagle Scout who was with IBM for 31 years and oversaw the company’s personal-computer business, pleaded guilty in March to conspiracy and securities fraud. He isn’t cooperating in the U.S. probe, according to his lawyer, Kerry Lawrence.

In May, New Castle co-founder Mark Kurland, who pleaded guilty to insider trading in January, was sentenced to 27 months in prison. Kurland also isn’t cooperating with prosecutors. They said he and Chiesi used secret tips when they traded in AMD, Akamai Technologies Inc. and Sun Microsystems Inc. while at New Castle from August 2008 to January 2009.

The case is U.S. v. Moffat, 10-cr-00270, U.S. District Court, Southern District of New York (Manhattan).

Tribune Creditors Seek to Sue Shareholders, Zell

Tribune Co. creditors asked a judge to let them sue real- estate billionaire Sam Zell, who took the newspaper publisher private in 2007 for more than $8 billion, and shareholders who benefited from the deal.

Zell, the shareholders and six other groups of potential targets of the lawsuit “collectively caused massive damage” to Tribune, the official committee of unsecured creditors said yesterday in a filing in U.S. Bankruptcy Court in Wilmington, Delaware.

The committee, which once supported Tribune’s plan to settle any allegations against Zell, told U.S. Bankruptcy Judge Kevin Carey that it doesn’t plan to pursue the proposed lawsuit while the company is trying to negotiate an end to its bankruptcy. It said it wants to protect its right to file the case should mediation among Tribune’s warring creditors fail.

Tribune filed for bankruptcy in December 2008, a year after the buyout led by Zell. Gary Weitman, a spokesman for Chicago- based Tribune, had no immediate comment.

Potential defendants include Tribune’s directors and officers and one of its financial advisers, Valuation Research Corp., according to yesterday’s filing.

A court-ordered report released in July found that shareholders who profited from the second stage of the two-part deal may be susceptible to a lawsuit. The McCormick Foundation, a philanthropic foundation started by former Chicago Tribune publisher Robert R. McCormick, took in $422 million when it sold almost 12 million shares in Tribune in the second stage, according to court documents.

The creditors’ committee, represented by law firm Chadbourne & Parke LLP, didn’t name any of its own members as potential targets. Those members include buyout lender JPMorgan Chase Bank NA and Deutsche Bank Trust Co. Americas, a trustee for some lenders.

To avoid any legal conflicts, the committee had hired a separate law firm, Zuckerman Spaeder LLP, to pursue any potential claims against the lenders. That firm dropped its request to sue the lenders earlier this year when the committee joined a settlement to end the bankruptcy. The settlement was later abandoned.

Fighting among Tribune creditors, who are owed more than $12 billion, intensified after July 27 when a bankruptcy examiner, Kenneth N. Klee, released a report that bolstered the position of lower-ranking creditors. Those creditors, including noteholders owed $1.2 billion, said JPMorgan and the other buyout lenders should lose their position among the first to be repaid because of the 2007 transaction.

Some of the lower-ranking creditors have already sued JPMorgan and other lenders for their roles in financing the buyout. The creditors say the deal was a so-called fraudulent transfer because it added $8 billion in debt to Tribune without conferring any benefit on the company.

The case is In re Tribune Co., 08-13141, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Court Rulings

EBay Wins Court Ruling Rejecting Tiffany’s Ad Claim

EBay Inc., the most-visited U.S. e-commerce site, won a judge’s ruling tossing out a false-advertising claim by Tiffany & Co., the second time in two years that the online auctioneer has prevailed in a lawsuit against the second-largest luxury jewelry retailer.

Tiffany sued in 2004 over the sale of counterfeit jewelry on EBay’s website. U.S. District Judge Richard Sullivan in New York ruled in EBay’s favor in 2008, rejecting trademark infringement and false-advertising claims. An appeals court in April upheld most of the judge’s ruling while reinstating a single false-advertising claim.

