Kerviel, Visa, Galleon, Citigroup in Court News

Jerome Kerviel was sentenced to three years in prison and ordered to repay Societe Generale SA’s 4.9 billion-euro ($6.8 billion) trading loss by a judge who said the former trader’s actions threatened the bank’s existence.

“By his deliberate actions, he put in peril the existence of the bank that employed 140,000 people, of which he was a part, and whose future was threatened,” Judge Dominique Pauthe said today in finding Kerviel guilty of breach of trust, forging documents and computer hacking.

The trading loss, announced Jan. 24, 2008, was the biggest ever and prompted then-chief executive officer Daniel Bouton to describe Kerviel as a “terrorist.” The court placed the blame for the loss on Kerviel alone, rejecting defense arguments during a three-week trial in June that his superiors knew of his actions and that the bank’s decision to unwind the bets over three days of falling markets caused the loss.

The 4.9 billion-euro award “is obviously symbolic,” Christopher Mesnooh, a Paris-based lawyer with Field Fisher Waterhouse LLP, said in a telephone interview. “It goes a very long way in exonerating the bank and putting responsibility for the losses, including the winding down of the positions by Societe Generale, entirely in Jerome’s court.”

“No one has any expectation that he’ll pay,” said Mesnooh, who isn’t involved in the Kerviel case.

Olivier Metzner, Kerviel’s lawyer, said he would appeal the ruling, and that Kerviel would “obviously not” be able to repay the loss. Dressed in a dark suit, Kerviel, 33, sat in court following the decision reading on his iPhone. He will remain free during the appeal.

The former trader is “revolted that those that created him put all responsibility on him,” Metzner said, noting Kerviel wouldn’t comment directly. “Prison is unacceptable for a man who didn’t make a penny.”

Pauthe said problems with Societe Generale’s computer controls and management’s encouragement of traders to speculate wasn’t enough to absolve Kerviel.

“The lack of vigilance by the bank in monitoring the only existing limits, acting as alert signs, hardly exempted Jerome Kerviel from his duty to inform his hierarchy of the reality of his excesses or to come back to the limits imposed,” Pauthe said in reading excerpts of the decision.

Jean Veil, the lawyer representing Societe Generale, said he was satisfied by the guilty verdict and award, which the Paris-based bank had requested at trial.

The award “confirms what Societe Generale has always told its shareholders and employees,” Veil said.

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MasterCard, Visa Settle as Amex Fights U.S. Lawsuit

Visa Inc. and MasterCard Inc. reached a settlement with the U.S. Justice Department to resolve a two-year antitrust investigation over restrictions on merchants.

The settlement was filed in federal court in Brooklyn, New York, yesterday as the Justice Department filed charges against Visa, MasterCard and American Express Co.

Yesterday’s settlement means that about 4 million merchants across the U.S. that accept just Visa and MasterCard are now free to steer customers to different credit cards or forms of payment by offering discounts, rebates or other special treatment, the Justice Department said. Six million more retailers who also accept cards from American Express are still subject to restrictions until the lawsuit is resolved, the Justice Department said.

“We want to put money in consumers’ pockets,” said Attorney General Eric Holder at a press conference. “By eliminating credit-card companies’ anticompetitive rules, we will accomplish that.”

American Express spokesman Michael O’Neill said his company would fight the charges. “We do not intend to settle,” he said.

The U.S. probe focused on rules that bar merchants from charging extra to customers who use credit cards and steering them to competing cards, and that require retailers to accept every type of card banks issue.

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Merck Verdict Cut to $1.5 Million From $8 Million

A federal judge cut a jury award against Merck & Co. in a lawsuit over its Fosamax osteoporosis drug to $1.5 million from $8 million while upholding the verdict in the case.

U.S. District Judge John F. Keenan in Manhattan yesterday denied Merck’s request for a defense verdict or a new trial. The case resulted in a verdict for Shirley Boles, a 72-year-old Fort Walton Beach, Florida, woman who claimed she developed osteonecrosis of the jaw, or so-called jaw death, from taking Fosamax.

Keenan ruled that the $8 million verdict was unreasonably high. He said Boles may choose between a reduced award of $1.5 million or a retrial to determine damages.

“A significant damage award is warranted, but the $8 million deviates substantially from what would be reasonable compensation,” Keenan wrote.

Merck said it will appeal Keenan’s refusal to throw out the verdict entirely or to order a new trial.

