Drilling Ban, Galleon, Bank of America in Court News

U.S. regulators asked the federal judge in New Orleans who threw out the Interior Department’s first ban on deep-water oil drilling not to reject a second version of the moratorium.

U.S. District Judge Martin Feldman in New Orleans struck down the first order June 22, finding it overly broad and punitive to the Gulf Coast economy. Lawyers for Interior Secretary Kenneth Salazar asked Feldman yesterday to reject an oil industry suit and uphold the revised ban imposed in July.

“This is a policy call,” Guillermo Montero, one of the Interior Department’s lawyers, told Feldman.

“A policy call which I’m not enslaved to accept unless I find it was reasonably discerned,” the judge responded. Feldman also told the lawyers yesterday that he would “try to get a decision out as quickly as is reasonable.”

Separately, the U.S. Court of Appeals in New Orleans yesterday narrowed the dispute by rejecting a government appeal of Feldman’s June 22 order stopping enforcement of the original six-month ban on drilling in waters deeper than 500 feet. The court found the original ban, imposed after BP Plc’s Gulf of Mexico oil spill, was “legally and practically dead.”

The appeals panel said the second ban rendered Feldman’s original order irrelevant and tossed the appeal.

“Any opinion expressed by this court on the merits and legality of the issuance of the preliminary injunction would address an injunction that is legally and practically dead,” the panel said in a 2-1 decision.

The second moratorium was challenged in a suit filed by Ensco Offshore Co., which claims Salazar overstepped his authority, setting new rules in an attempt to circumvent Feldman’s June 22 order.

The case is Ensco Offshore Co. v. Salazar, 2:10-cv-01941, U.S. District Court, Eastern District of Louisiana (New Orleans). The appeal is Hornbeck Offshore Services v. Salazar, 10-30585, U.S. Court of Appeals for the Fifth Circuit (New Orleans).

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Trials/Appeals

SEC Can’t Have Rajaratnam Wiretaps, Appeals Court Says

A federal appeals court blocked a demand by the Securities and Exchange Commission for wiretaps from the insider-trading prosecution of Galleon Group co-founder Raj Rajaratnam for use in its related civil suit.

U.S. District Judge Jed Rakoff, who is presiding over the SEC’s civil enforcement case, erred in ordering Rajaratnam and his co-defendant, Danielle Chiesi, to turn over the wiretaps, a panel of the U.S. Court of Appeals in New York ruled yesterday. The defense received the recordings from federal prosecutors in their criminal case.

The appeals court said Rakoff abused his discretion because U.S. District Judge Richard J. Holwell, who is presiding over the criminal case, hasn’t yet ruled on their legality. The decision doesn’t bar the agency from obtaining the wiretaps later in the case after Holwell rules.

“The district court clearly exceeded its discretion in ordering disclosure of thousands of conversations involving hundreds of parties, prior to any ruling on the legality of the wiretaps and without limiting the disclosure to relevant conversations,” the panel said in its opinion.

Rajaratnam, 53, and Chiesi, 44, are accused of illegally using tips from company executives, hedge fund employees and other insiders. They were charged in October 2009 as part of the biggest insider-trading prosecution in history. The scheme reaped $52 million in illegal profits, according to the SEC.

According to Rajaratnam and Chiesi, the government wiretapped conversations involving 18,150 communications involving 550 people on 10 phones over the course of 16 months.

Prosecutors said they lack the legal authority to provide the wiretaps directly to the SEC, according to the appeals court. “The more prudent course” may have been to postpone the civil trial until after completion of the criminal trial, a proposal that was agreed to by all the parties in the case, the appeals court said.

The appeals court rejected an argument by Rajaratnam and Chiesi that federal law bars the disclosure of wiretaps in civil cases.

“We are pleased with the 2nd Circuit ruling today that the Commission has a legitimate right to obtain relevant, legally intercepted wiretap materials from defendants prior to their disclosure in criminal proceedings,” John Nester, an SEC spokesman, said in an e-mailed statement.

The case is Securities and Exchange Commission v. Rajaratnam, 10-CV-462, U.S. Court of Appeals for the Second Circuit (Manhattan).