Sullivan yesterday dismissed the claim, saying “there is no extrinsic evidence indicating that the challenged advertisements were misleading or confusing.”

EBay, based in San Jose, California, owner of the PayPal payment service, on July 21 reported second-quarter profit that topped analysts’ estimates while predicting that a foreign- currency slump would eat into overseas sales this year.

Mark Aaron, a spokesman for New York-based Tiffany, declined to comment.

“which settles the last remaining claim before the trial court in this case,” Michelle Fang, EBay’s associate general counsel, said in a statement that the ruling “settles the last remaining claim before the trial court in this case.”

The case is Tiffany v. EBay, 04-cv-4607, U.S. District Court, Southern District of New York (Manhattan).

Convicted Accountant Loses Legal Bid for MBA Degree

A certified public accountant who hid his conviction for insider trading from his teachers at New York University’s graduate business school wasn’t entitled to the MBA degree that he thought he earned, a judge ruled.

In February 2007, three months after completing his course work at NYU’s Stern School of Business, Ayal Rosenthal pleaded guilty to charges that he leaked to his brother secret tips that he learned at his job at PricewaterhouseCoopers LLP. Rosenthal never told the school about the investigation of him or his guilty plea, even while serving as a teaching assistant in a professional responsibility course, according to a court ruling.

Rosenthal sued after faculty learned of his conviction and voted not to award the degree. U.S. District Judge Lewis Kaplan in New York yesterday upheld the university’s decision, saying Rosenthal wasn’t entitled to damages and can’t force NYU to grant him the masters of business administration degree.

The faculty determined “that Rosenthal was not fit to receive a degree of the basis of his admitted felonious conspiracy to commit securities fraud,” Kaplan wrote. “That decision was fully within the faculty’s power and discretion.”

Rosenthal, who was a part-time student, also didn’t tell the school that he had served a two-month term in prison, Kaplan said. Two days after he was released from jail, Rosenthal told the school’s Judiciary Committee that his guilty plea was for “conscious avoidance of securities laws, which is materially different from a customary guilty plea,” Kaplan wrote in his decision.

As part of its recommendation to the faculty that Rosenthal be denied a degree, the school’s committee also recommended that Rosenthal’s grade in professional responsibility be changed to an “F,” the judge said.

Rosenthal argued in his 2008 lawsuit that the Stern faculty lacked jurisdiction to discipline him and that NYU failed to comply with its own disciplinary rules and procedures.

Edward Hernstadt, Rosenthal’s lawyer, didn’t immediately return a call seeking comment after regular business hours.

The case is Rosenthal v. New York University, 08-cv-05338, U.S. District Court, Southern District of New York (Manhattan).


U.S. Foodservice to Pay $30 Million to Settle Suit

U.S. Foodservice Inc. agreed to pay $30 million to settle a fraud lawsuit claiming it used shell companies to overcharge the Defense Department and the Department of Veterans Affairs for products at military bases.

The settlement, announced yesterday by U.S. Attorney Preet Bharara in Manhattan, resolves a lawsuit filed by the U.S. that accused the company of fraudulently inflating prices it charged under its cost-based contracts to supply federal agencies.

U.S. Foodservice received “millions of dollars from the United States to which it was not entitled” as a result of the scheme, Bharara’s office said in a statement. The complaint against the company included claims of fraud and unjust enrichment, according to the statement.

The company was awarded contracts from 2000 to 2005 to supply installations in the U.S., according to the settlement filed with the complaint yesterday and approved by U.S. District Judge John Keenan in New York.

Bharara’s office began its investigation in February 2003, the U.S. said in court papers. U.S. Foodservice didn’t admit wrongdoing, fault or liability in the settlement.

U.S. Foodservice said in an e-mailed statement that it fully cooperated in the probe.

“We deny any wrongdoing and stand behind our pricing policies and practices, which have always been consistent with the terms of our federal government contracts and industry standards,” the company said. “We settled because we want to close this chapter in our past.”

