JPMorgan Chase & Co., Bank of America Corp. and Ally Financial Inc., defending allegations of fraudulent home foreclosures from customers and Congress, may face the most financial peril from investigations by state attorneys general.
Authorities in at least seven states are probing whether lenders used false documents and signatures to justify hundreds of thousands of foreclosures, and the number of these inquiries will grow, according to state officials and legal experts.
“You’re going to see a tremendous amount of activity with all the AGs in the U.S.,” Ohio Attorney General Richard Cordray said in an interview. “We have a high degree of skepticism that the corners that were cut are truly legal.”
JPMorgan, Bank of America and Ally have curtailed foreclosures or evictions in 23 states where courts have jurisdiction over home seizures.
While homeowners in those states and elsewhere must usually show damages to win a lawsuit, “attorneys general can just sue over deceptive sales practices and get penalties,” said Christopher Peterson, a University of Utah law professor who specializes in commercial and contract law.
Officials in Ohio and Connecticut, along with Florida, Texas, North Carolina, Iowa and Illinois, said they are investigating mortgage foreclosure practices.
Attorneys general in Colorado and California asked Ally’s GMAC unit to halt foreclosures in their states. GMAC and Colorado Attorney General John W. Suthers are planning to meet to discuss the matter, said Mike Saccone, spokesman for Suthers.
“We’re talking to them,” Jim Finefrock, spokesman for California Attorney General Jerry Brown, said in a telephone interview about Detroit-based Ally.
Lenders, loan servicers and even title insurance companies are facing litigation on multiple fronts, said Peter Henning, a law professor at Wayne State University in Detroit and a former federal prosecutor who worked on cases involving bank fraud.
“This is going to become a hydra,” he said in an interview. “You’ve got so many potential avenues of liability. You don’t even know the parameters of this yet.”
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3M Cleared to Buy Cogent as Judge Rejects Challenge
Delaware Chancery Court Judge Donald F. Parsons yesterday denied Cogent shareholders’ request for an injunction to stop the sale in favor of a late, non-binding offer from NEC Corp. that would be worth more.
Parsons rejected the investors’ claim that Cogent Chief Executive Officer Ming Hsieh was biased in favor of 3M because he wanted to collect a $153,000 retention bonus.
“This argument is spurious,” Parsons wrote in a decision issued yesterday in Wilmington, Delaware. “Hsieh’s interests appear to be closely aligned with those of the stockholders as a whole.”
In an NEC sale, Hsieh, who owns almost 39 percent of Cogent, would have collected $18 million more than through the 3M deal, Cogent attorney Donald J. Wolfe said in court last week.
Parsons sided with Pasadena, California-based Cogent, which argued that a possible sale to NEC wasn’t firm enough and would pose antitrust risks.
“The board had good reason to think that there was a substantial risk,” Parsons wrote.
Michael Hanrahan, an attorney for the shareholders with Prickett, Jones & Elliott PA in Wilmington, didn’t return a call seeking comment.
The case is In Re Cogent Inc. Shareholders Litigation, Consolidated CA 5780-VCP, Delaware Chancery Court (Wilmington).
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Judge Narrows Suit Against Madoff Feeder Fund Beacon
Investors may pursue securities fraud claims against Bank of New York Mellon Corp.’s Ivy Asset Management LLC for losing client money in Bernard Madoff’s Ponzi scheme through the Beacon Associates fund, a judge said.
U.S. District Judge Leonard Sand in Manhattan yesterday threw out other claims, including those based on state law, against Ivy and other defendants in the case. Ivy had a contract to evaluate and recommend investment managers to Beacon, which invested about 71 percent of its assets with Madoff.
“Between 1995 and 2008, Beacon invested approximately $164 million with Madoff and withdrew approximately $26 million, leaving a net investment of approximately $138 million,” Sand said in his 82-page opinion.
Investors claim that Ivy withheld suspicions about Madoff to continue collecting millions in fees on the investments.
In May, New York Attorney General Andrew Cuomo sued Ivy and two of its executives, former Chief Executive Officer Lawrence Simon and ex-Chief Investment Officer Howard Wohl, for fraud in state court in Manhattan.
“We’re delighted that the claims will proceed into discovery on behalf of the class,” said Barbara Hart, a lawyer for the investors.
Lewis Liman, who represents Ivy, didn’t return a voice-mail message seeking comment.
Madoff, 72, pleaded guilty to orchestrating history’s biggest Ponzi scheme at his New York firm, Bernard L. Madoff Investment Securities LLC. He is serving a 150-year term in a federal prison in North Carolina.
The case is In Re Beacon Associates Litigation, 09-CV-777, U.S. District Court, Southern District of New York (Manhattan).
Och-Ziff Sues London Firm for Impersonation, Name Use
Och-Ziff Capital Management Group, the New York-based hedge-fund firm run by Daniel Och, is suing a London investment adviser and its founder to block the use of the Och name.