Black’s Lawyer Urges Court to Throw Out Conviction

Conrad Black’s 2007 convictions for fraud and obstructing justice should be thrown out because it’s impossible to tell whether jurors found him guilty under a now-invalid legal theory, his lawyer told a federal appeals court.

A three-judge panel in Chicago heard Black’s case yesterday for the second time following a U.S. Supreme Court decision that narrowed the scope of the so-called honest services fraud statute, the law used to prosecute the former Hollinger International Inc. chairman.

“None of the fraud or obstruction convictions can survive examination of the trial record,” Black’s appellate lawyer, Miguel Estrada, told the judges during oral arguments. Prosecutors, in court filings, said there’s ample evidence to support Black’s conviction on other grounds.

Black, 66, was convicted by a U.S. jury in July 2007 after a four-month trial. He and three other former executives at the Chicago-based publisher now known as Sun-Times Media Group Inc. were found to have stolen $6.1 million from the company as they engineered its sale of assets.

The Supreme Court, ruling on former Enron Corp. Chief Executive Officer Jeffrey K. Skilling’s appeal, said the statute can be applied only to allegations involving bribes or kickbacks that deprive citizens or shareholders of honest services. Federal prosecutors also used the law in cases against ex- Illinois governors George Ryan and Rod Blagojevich.

In a separate opinion, the court returned Black’s case to the Chicago appellate judges to reconsider how the jury arrived at its verdict. Jurors were allowed to base their vote for convictions of Black and the other Hollinger executives on either honest-services fraud or conventional fraud without having to specify.

The men were convicted on three fraud counts spanning two separate transactions, one involving a $5.5 million payment and another for $600,000.

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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JPMorgan Asks Courts to Halt Rulings Amid Foreclosure Review

JPMorgan Chase & Co., the third-biggest U.S. mortgage servicer, said it’s asking courts to delay judgments in pending foreclosure cases while the bank reviews and possibly resubmits statements.

JPMorgan began to “systematically re-examine” foreclosure filings after learning that employees may have signed affidavits without personally reviewing underlying records, relying instead on other personnel, said Thomas Kelly, a spokesman for the New York-based firm. The review includes at least 56,000 loans and covers 23 U.S. states in which courts oversee the foreclosure process, a person briefed on the matter said.

“We have requested that the courts not enter judgments in pending matters until we complete our review,” Kelly said yesterday. The review is expected to be finished in “a few weeks,” he said.

Attorneys general in at least five states are investigating borrowers’ claims that some of the nation’s largest home lenders and loan servicers are making misstatements in foreclosures. Ally Financial Inc. said last week it found a “technical” deficiency in the foreclosure process at its GMAC Mortgage unit allowing employees to sign documents without a notary present or with information they didn’t personally know was true.

Misstatements may stall foreclosures in some states and exacerbate losses for bonds backed by home loans, Fitch Ratings said in a statement yesterday. Fitch is reviewing how servicers handle foreclosures and may downgrade them if they aren’t taking adequate steps to avoid lapses, Diane Pendley, a managing director at the ratings company, said in the statement.

As of June 30, JPMorgan serviced $1.35 trillion of U.S. home mortgages, or almost 13 percent of the market, according to industry newsletter Inside Mortgage Finance. The other servicers in the top five are Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and Ally.

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Goldman’s Tourre Seeks Dismissal of SEC’s CDO Suit

Goldman Sachs Group Inc.’s Fabrice Tourre asked a federal judge to dismiss a Securities and Exchange Commission lawsuit, saying the transactions at issue in the complaint didn’t take place in the U.S.

The sole investor alleged in the complaint to have purchased notes in the transaction was a foreign bank that invested overseas, Tourre’s lawyer said in a filing yesterday in federal court in Manhattan. The transaction “was not subject to the antifraud provisions of federal securities laws,” according to the filing.

The SEC sued Goldman Sachs and Tourre in April over claims the firm misled investors in collateralized debt obligations linked to subprime mortgages.

Tourre, the only Goldman Sachs executive sued individually, remains a defendant in the case after the firm agreed to a $550 million settlement in July. Fiona Laffan, a Goldman Sachs spokeswoman, said Sept. 9 that Tourre “remains an employee on paid leave.”