The company, based in Rosemont, Illinois, said it set aside funds in anticipation of the settlement, which it said won’t affect customers, suppliers or employees.

U.S. Foodservice is a former subsidiary of supermarket giant Royal Ahold NV. Ahold sold U.S. Foodservice for $7.1 billion in 2007 to buyout firms Clayton Dubilier & Rice Inc. and Kohlberg Kravis Roberts & Co.

More than a dozen people were charged in a related criminal case brought by the U.S. Attorney’s office in Manhattan. They included U.S. Foodservice’s former finance chief, Michael Resnick, who pleaded guilty to conspiracy and was sentenced to six months of house arrest.

The case is U.S. v. U.S. Foodservice Inc. 10-cv-06782, U.S. District Court, Southern District of New York (Manhattan). Citigroup Urges Approval of SEC Subprime Settlement (Update1)

Citigroup Inc. urged a judge to approve a $75 million settlement with the U.S. Securities and Exchange Commission over claims the bank misled investors by failing to disclose $40 billion in subprime-related holdings.

U.S. District Judge Ellen Huvelle in Washington was initially dissatisfied with the written proposal and had sought more information before approving the accord.

“Citigroup believes the SEC’s proposed resolution of this matter is entitled to substantial deference and joins the commission in urging the court to approve the proposed settlement as fair, adequate, reasonable and appropriate,” the bank said in yesterday’s filing.

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 its complaint. Some disclosures omitted more than $40 billion in investments, the SEC said.

Shannon Bell, a Citigroup spokeswoman, declined to comment on the filing.

The SEC filed papers with the judge on Sept. 8 encouraging approval for the settlement.

The penalty “takes into account the seriousness of the misconduct,” the SEC wrote it its filing. “It is sufficiently substantial to send a clear message that misleading statements by a corporation on issues of importance to investors cannot go unaddressed.”

The SEC identified Citigroup officials -- including former Chief Executive Officer Charles O. “Chuck” Prince and former Chairman Robert Rubin -- who were aware that losses were mounting in October 2007 on the highest-rated segments of mortgage-based assets, which the agency claims hadn’t been fully disclosed. The SEC didn’t accuse those officials of wrongdoing.

The fact that so many executives were aware of the disclosure and valuation process and “nonetheless did not note the central issue identified by the commission in its complaint, only underscores the weakness of any possible case against additional parties,” Citigroup wrote in yesterday’s filing.

Citigroup was under “no obligation to say anything about its ‘subprime exposure’” in the second and third quarters of 2007, the bank wrote. It voluntarily decided shareholders would benefit from “a more concrete understanding” and made some statements, it said.

“In making these July and October disclosures, Citigroup was among the first of its financial institution peers to provide information of this type to the investing public,” the bank said.

Huvelle has scheduled a Sept. 24 hearing for further proceedings.

The case is Securities and Exchange Commission v. Citigroup Inc., 10-cv-01277, U.S. District Court, District of Columbia (Washington).

For more, click here.

New Suits

Former Moody’s Worker Sues Rating Firm for Defamation

Eric Kolchinsky, the former Moody’s Corp. analyst who criticized the company after allegedly being demoted and then suspended for complaining internally about its practices, sued the firm, its credit-ratings unit and chief executive officer for defamation.

The company has responded to criticism by Kolchinsky with false statements meant to “undercut his credibility and portray him as disgruntled, potentially unstable and unprofessional,” according to the complaint in a civil suit filed yesterday in federal court in Manhattan.

The attacks “have caused great damage to Mr. Kolchinsky’s professional reputation and have ‘black-listed’ Mr. Kolchinsky in the private sector on Wall Street,” according to the complaint, which seeks at least $15 million in compensatory damages.