Och-Ziff’s European unit asked a London court for an injunction to stop OCH Capital LLP and its founder Thomas Ochocki from using the first portion of its name. It is also seeking damages for trademark infringement and passing itself off as the New York firm, which has more than $26 billion in assets under management.
Guy Hollingworth, a lawyer for Och-Ziff, said yesterday at the start of a two-day trial in London that OCH Capital’s cooperation “has been totally unsatisfactory and inexcusable.”
Michael Cohen, the chief executive officer of Och-Ziff Management Europe Ltd., testified about the importance of Europe to the firm’s business, saying Och-Ziff has 50 percent of its assets under management outside of the U.S. and 40 percent of its investors in Europe. It has about 65 employees in the U.K. and manages $1.5 billion in assets for people there, Cohen said.
A lawyer for OCH Capital, Alistair Wilson, said the London- based firm pronounces its name as initials, and offered to Och- Ziff to clarify that late last year.
“Our client said they were willing to change to O.C.H. to make it clear that it was pronounced O-C-H,” Wilson said at the first day of the trial. “That was rejected.”
Och Capital is named after the first three letters of its founder’s name, Wilson said. At a previous job as a trader, Ochocki became known by the letters O-C-H, Wilson said, and is still referred to as that because his name is hard to pronounce.
There was “no intention to cause any confusion at all” with Och-Ziff, Wilson said. He apologized to Judge Richard Arnold for initially failing to comply with court orders and said the firm is now cooperating.
The case is Och-Ziff Management Europe v. OCH Capital LLP, 112/10, High Court of Justice, Chancery Division (London).
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Lehman Blank Check May Haunt Judge at Barclays Trial
Two years ago, U.S. Bankruptcy Judge James Peck in Manhattan gave lawyers a blank check to complete a deal with Barclays Plc to salvage the remains of Lehman Brothers Holdings Inc. and prevent further financial catastrophe.
While Peck’s decision to let lawyers for both sides hash out the final details of Lehman’s brokerage sale may have helped seal the deal, his blanket approval spawned an $11 billion lawsuit that threatens to undo the 2008 agreement, Bloomberg News’s Linda Sandler reports.
Lehman alleges Barclays took advantage of the haste in which the deal was worked out to gain assets it never told the judge about. Now Peck may have to decide whether to undo his own order, or find another way to claw back some money for Lehman creditors.
“Those in charge of the sale decided, ‘the whole financial system will collapse unless the sale is approved now,’” said George Kuney, a professor at the University of Tennessee College of Law in Knoxville who teaches bankruptcy and contract law. “Once you proceed on that basis in a transaction of this size, the process is going to be pretty sloppy and mistakes are inevitably going to be made.”
Peck’s assistant and courtroom deputy Lynda Calderon didn’t return calls requesting comment from the judge. Under Peck, the two-year bankruptcy case has cost Lehman creditors $961 million in fees to managers and advisers through August, the most expensive bankruptcy ever.
Peck’s Sept. 19, 2008, order approving the brokerage sale, signed four days after the 158-year-old bank collapsed, specifically allowed Lehman’s and Barclays’ lawyers to change any documents he’d approved, or add documents that weren’t finished yet, though he said the changes shouldn’t “have a material adverse effect on the debtors’ estates” and should be okayed by Lehman, its creditors and Barclays.
The 2009 lawsuit led to a trial that’s been going on since April. It pits Lehman, which examiner Anton Valukas has said hid billions of dollars in risks before it failed, against Barclays, which was the only bidder for the brokerage.
Lehman accuses Barclays of taking a $5 billion “secret” profit on a portfolio of securities it acquired with the brokerage, and of making another $6 billion by writing up business assets, skimping on promised payments and “grabbing” more financial assets belonging to Lehman. Some of the disputed assets were assigned to Barclays in a so-called clarification letter that should have been shown to Peck, Lehman says.
Barclays says it wants $3 billion of assets that were never delivered. Lehman has no legal right to challenge the transaction now because its advisers knew and documented all the details when the deal was struck, and defended it in a higher court when it was challenged, according to Barclays.
The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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Tax Trial Jury Hears Developers Are Either Liars or Scapegoats
A father and son on trial on charges they hid a $33 million hotel sale from U.S. tax authorities were either lying tax cheats or innocent scapegoats, jurors heard in closing arguments.
Prosecutors yesterday said Mauricio Cohen Assor, 77, and Leon Cohen Levy, 46, conspired to defraud the Internal Revenue Service and file false tax returns that concealed income and more than $150 million in assets.
Michael Pasano, a defense lawyer, said the government offered an “Alice in Wonderland” case built on flawed theories and lying witnesses.
The case is U.S. v. Assor, 10-cr-60159, U.S. District Court, Southern District of Florida (Fort Lauderdale).