The case is SEC v. Goldman Sachs, 10-CV-3229, U.S. District Court, Southern District of New York (Manhattan).

Microsoft Gets Apple, Google Support in I4i High Court Appeal

Microsoft Corp. is getting some support from Google Inc. and Apple Inc. in its efforts to overturn a patent-infringement verdict that forced the software maker to change its Word program.

Microsoft, the world’s largest software maker, is asking the U.S. Supreme Court to consider making it easier to invalidate patents in a case it lost to closely held I4i Inc. of Toronto. Google, Apple, Intel Corp., Toyota Motor Corp. and the Securities Industry and Financial Markets Association trade group are among those that filed papers yesterday urging the high court to take the case.

Under federal law, a patent is presumed valid because it has undergone scrutiny by the U.S. Patent and Trademark Office and courts require “clear and convincing” evidence to overcome that. Microsoft contends that the presumption doesn’t apply when a jury is hearing evidence that wasn’t considered during the application process.

“Juries take the presumption of validity very seriously and are extremely reluctant to second-guess the PTO’s determination,” a group including Google, retailer Wal-Mart Stores Inc. and phone company Verizon Communications Inc. said in a filing yesterday. “The clear-and-convincing-evidence standard serves only to tilt the playing field even further in favor of patent holders.”

The case before the Supreme Court involves a dispute over I4i’s invention related to customizing extensible markup language, or XML, a way of encoding data to exchange information among programs. Microsoft issued an update to its Word software to comply with a court order that it stop using the invention.

The case is Microsoft Corp. v. I4i LP, 10-290, U.S. Supreme Court (Washington). The appeals court case is I4i LP v. Microsoft Corp., 2009-1504, U.S. Court of Appeals for the Federal Circuit (Washington). The lower-court case is I4i LP v. Microsoft Corp., 07-cv-113, U.S. District Court, Eastern District of Texas (Tyler).

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New Lawsuits

Business Groups Sue SEC Over Proxy-Access Rule

The U.S. Chamber of Commerce, the nation’s biggest business lobby, and the Business Roundtable sued the Securities and Exchange Commission to overturn a rule that makes it easier for investors to oust corporate directors.

The two groups decided to sue after completing a legal analysis of the regulation, they said yesterday at a news conference in Washington. The rule, which allows shareholders owning 3 percent of a company to nominate board members on corporate ballots, was passed by a divided SEC last month.

“These rules are wholly unnecessary,” said David Hirschmann, president of the chamber’s Center for Capital Markets Competitiveness. “This special interest-driven rule will give small groups of special-interest activist investors significant leverage over a business’ activities.”

SEC Chairman Mary Schapiro has said the 2008 credit crisis, which cost financial firms more than $1.82 trillion, shows shareholders need more clout in picking board members to oversee companies.

Before the SEC approved its rule, shareholders could nominate dissident directors only by mailing a separate ballot and persuading other investors to vote with them. Activist investors such as Carl Icahn and Nelson Peltz have waged proxy fights to get their candidates elected to boards of companies they said were underperforming.

The SEC, in a 3-2 vote, stipulated that investors or groups of shareholders who have owned 3 percent of a company for three years could have board candidates on proxy statements.

Under the regulation, shareholders would be able to nominate at least one director and as much as 25 percent of a board. Investors couldn’t use the rule if their intent is to oust a majority of board members and take over a company.

The financial-regulation law signed by President Barack Obama in July authorized the SEC to let investors place director nominees on corporate proxies. The law’s language was meant to make it easier for the SEC to withstand a legal challenge.

The chamber and Washington-based Business Roundtable, which represents chief executive officers of the biggest U.S. companies, have retained Gibson Dunn & Crutcher LLP lawyers Eugene Scalia and Amy Goodman to handle the case, which was filed in the U.S. Court of Appeals for the District of Columbia.

“We believe that the commission’s proxy-access rules are both lawful and in the best interests of the public and shareholders,” SEC spokesman John Nester said in the agency’s statement. “The commission will, of course, carefully consider and timely respond to the motion for a stay.”

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Ambac Sues Countrywide Over Mortgage-Backed Bonds

Ambac Assurance Corp. sued Bank of America Corp. over $16.7 billion of mortgage-backed securities, saying the bank’s Countrywide Financial Corp. fraudulently induced Ambac to insure the bonds.