Kolchinsky, 39, is among a handful of former Moody’s and Standard & Poor’s workers who have chosen over the past two years publicly to accuse the ratings companies of conflicts of interest and other failings before the start of the financial crisis of 2008, which was caused in part by the collapse in mortgage debt to which they gave top credit grades. Moody’s alleged “retaliation” against him is the subject of a Department of Labor investigation, according to the complaint.

“We are confident that he has no basis for any suit against Moody’s,” Michael Adler, a company spokesman, said yesterday in a telephone interview.

Raymond McDaniel, one of the defendants in the complaint and CEO of New York-based Moody’s Corp., the parent company of Moody’s Investors Service, said on an October conference call that Kolchinsky’s claims were “not supported by the facts.”

Adler said in a September 2009 telephone interview that Kolchinsky was moved from Moody’s derivatives group in 2007, “which was a change in position not to his liking.” Moody’s “has a strict non-retaliation policy, and Mr. Kolchinsky was not disciplined or suspended because he raised complaints,” he said then.

A former head of the structured-products group at Moody’s that dealt with the collateralized debt obligations filled with mortgage bonds that collapsed once home foreclosures began to soar, Kolchinsky has criticized the ratings firm during television interviews, Congressional hearings and a panel held by the Financial Crisis Inquiry Commission. He testified to a Senate committee in April that a Moody’s manager in September 2007 balked at a plan to grade new CDOs with an assumption that its rankings on the underlying home-loan securities were no longer accurate, after a meeting in which its analysts revealed they would downgrade a large number of such subprime notes.

Calamos Asset Management Sued Over ARS Buyout

Financier John P. Calamos Sr. and his Calamos Asset Management Inc. were sued by an investor over claims they needlessly spent $280 million to redeem illiquid auction-rate securities in 2008 and 2009.

Calamos, the firm, its closed-end Calamos Convertible Opportunities and Income Fund and six trustees allegedly breached their duty to common shareholders by redeeming the auction-market preferred shares, or AMPS.

“The redemptions by the fund of the AMPS damaged the holders of the fund’s common stock by denying them the financial benefits associated with the AMPS,” according to investor Christopher Brown’s complaint filed yesterday in Illinois state court in Chicago.

Calamos is the founder of the Naperville, Illinois-based firm. Its Convertible Opportunities and Income Fund had more than $917 million in assets under management as of July.

Jennifer McGuffin, a Calamos spokeswoman, declined to comment.

The auction-rate securities market froze in February 2008 amid fallout from the global decline in bond prices. Interest rates for the illiquid securities were set at auctions held at regular intervals.

Closed-end funds issue a fixed number of common shares that trade on an exchange like stocks. Brown, identified in the complaint as a North Carolina resident who has held Calamos fund shares since 2006, seeks class-action, or group, status on behalf of all of its common shareholders from March 2008 to now, together with unspecified money damages.

The case is Brown v. Calamos, 10CH39590, Cook County, Illinois, Circuit Court, Chancery Division (Chicago).


Drilling-Ban Foes Ask Court to Uphold Judge’s Order

Offshore oil-services companies asked an appeals court to uphold a judge’s decision blocking enforcement of a U.S. moratorium on deep-water drilling in the Gulf of Mexico while the government asked the court to uphold the ban yesterday.

The U.S. banned drilling in waters deeper than 500 feet in May after the BP Plc oil spill. U.S. District Judge Martin Feldman in New Orleans on June 22 barred enforcement of the moratorium after Hornbeck Offshore Services Inc. and other companies sued, claiming that it posed irreparable economic harm.

The companies asked the U.S. Court of Appeals in New Orleans yesterday to uphold Feldman’s order and called a second moratorium issued July 12 a “mirror image” of the first. The U.S. had asked the appeals court to lift Feldman’s order and throw out the Hornbeck lawsuit as irrelevant in light of the revised moratorium from the Interior Department.

“The government has defied compliance with the preliminary injunction from the day of its entry,” Hornbeck’s lawyers said. “The agency has continued its pattern of defiance, culminating with its replacement of its challenged action with a mirror- image moratorium and its simultaneous proclamation that it had thereby successfully evaded judicial review.”