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Toyota Concealed Defects, Investors Say in Consolidated Suit
Toyota Motor Corp. was accused by U.S. investors of violating securities law by failing to disclose acceleration- related defects that it knew about, according to a consolidated complaint in a class-action lawsuit.
The shareholders, led by the Maryland State Retirement and Pension System, said in the Oct. 4 filing in federal court in Los Angeles that internal documents show Toyota deliberately concealed unintended sudden acceleration problems in the U.S. They said the company knew about the defects as early as 2000 and “stonewalled” regulators to avoid recalls.
“As government regulators and the media began to focus on this serious safety problem in the Toyota vehicles, defendants initially denied that any unintended acceleration problem existed, despite a plethora of internal evidence to the contrary, and instead blamed driver error and media-induced publicity,” the investors said.
Toyota’s recalls related to sudden acceleration defects have erased $30 billion in market capitalization, the investors said. The Maryland pension fund seeks to represent investors who bought Toyota’s American depositary receipts from May 10, 2005, to Feb. 2, 2010.
Gerald Silk, a lawyer for the Maryland fund, said in August that the decision as to which claims will be allowed to proceed will be made through a motion to seek class certification or a motion to dismiss the complaint.
“Toyota believes that the claims contained in the recently filed shareholder securities consolidated complaint are unfounded,” Celeste Migliore, a spokeswoman for Toyota Motor Sales USA in Torrance, California, said yesterday in an e-mailed statement. “We look forward to presenting our position to the court.”
The case is In re Toyota Motor Corp. Securities Litigation, 10-00922, U.S. District Court, Central District of California (Los Angeles.)
ArcelorMittal Sues Trader for Steel Stolen to Finance Gambling
ArcelorMittal Singapore Pte, claiming a former warehouse manager stole steel products and sold them at a discount to fund his gambling, sued scrap metal trader Guan Peng Hardware Pte for the return of the goods.
Low Kok Leong stole about 4,000 metric tons of steel products valued at $7 million and sold them to four companies including Guan Peng at a fraction of their actual value, according to lawsuit filed with the Singapore High Court last month. Low has admitted to the theft, according to the suit.
The Singapore unit of the world’s largest steelmaker said in the suit that Guan Peng offered to return 500 metric tons of steel, and that it failed to disclose another 700 tons. Low has been charged with criminal breach of trust and faces a jail term of as long as 15 years, according to the suit.
Guan Peng Managing Director Ng Boon Tin said he paid Low in cash checks for the goods, according to court papers. Ng couldn’t be reached for comment at his office.
Lynn Robbroeckx, a London-based spokeswoman for ArcelorMittal, couldn’t be reached for comment outside office hours.
The case is ArcelorMittal Singapore Pte v. Guan Peng Hardware Pte, S677/2010, Singapore High Court.
Toyota Sued by Allstate in Acceleration-Caused Claims
Toyota Motor Corp. was sued by Allstate Corp. and affiliates of the insurer saying they have paid $3 million for accidents caused by sudden acceleration.
Toyota “had full knowledge of the numerous complaints regarding its vehicles, that such vehicles were susceptible of sudden unintended acceleration, and thus that such vehicles posed a significant risk of property damage, as well as physical injury to vehicle occupants and other motorists,” Allstate said Oct. 1 in a complaint in California state court.
Sudden acceleration has accounted for at least 725 accidents with 304 injuries and 18 fatalities, Allstate said, citing Safety Research and Strategies Inc. Undisclosed flaws in the electronic throttle have been linked to sudden acceleration, it said.
It accused Toyota of negligence, product liability, breach of implied warranty and fraud.
“While Toyota has not seen the complaint, based on reports, we believe the unfounded allegations in this suit have no basis,” Celeste Migliore, a spokeswoman for Toyota Motor Sales USA Inc. in Torrance, California, said Oct. 4 in an e- mailed statement.
Toyota said Oct. 4 that it hasn’t found evidence its electronic throttle control caused unintended acceleration after engineers and technicians investigated more than 4,000 U.S. vehicles whose drivers made such complaints.
The case is Allstate Insurance Co. v. Toyota Motor North America Inc., BC446704, Los Angeles County Superior Court (Los Angeles).
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Allergan Pleads Guilty Over Unapproved Botox Marketing
Allergan Inc. pleaded guilty and was ordered by a judge to pay $375 million to resolve allegations that the drug company marketed its Botox Therapeutic product for unapproved purposes, the U.S. Justice Department said.
U.S. District Judge Orinda Evans in Atlanta yesterday approved the plea, which includes a $350 million criminal fine and $25 million in forfeited assets, the Justice Department said.
Allergan, based in Irvine, California, promoted Botox for headache, pain and juvenile cerebral palsy from 2000 through 2005, though it had never received U.S. Food and Drug Administration for those uses, the U.S. claimed.