“Both the finding and the amount of compensatory damages are against the weight of the evidence,” Bruce N. Kuhlik, Whitehouse Station, New Jersey-based Merck’s general counsel, said in a statement. “The evidence showed that Fosamax did not cause the plaintiff’s injury and that it is a safe and effective medication that was properly designed.”

The case is Boles v. Merck & Co., 06-cv-09455, and the lawsuits are combined in In Re Fosamax Products Liability Litigation, MDL 1789, U.S. District Court, Southern District of New York (Manhattan).

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Rajaratnam Asks Court to Find U.S. Wiretaps Illegal

Galleon Group co-founder Raj Rajaratnam is seeking to show that U.S. agents illegally wiretapped his communications and that the recordings can’t be used in his criminal insider- trading trial.

At a hearing yesterday in federal court in Manhattan, Rajaratnam tried to convince U.S. District Judge Richard Holwell that the government misled a different judge into authorizing the wiretaps in March 2008. As a result, the wiretaps, the centerpiece of the biggest insider-trading prosecution in history, must be thrown out, he claims.

“They gamed the system,” John Dowd, a lawyer for Rajaratnam, said.

Rajaratnam, 53, is accused of using tips from company executives, hedge-fund employees and others in a multimillion- dollar insider-trading scheme. He’s the central figure in an investigation in which 21 were charged. Rajaratnam, who denies wrongdoing, faces as long as 20 years in prison if convicted.

Dowd argued that U.S. investigators hid from Gerard Lynch, the federal judge who issued the wiretap warrant, the fact that the Securities and Exchange Commission had already assembled the elements of “a classic insider-trading case” against Rajaratnam and others.

Prosecutors said the government secretly recorded about 2,400 conversations between Rajaratnam and more than 130 friends, business associates and alleged accomplices. The evidence against him will include testimony from some of the people caught on the wiretaps, the government said. The U.S. said it’s the first insider-trading prosecution to use wiretap evidence.

The case is U.S. v. Rajaratnam, 09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

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Swiss Re Wins Dismissal of Credit Default Swaps Suit

Swiss Reinsurance Co. the world’s second-biggest reinsurer, won dismissal of an investor suit in which it was accused of failing to disclose risk that led to a 1.2 billion franc ($1.1 billion) derivative loss over credit-default swaps.

U.S. District Judge John Koeltl in New York yesterday dismissed the suit on grounds including a June ruling by the U.S. Supreme Court that limits the reach of civil claims for acts occurring outside the country. Koeltl said the plaintiffs also failed to supply sufficient details of their fraud claims.

Swiss Re “made false and misleading statements about the company’s financial condition,” the shareholders claimed in the 2008 lawsuit.

“The plaintiffs have failed to allege with particularity that the defendants made any material misstatements or omissions with respect to the CDSs it had insured or that the defendants had any obligation to provide further disclosure with respect to the CDSs it had issued,” Koeltl said.

The lead plaintiff, Plumbers Union Local No. 12 Pension Fund, sued on behalf of a proposed class of purchasers of Swiss Re’s common shares from March 1, 2007, to Nov. 19, 2007.

The complaint described statements that the defendants made about Swiss Re’s involvement with mortgage-related securities, with the subprime mortgage market, Swiss Re’s management practices and the value of its earnings and accounts.

Koeltl cited the Supreme Court ruling in Morrison v. National Australia Bank issued in June that limits the reach of civil claims for acts occurring outside the U.S. He said that ruling disagreed with the plaintiffs’ argument “that a purchase occurs when and where an investor places a buy order.”

Neither a lawyer for the plaintiffs nor a spokeswoman for Swiss Re could be reached yesterday for comment.

The case is Plumbers’ Union Local No.12 v. Swiss Reinsurance Co., 1:08-cv-1958, U.S. District Court, Southern District of New York (Manhattan). The Supreme Court case is Morrison v. National Australia Bank Ltd, 08-1191, U.S. Supreme Court (Washington).

Deutsche Bank Wins Order for Singapore End to Indonesia Dispute

Deutsche Bank AG won a court order that a company controlled by two of Indonesia’s richest men must end legal attempts outside Singapore to regain pledged shares that Germany’s biggest bank sold.

Beckkett Pte, controlled by Sukanto Tanoto and Hashim Djojohadikusumo, can’t pursue duplicate proceedings after six years in the Singapore courts, Singapore High Court Judge Judith Prakash said in SGHC 284&notShowClose=y] a ruling made public yesterday.