Ambac found that 97 percent of 6,533 home mortgage loans it reviewed across the 12 securitizations sponsored by Countrywide didn’t conform to the lender’s underwriting guidelines, according to the complaint filed in New York state Supreme Court. Many of the loans were made to borrowers with limited or no ability to meet their payment obligations, Ambac said.

Ambac has paid hundreds of millions of dollars in claims connected to defaults in the securities, according to the suit filed yesterday. At the same time, Countrywide has refused to comply in a timely fashion with its obligations to repurchase the out-of-guideline loans or bring them into compliance, the lawsuit claims.

Ambac is “entitled to redress for Countrywide’s massive fraud and pervasive and material breaches, including damages sufficient to place Ambac in the same position it would have been in had it never insured the transactions,” the suit says.

Shirley Norton, a spokeswoman for the Charlotte, North Carolina-based lender, said the bank has no comment.

The case arises out of 12 Countrywide-sponsored transactions that closed between 2004 and 2006, nine of which involve home equity lines of credit secured by second-lien mortgages and three that involve fixed amount second-lien loans.

Over the last two years, the loans in the transactions have defaulted at what Ambac calls “extraordinary rates.” To date, the suit claims, more than 35,000 loans with a total principal balance of more than $1.95 billion have defaulted or been charged off. As a result, the suit says, Ambac has been forced to make more than $466 million in claim payments.

The case is Ambac Assurance Corp. v. Countrywide Home Loans Inc., 651612/2010, New York state Supreme Court (Manhattan).

Lehman, Nortel Challenge U.K. Regulator on Pension Debt

Lehman Brothers Holdings Inc.’s European unit and Nortel Networks Corp. are challenging the U.K. Pensions Regulator in court over whether they must pay as much as a combined 2.25 billion pounds ($3.55 billion).

The Pensions Regulator this month issued a so-called financial support direction against Lehman Brothers and its affiliates seeking funds to cover a deficit of more than 148 million pounds in the former investment bank’s retirement plan. The panel issued a similar order against Toronto-based Nortel in July seeking as much as 2.1 billion pounds for the underfunding of its plan.

Lehman Brothers International Europe and Nortel are jointly challenging the regulator’s claims in a London court, saying they shouldn’t be required to pay the deficits while they are in administration or bankruptcy protection. Judge Kim Lewison ruled at the hearing yesterday that the parent company and Lehman Brothers Asset Management (Europe) Ltd. can also join the challenge to protect their specific interests.

Lehman doesn’t want to have to pay the European unit’s debts, its lawyer, Barry Isaacs, said at the hearing.

David Hannant, a spokesman for the regulator, declined to comment because the case is ongoing.

Lehman Brothers filed the largest bankruptcy in U.S. history in September 2008, and its European unit is liquidating in London. Nortel and affiliates filed for bankruptcy in the U.S., Canada and London in January 2009.

A bankruptcy judge in Delaware ruled last month that efforts by the U.K. regulator to force Nortel to contribute to its retirement plan violate the so-called automatic stay in the case, and halted the request.

ABB Units Charged With Violating U.S. Bribery Law

The U.S. charged two units of ABB Ltd., the world’s biggest electricity-networks builder, with conspiracy and violating the Foreign Corrupt Practices Act.

According to the complaint filed yesterday in federal court in Houston, ABB and its co-conspirators made “concealed, corrupt payments” to officials at Comision Federal de Electricidad, an electric utility owned by Mexico, “in exchange for improper business advantages to ABB Inc. and ABB NM, including the award of contracts.”

The payments related to an upgrade for Mexico’s electrical network in a contract that generated $44 million in revenue for an ABB unit, prosecutors claim.

Laurence A. Urgenson, a lawyer representing Zurich-based ABB, didn’t immediately return a call seeking comment.

The case is U.S. v. ABB Inc., 10-664, U.S. District Court, Southern District of Texas (Houston).

Boston Scientific Claims Rivals Infringe U.S. Stent Patents

Boston Scientific Corp., the world’s second-biggest maker of heart devices, sued Cook Group Inc., TaeWoong Medical Co. and EndoChoice Inc. over mesh tubes used in minimally invasive surgery.