The U.S. defended its moratorium on deep-water drilling in the Gulf of Mexico announced in May after the BP Plc oil spill. U.S. District Judge Martin Feldman barred enforcement of the government moratorium on June 22 after Hornbeck Offshore Services Inc. and other companies sued, claiming that it would cause irreparable economic harm. The federal government issued a new ban on July 12.

“The July 12 directive was based in part on new information documenting the significant environmental and safety risks associated with continued deep-water drilling under the circumstances,” lawyers for Interior Secretary Ken Salazar said in court papers yesterday.

Deep-water drilling hasn’t resumed in the Gulf of Mexico since Feldman’s June 22 decision, said Anthony Sabino, a law professor at St. John’s University in New York who is an expert on complex litigation and oil-and-gas law. A case challenging the second moratorium is pending before Feldman.

“The uncertainty of it all has made the industry hold off,” Sabino said in an interview before yesterday’s filing. “The administration got what it wanted, rightly or wrongly.”

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

For more, click here.

American Medical’s Suit Against Biolitec Revived

American Medical Systems Holdings Inc.’s patent- infringement lawsuit against Biolitec AG over a way to treat enlarged prostates using a laser was revived by a U.S. appeals court.

A trial judge erred in his interpretation when he ruled last year that Biolitec didn’t infringe the patent, the U.S. Court of Appeals for the Federal Circuit in Washington ruled yesterday. The court sent the case back for further proceedings.

American Medical sued Biolitec in 2007, accusing the company of violating a patent on a method and system of using lasers to vaporize prostate tissue. The invention is used to treat benign prostatic hyperplasia, known as enlarged prostate.

“We are obviously very pleased with the court decision and we agree with the finding,” Jeanne Forneris, general counsel for Minnetonka, Minnesota-based American Medical, said in an interview.

Biolitec, based in Jena, Germany, makes surgical and cosmetic lasers and disposable medical supplies for urology and skin care. A spokesman for Biolitec had no immediate comment.

The case is American Medical Systems Inc. v. Biolitec Inc., 2009-1323, U.S. Court of Appeals for the Federal Circuit (Washington). The lower-court case is American Medical Systems Inc. v. Biolitec Inc., 07-30109, U.S. District Court, District of Massachusetts (Springfield).


Father-Son Developers’ Miami Tax-Fraud Trial Begins

Two Miami area hotel developers accused of hiding more than $150 million in assets from the Internal Revenue Service went on trial yesterday in a case that will display their mansions, yachts and luxury cars.

Mauricio Cohen Assor, 77, and his son, Leon Cohen Levy, 46, are accused of conspiring to defraud the IRS and filing false tax returns. A jury was picked yesterday in federal court in Fort Lauderdale, Florida, where prosecutors will try to prove the men used shell companies in tax havens to cheat the IRS. Opening statements to the jury are set for tomorrow.

Prosecutors claim they hid ownership of a $26 million Miami Beach home and another valued at $20 million. They never declared $45 million in investments, commercial properties worth $55 million and cars like a Rolls-Royce Phantom, a Porsche Carrera GT and a Ferrari Testarossa, prosecutors say. Defense lawyers will try to show they never meant to break the law.

“In a tax case, if you had a good faith belief that what you did was lawful, even if that belief was stupid or ignorant or insane, you’re not guilty,” said Robert Panoff, a Miami tax litigator who isn’t involved in the case. “The key words are a ‘good faith belief.’ Juries aren’t stupid.”

Seven men and seven women make up the panel of 12 jurors and two alternates.

Defense lawyer Michael Pasano, who is representing both men, didn’t return a call seeking comment.

“In this case there will be no proof of any agreement to violate the law,” he said in a Sept. 9 court filing. “Nor will there be proof of any knowing participation in criminal acts.”

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

For more, click here.

To contact the reporter on this story: Ellen Rosen in New York at

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