The ruling was made on an appeal by Deutsche Bank, which had asked Beckkett to withdraw a separate Indonesian lawsuit from 2008, and challenged a February decision by Singapore’s assistant registrar not to order the Indonesian proceedings to be halted. Singapore’s Court of Appeal last year ruled that the bank didn’t take proper steps to sell the shares in companies including coal miner PT Adaro Indonesia at the best price.

Beckkett, which had pledged the shares as collateral for a 1997 loan to its unit PT Asminco Baru Utama, was entitled to have any losses determined. The Court of Appeal also allowed Deutsche Bank to make a counterclaim for an outstanding loan.

“Beckkett had no business starting the Indonesian action in the first place,” Judge Prakash wrote. “There was no excuse for it to attempt to bypass a possibly unfavorable decision of the Singapore courts by taking action in Indonesia.”

Laurel Teo, a Singapore-based spokeswoman for Beckkett, declined to comment, as did Michael West, a Hong Kong-based spokesman at Deutsche Bank.

The case is Beckkett Pte Ltd. v. Deutsche Bank AG and Anor, S326/2004, Singapore High Court.

Tyco Wins Bid to Exclude Some Evidence Against Walsh

Tyco International Ltd. won a bid to exclude some evidence in a lawsuit that centers on ex-director Frank E. Walsh Jr.’s $20 million “finder’s fee” related to the purchase of CIT Group Inc.

Walsh had asked U.S. District Judge Denise Cote in New York to bar Tyco from putting attorneys’ fees into evidence at trial. Tyco persuaded Cote that the fees were evidence of damages sustained by the company and that Walsh’s conduct triggered an internal investigation by the law firm of Boies, Schiller & Flexner LLP, which was hired to investigate the payment.

“Tyco has shown that the evidence is properly admitted at trial,” Cote said.

In a separate ruling, Cote denied a bid by Tyco to exclude the testimony of an expert witness Walsh wants at a trial about Bermuda law. Walsh said he relied upon the advice in connection with his receipt of the $20 million from Tyco.

Walsh, who was “lead director” and a member of the corporate governance committee, hid the payment from the board and later refused to return it, Tyco alleges in a suit filed in New York in 2002. Tyco alleges seven causes of action, including that Walsh breached his fiduciary duty when he accepted the payment. He denies allegations of any wrongdoing.

Mark Levine, a lawyer for Tyco, declined comment. Michele Pahmer, a lawyer for Walsh, didn’t return a voice-mail message left at her office seeking comment.

The case is Tyco International Ltd. v. Frank Walsh Jr. 02- CV-46233, Southern District of New York (Manhattan).

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New Suits

Goldman Sachs Sued Over German Bank’s $37 Million Loss on CDO

Goldman Sachs Group Inc., which served as the placement agent for a collateralized debt obligation named Davis Square Funding VI, was sued by Landesbank Baden-Wuerttemberg over its $37 million loss on the investment.

The CDO held 95 percent residential mortgage-backed securities, of which 33 percent were subprime and 46 percent were “midprime,” the German bank said in a complaint filed yesterday in federal court in Manhattan. TCW Group Inc., the investment adviser on the CDO, was also sued by the bank.

When Goldman sold the investments to a Luxembourg affiliate of LBBW in March 2006, they were represented as “safe, secure, and nearly risk free,” according to the complaint. At the same time, Goldman senior executives privately observed that “it was game over” for subprime lenders and were reducing their exposure to the mortgages, LBBW said.

“Goldman knew at the highest levels of its organization that its representations to LBBW Luxemburg that the notes merited triple-A ratings and were high grade were blatantly false,” the Stuttgart-based bank said. “Goldman committed fraud and, or, was negligent in marketing and selling the notes to LBBW Luxemburg.”

“TCW has acted appropriately in managing Davis Square VI and any allegation to the contrary is without merit,” the company said in an e-mailed statement.

Michael DuVally, a spokesman for New York-based Goldman Sachs, said yesterday that the company had no immediate comment.

The case is Landesbank Baden-Wurttemberg v. Goldman Sachs, 10-7549, U.S. District Court, Southern District of New York (Manhattan.)

Citigroup, Ally Accused of Racketeering With Mortgage Database

Citigroup Inc. and Ally Financial Inc. units were sued by homeowners in Kentucky who allege they conspired with Mortgage Electronic Registration Systems Inc. to falsely foreclose on mortgages.

The lawsuit, filed as a civil racketeering class action on behalf all Kentucky homeowners facing foreclosure, also names as a defendant Reston, Virginia-based MERS, the company that handles mortgage transfers among member banks. The suit claims that through MERS the banks are foreclosing on homes even when they don’t hold titles to the properties.