Boston Scientific claims the tiny tubes that prop open arteries and are used in endoscopies are infringing at least three patents. The complaint, filed Sept. 27 in federal court in Boston, targets Evolution stents made by closely held Cook Group; TaeWoong’s Niti-S; and the Bonastent made by EndoChoice and South Korean partners Standard Sci-Tech Inc. and Sewoon Medical Co.

Boston Scientific makes the WallFlex stent and related delivery system. The products are used in endoscopy products for the treatment of diseases of the digestive system, according to the complaint. The patents relate to types of stents that work better when inserted, for instance, in the food pipe.

The company’s endoscopy unit generated $134 million in U.S. sales in the second quarter, driven largely by the U.S. introduction of the WallFlex binary stent system and continued sales of the WallFlex esophageal stent, Boston Scientific said in an Aug. 5 regulatory filing.

Boston Scientific, based in Natick, Massachusetts, is seeking unspecified cash compensation and an order that would prevent further use of its inventions. Three patents were asserted against all of the companies, and a fourth, for a self- expanding esophageal stent, was asserted only against Bloomington, Indiana-based Cook.

The Bonastent received U.S. Food and Drug Administration clearance earlier this year, Alpharetta, Georgia-based EndoChoice said April 29. Officials at Cook and EndoChoice didn’t immediately respond to messages seeking comment. Officials at TaeWoong and Standard Sci-Tech couldn’t be reached.

Closely held TaeWoong is based in Goyang-Si, South Korea, and Standard Sci-Tech is based in Seoul, according to the complaint.

The case is Boston Scientific Corp. v. Cook Inc., 10cv11646, U.S. District Court for the District of Massachusetts.

Eli Lilly Sues Celesio U.K. Units Over Generic Zyprexa Sales

Eli Lilly & Co., the world’s biggest maker of psychiatric drugs, sued two U.K. units of drug distributer Celesio AG for allegedly infringing its patent for the schizophrenia drug Zyprexa two years ago.

Celesio’s Lloyds Pharmacy and Aah Pharmaceuticals businesses sold about 800,000 tablets of generic Zyprexa before agreeing in 2008 to halt sales, Eli Lilly said in a complaint filed in the High Court in London on Aug. 18 and made public last week.

Eli Lilly, based in Indianapolis, took legal action two years ago against “a number of companies” to stop sales of the generic known as olanzapine, according to an e-mailed statement from Edward Sagebiel, an Eli Lilly spokesman. The sales ended after Eli Lilly’s patent expiration won an extension until Sept. 26, 2011, according to the complaint.

The lawsuit “has been undertaken by Lilly to obtain its damages as a result of the sale of those products” in 2008, Sagebiel said.

Lloyds Pharmacy agreed to halt the sales “and hold the remainder of the stock in quarantine,” Sarah Stokes, a spokeswoman for Lloyds Pharmacy, said in an e-mail. The lawsuit relates to a single batch of olanzapine that Lloyds Pharmacy purchased and the company is no longer selling it, she said.

Dean Enon, a spokesman for Coventry, England-based Aah Pharmaceuticals, referred calls to Stokes.

The case is: Eli Lilly v. AAH Pharmaceuticals, Lloyds Pharmacy, High Court of London, Chancery Division, No. HC10C02699.

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Court Rulings

Visteon Accord on Contract, Bankruptcy Debt Approved

Visteon Corp. won court approval to settle a dispute with Ford Motor Co. over the automaker’s claim that Visteon owed it $160 million.

U.S. Bankruptcy Judge Christopher S. Sontchi in Wilmington, Delaware, approved the deal’s terms yesterday. Under the settlement, Ford will drop its demand for $160 million from Visteon and instead will pay the company $29 million, James Mazza, a Visteon attorney, said in court.

The approval was the last Visteon needed to exit bankruptcy, Mazza said in an interview after the hearing. The company expects to leave bankruptcy by Oct. 1, the date announced in August when it won court approval of its reorganization plan.

“No other court action is necessary,” Mazza said.

Visteon will continue supplying parts to Ford under a contract valued at about $600 million, Mazza said in court.

The case is In re Visteon Corp., 09-11786, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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

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

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