The company said on Sept. 1 that it would pay $225 million to resolve civil claims asserted by the Justice Department under the False Claims Act.
“The FDA approval process is designed to help protect the public, and when a manufacturer puts potential profits and sales ahead of the approval process, they risk paying a bigger price,” said U.S. Attorney Sally Quillian Yates in Atlanta.
The global settlement concludes a 2 1/2-year investigation that some analysts have said has held up FDA approval for treatment of migraines. Botox, a wrinkle smoother, is Allergan’s top product with $1.3 billion in annual sales.
“Allergan is committed to conducting its business with the highest ethical standards and in compliance with all applicable laws,” said Crystal Muilenburg, a company spokeswoman. “We will continue to do so and implement the new requirements” under the agreement.
Times Square Bomber Faisal Shahzad Gets Life in Prison
Faisal Shahzad was given a life prison sentence for driving a bomb-laden car into New York’s Times Square in May and trying unsuccessfully to blow it up.
U.S. District Judge Miriam Goldman Cedarbaum handed down the sentence yesterday in a 25-minute proceeding in federal court in Manhattan. There is no parole in the federal penal system.
“You are a young man and you will have a long time to reflect on what you have done and what you have said, today and in the past,” Cedarbaum told Shahzad. The judge said she hopes Shahzad, a Muslim who worked with the Taliban in Pakistan, spends some of that time considering “whether the Koran wants you to kill lots of people.”
“The Koran gives us the right to defend, and that’s what I’m doing,” Shahzad answered.
Shahzad, 31, a naturalized U.S. citizen born in Pakistan, admitted he drove a Nissan Pathfinder into the crowded Manhattan intersection laden with improvised explosives. He fled when they failed to go off and was arrested May 3 at New York’s John F. Kennedy International Airport after boarding a flight to Dubai.
“I am happy with the deal that God has given me,” Shahzad, smiling, told Cedarbaum after she imposed the sentence.
He pleaded guilty on June 21 to all 10 terrorism-related charges, including attempted use of a weapon of mass destruction, in an indictment filed by prosecutors in the office of Manhattan U.S. Attorney Preet Bharara.
The case is U.S. v. Shahzad, 10-00928, U.S. District Court, Southern District of New York (Manhattan).
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Thai Court Puts Russia’s Bout Closer to U.S. Custody
A Thai court dismissed a second case against accused Russian arms dealer Viktor Bout, clearing a legal hurdle to having him extradited to the U.S. to face terrorism charges.
“The second set of cases are dropped,” prosecutor Sirisak Tiyapan told reporters in Bangkok after the ruling. “So the extradition on the first case will continue.”
Thai prosecutors are seeking to send Bout to the U.S., where a grand jury indicted him on four charges that he plotted to kill Americans. Bout’s lawyer immediately announced plans to file more appeals in a bid to keep him in Thailand.
“It’s not finished yet,” lawyer Lak Nittiwattanawichan told reporters. “They can’t do anything. I know how to fight.”
The U.S. accuses the ex-Soviet air force officer of running an air cargo network that shipped weapons to conflict zones from Afghanistan to Rwanda. Bout has denied wrongdoing, saying he was framed by U.S. undercover agents who posed as Colombian rebels during his arrest in Bangkok two years ago.
Synthes to Pay Fine, Sell Unit to Settle Criminal Case
Synthes Inc., the maker of devices to treat spinal injuries, will sell its Norian Corp. unit to settle criminal allegations Norian illegally tested a bone-mending cement that caused the deaths of three patients.
The agreement allows Synthes to keep operating in the U.S. without its products being banned from Medicare reimbursement programs. Under the terms of the settlement, Norian will plead guilty to a felony, pay a $23.5 million fine and face exclusion from Medicare, the government’s health plan for the elderly and disabled, the company and the Department of Justice said Oct. 4 in separate statements.
The divestiture is the first time the U.S. has ordered a medical device maker to sell a subsidiary in a health-fraud case, Gregory Demske, assistant inspector general for legal affairs with the Department of Health and Human Services, said in a telephone interview.
“We are used to seeing cases that involve monetary fraud,” Demske said. “The patient harm and the subversion of the Food and Drug Administration process took this to a different level from our perspective.”
Synthes, which has its U.S. headquarters in West Chester, Pennsylvania and trades in Zurich, will plead guilty to one misdemeanor charge of shipping an adulterated and misbranded Norian product across state lines. Synthes didn’t admit the broader allegations about an illegal medical trial made by federal prosecutors in court documents.
“It is a reasonably good outcome,” Synthes spokesman Gilgian Eisner said in a telephone interview. “It permits us to focus on the business that we have.”
The case is U.S. v. Norian Corp., 09-00403, U.S. District Court, Eastern District of Pennsylvania (Philadelphia).
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