“Defendants have filed foreclosures throughout the State of Kentucky and the United States of America knowing that they were not the ‘owners’ or beneficiaries of the loan they filed foreclosure upon,” the home owners wrote in their complaint filed Sept. 28 in federal court in Louisville, Kentucky.

The lawsuit is one of multiple cases against MERS and banks alleging that the process allows wrongful foreclosures. Several of these cases, combined in a multidistrict litigation in Phoenix were dismissed Sept. 30, with the judge allowing the plaintiffs to re-file their complaints.

“The allegation is inflammatory and without merit and we intend to defend our position fully in a court of law,” Gina Proia, a spokeswoman for Ally, said in an e-mailed statement.

Mark Rodgers, a spokesman for Citigroup, declined to comment. Karmela Lejarde, a spokeswoman for MERS, didn’t have an immediate comment.

The case is Foster v. Mortgage Electronic Registration Systems Inc., 10-cv-611, U.S. District Court, Western District of Kentucky (Louisville).

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Air Products Executive Says Airgas Bid ‘Attractive’

Air Products & Chemicals Inc.’s $5.5 billion bid for Airgas Inc. is an “attractive offer,” an Air Products executive testified as the producer of industrial gases presses its rival to consider a sale.

At $65.50 a share, Air Products would be paying “full price,” Chief Financial Officer Paul Huck told a Delaware Chancery Court judge yesterday. Air Products, based in Allentown, Pennsylvania, sued Radnor, Pennsylvania-based Airgas on Feb. 4 to force consideration of the bid.

“A number of long-time Airgas holders found it to be a very attractive offer,” Huck testified in Georgetown, Delaware. The courtroom earlier was closed to the public during part of Huck’s testimony about Airgas’s value.

As part of the case, Airgas is asking Chancery Court Judge William B. Chandler III to invalidate a bylaw approved by shareholders in a Sept. 15 vote that added three Air Products nominees to the Airgas board. The bylaw would move Airgas’s annual meeting to January from as early as April.

Airgas contends that moving up the annual meeting will unfairly allow Air Products to try to knock more Airgas nominees off the board and take control. Chandler has agreed to hear both issues in the trial.

The cases are Air Products & Chemicals Inc. v. Airgas Inc., 5249, Delaware Chancery Court (Wilmington); and Airgas Inc. v. Air Products & Chemicals Inc., 5817, Delaware Chancery Court (Wilmington).

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Halliburton Investors Draw Top U.S. Court Inquiry in Fraud Case

The U.S. Supreme Court signaled interest in an appeal from shareholders trying to sue Halliburton Co. for securities fraud, seeking the Obama administration’s advice on the case.

The appeal potentially would make it easier for investors to press class-action suits in some states. A federal appeals court in New Orleans said the Halliburton shareholders couldn’t sue as a group because they hadn’t established that they lost money as a result of the alleged fraud.

The Halliburton shareholders’ lawyer, David Boies, argued in his appeal that the 5th U.S. Circuit Court of Appeals had established a “virtually unattainable standard.”

The shareholders, led by the Erica P. John Fund, contend that Halliburton from 1999 to 2001 falsified earnings reports, played down estimated asbestos liability and overstated the benefits of a merger. The company was led during part of that period by Dick Cheney, later the U.S. vice president.

The high court appeal concerns the standard that applies at the so-called class certification stage, not at final judgment. The Supreme Court ruled in 2005 that to recover damages shareholders ultimately must show a direct connection between a misrepresentation and a decline in stock prices.

Boies’s appeal contends that shareholders shouldn’t have to make that showing at the class certification stage, when they haven’t yet had a chance to marshal their evidence.

The case is Erica P. John Fund v. Halliburton, 09-1403, U.S. Supreme Court (Washington).

U.K. Lawsuits Against FTSE 100 Companies Rise 16%, Survey Says

U.K. lawsuits against the country’s 100 biggest companies increased 16 percent in a year, suggesting an “inevitable flood” of litigation from the financial crisis hasn’t peaked, a legal publisher said.

Cases against FTSE 100-listed companies in the High Court in London rose to 179 from 154 in the year ended June 30, the publisher Sweet & Maxwell said Oct. 3 in a statement.

Combined lawsuits against HSBC Holdings Plc, Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc and Barclays Plc fell 6 percent, and comprised 43 percent of the FTSE 100 cases, Sweet & Maxwell said. Financial services companies make up 18 percent of the FTSE 100, Sweet & Maxwell said.

“Banks are likely to feature frequently in hard-fought litigation by virtue of the huge volume of complex financial transactions that they are involved with,” said Sweet & Maxwell, a subsidiary of Thomson Reuters Corp.

Lawsuits against FTSE 100 companies weren’t the only ones to increase. Cases to shield corporate secrets more than quadrupled in London last year and trademark cases rose 20 percent, the U.K. Ministry of Justice said last month.

Abu Ghraib Contractor Suit Draws U.S. Supreme Court Interest

The U.S. Supreme Court signaled it may consider whether two military contractors can be sued for allegedly abusing inmates at Iraq’s Abu Ghraib prison in a case that could make companies more vulnerable to human rights suits.

The justices yesterday asked the Obama administration for advice on an appeal from 26 Abu Ghraib inmates seeking to sue CACI International Inc., which helped interrogate prisoners at the facility, and Titan Corp., which provided translation services. Titan has since been renamed and is now part of L-3 Communications Holdings Inc.

The appeal asks the court to decide whether companies and other private parties can be sued under a federal law that authorizes some suits against foreign governments for human rights abuses. The inmates also want the justices to consider whether contractors are immune from state-law suits stemming from activities that take place on the battlefield.

The inmates, who were civilian detainees, say they were subjected to abuses by CACI and Titan employees including beatings, sexual humiliation, exposure to extreme temperatures and rape. In court papers, the inmates say some prisoners were tortured into unconsciousness and several were murdered.

Two groups of inmates are seeking to sue under the 1789 U.S. Alien Tort Statute and District of Columbia law.

The case is Saleh v. CACI International, 09-1313, U.S. Supreme Court (Washington).

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Accused Tax Cheat Cohen Denies Owning New York Hotel

Hotel developer Leon Cohen Levy, accused by U.S. prosecutors of hiding a $33 million hotel sale from the Internal Revenue Service, testified that he never cheated on his taxes or made more than $40,000 a year.

Cohen, 46, is charged with his father, Mauricio Cohen Assor, 77, with conspiring to defraud the IRS and filing false tax returns that hid income and more than $150 million in assets. Prosecutors say the men, who built hotels in Europe under the “Flatotel” brand, failed to declare their sale of a New York hotel in 2000 that they owned in the names of friends, relatives and employees.

Leon Cohen said he never owned the Flatotel and never made more than $40,000 a year working for its owners. He said that he never paid taxes for his use of a Miami Beach house that prosecutors say was once worth $26 million. Cohen said he used the house for business and never paid taxes for the benefit of its use or of luxury cars he drove.

“Why would I pay taxes?” Cohen told jurors in federal court in Fort Lauderdale, Florida. “I was a professional person working in a professional residence. That’s where I slept. I was just doing my job.”

Cohen, like his father, who testified Sept. 30, said he believed an accountant had prepared his taxes properly.

“I thought that all the returns and documents that had to be filed had been filed, absolutely,” he said, testifying in French through an interpreter.

Prosecutors said the Cohens put $33 million in proceeds from the New York Flatotel sale in a Swiss account of HSBC Holdings Plc, Europe’s largest bank by market value, and failed to tell the IRS.

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

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Court News

Kagan Full of Questions in Her First U.S. Supreme Court Hearing

Elena Kagan wasted no time joining the conversation in her first hearing as a U.S. Supreme Court justice.

Kagan, who will take part in only four of the 12 cases during the court’s first two-week argument session, asked questions of all three lawyers during the one-hour hearing in a bankruptcy case that marked the opening of the court’s nine- month term.

Kagan has recused herself from 24 of the court’s 51 scheduled cases because she played a role in the litigation while serving as U.S. solicitor general, the government’s top courtroom advocate.

Yesterday’s hearing focused on whether people seeking bankruptcy protection can limit the amount they must pay to creditors by claiming an auto expense deduction for a car that has already been paid off.

“What would happen if the debtor had a car that was 200,000 miles old and it was going to break down, you know, within the next five years?” Kagan asked Deanne Maynard, the attorney representing Bank of America Corp. in the case.

Both Maynard and Nicole Saharsky, the federal government lawyer in the case, worked under Kagan in the solicitor’s office.

Kagan sat at the far end of the bench, in the spot assigned to the most-junior justice on the court. She made eye contact with each speaker and at one point whispered to Justice Samuel Alito, who was seated to her right. Several of her questions built off comments and queries from the other justices.

The case is Ransom v. FIA Card Services, 09-907,U.S. Supreme Court (Washington).

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

To contact the editor responsible for this story: David E. Rovella at

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