SAC, Citigroup, Galleon, Airgas, UBS in Court News

Noah Freeman and Donald Longueuil, former junior portfolio managers at SAC Capital Advisors LP, were accused of insider trading while working at the $12 billion hedge fund in the latest round of charges stemming from a nationwide crackdown by federal prosecutors.

The allegations mark the first time in the 16-month U.S. probe that insider trading has been publicly alleged to have occurred at SAC Capital.

Longueuil, who worked at SAC Capital’s CR Intrinsic unit from July 2008 to July 2010, was arrested yesterday. Freeman, who worked at the hedge fund founded by Steven A. Cohen from June 2008 to January 2010, pleaded guilty Feb. 7 as part of a cooperation deal with prosecutors.

Two others charged in the probe are Samir Barai, the founder of Barai Capital Management, and Jason Pflaum, who worked for Barai. Pflaum pleaded guilty in December as part of a cooperation deal. From 2006 to 2010, the four men, while working at six funds, swapped tips from employees of public companies and from consultants at an expert-networking firm, prosecutors said.

“We are outraged by the alleged actions of two former employees, which required active circumvention of our compliance policies and are egregious violations of our ethical standards,” SAC Capital said yesterday in a statement. “The government alleges that their improper conduct together began at their prior firms in 2006 and continued after they joined SAC in mid-2008.”

The Stamford, Connecticut-based hedge fund said the defendants were employed “for a short time” and fired last year “due to poor performance.”

The charges are connected to earlier arrests of eight employees or consultants at Primary Global Research LLC, a Mountain View, California-based expert-networking firm that links investors with industry experts who work for public companies. Barai got inside tips from Primary Global consultants Anthony Longoria and Winifred Jiau, both previously charged, according to the complaint

Barai was granted release on $1 million bail by U.S. Magistrate Judge Frank Maas in Manhattan. Barai must surrender his travel documents, Maas said.

Evan Barr, Barai’s lawyer, declined to comment after court.

Longueuil was arraigned yesterday before U.S. Magistrate Judge Theodore Katz, who granted his release on a $1.5 million bond secured by $750,000 in cash or property.

The U.S. Securities and Exchange Commission yesterday sued the four, saying they earned more than $30 million on insider trades of stock in companies including Advanced Micro Devices Inc., Marvell Technology Group Ltd., Western Digital Corp., Fairchild Semiconductor International Inc. and Seagate Technology Plc.

The case is U.S. v. Barai, 11-mag-00332, U.S. District Court, Southern District of New York (Manhattan).

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Lawsuits/Pretrial

Citigroup, Ally Class-Action Foreclosure Suit Dropped

Kentucky homeowners dropped a possible class-action suit in which Citigroup Inc. and Ally Financial Inc. units were accused of conspiring with Mortgage Electronic Registration Systems Inc. to falsely foreclose on loans.

Heather Boone McKeever, the Lexington, Kentucky, lawyer who sued on behalf of the homeowners, said yesterday by e-mail that she dropped the case Feb. 3 because as a solo practitioner she wouldn’t be able to clear the “necessary hurdles” for maintaining a federal class action and she couldn’t interest a larger law firm. She said she continues to advise the plaintiffs in their individual state-court cases.

“My plan is to try to keep the cases in state court by filing class-action counterclaims against the individual creditors and MERS in each family’s action,” she said.

The lawsuit, filed as a civil-racketeering case on behalf of all Kentucky homeowners facing foreclosure, also named as a defendant Reston, Virginia-based MERS, the company that handles mortgage transfers among member banks.

MERS and banks have been accused in at least two other federal suits of violating the Racketeer Influenced and Corrupt Organizations Act, a law originally passed to pursue organized crime. A Florida case was thrown out Jan. 31 by a judge in Miami. Another is in Brooklyn, New York.

The Kentucky homeowners filed their complaint Sept. 28 in Louisville. They claimed that through MERS the banks are foreclosing on homes even when they don’t hold titles to the properties. The suit was dismissed without prejudice, meaning that the homeowners can refile it.

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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Trials/Appeals

Deutsche Bank May Lose Top Court Swap Case, Judge Says

Deutsche Bank AG, Germany’s biggest bank, may lose a ruling in the first case heard by the country’s top civil court over an interest-rate swap the lender sold to companies and local governments, a judge said.

The bank may have violated its duties when advising Ille Papier Service GmbH on a swap purchase, Federal Court of Justice Presiding Judge Ulrich Wiechers said at a hearing yesterday. The lender may have had the duty to disclose an initial negative market value that covered its fees or even to advise the company not to buy the product, he said.

“When advising in financial matters, the bank must guard the interests of its customer alone,” Wiechers said at the hearing in Karlsruhe. The assessment is preliminary and a ruling is scheduled for March 22.“A conflict of interest must be disclosed. That the bank earned money from the initial market value may be such a conflicted interest.”

Deutsche Bank has been sued by local governments, community-owned utilities and companies that claim the lender sold swaps without adequately disclosing risks. Cases over swap agreements have spread through Europe with similar disputes in Italy and England.

“If the court really intends to require banks to disclose fees built into a swap, it would open a new door,” Reiner Hall, a lawyer for Deutsche Bank, said at yesterday’s hearing. “This would shake up the whole market because it would require banks to disclose their profit from a deal. Such a ruling could even cause a new financial crisis.”

The case is BGH, XI ZR 33/10.

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Raj Rajaratnam Has Little to Lose in Demanding Trial Over Deal

Billionaire Raj Rajaratnam must decide this month whether he will join the few insider-trading defendants who “roll the dice” and seek acquittal by a jury, Bloomberg News’ David Voreacos and David Glovin report.

Rajaratnam, co-founder of the Galleon Group LLC hedge fund, is set for trial Feb. 28 in Manhattan federal court on charges he made $45 million on illegal stock tips dating back to 2003. He faces as long as 20 years in prison on the most serious charges. Two legal experts predicted a 12-year term if he is convicted.

To secure an acquittal, Rajaratnam’s lawyers must overcome a case built on wiretapped conversations and insiders who pleaded guilty and may testify against him. His lawyers may also believe they can beat some of the counts and persuade the judge to impose a shorter term than he would get in a plea deal, according to five lawyers not involved in the case.

“Prosecutors have some strong evidence, based on the wiretaps, so why would they want to cut a good deal?” said former federal prosecutor William Mateja, now with Fish & Richardson PC in Dallas. “From the defense side, if the prosecution is not going to cut a good deal, then why not roll the dice and see if they can get an acquittal?”

Rajaratnam has denied wrongdoing in a case that is the centerpiece of the largest U.S. crackdown on hedge fund insider trading. Manhattan U.S. Attorney Preet Bharara and defense attorney John Dowd of Akin Gump Strauss Hauer & Feld LLP declined to comment on whether plea talks have taken place.

Dowd said in court papers that Rajaratnam, 53, broke no laws in speaking to corporate insiders to “ferret out” information before making trades. Prosecutors must prove that he knew he was receiving illegal tips from company insiders who violated their duty to keep the information confidential.

Rajaratnam is alone among the six people arrested Oct. 16, 2009, not to plead guilty. Peter Henning, a professor at Wayne State University Law School in Detroit, said prosecutors have too strong a case to offer the hedge fund manager anything less than a seven- or eight-year prison term in any plea arrangement. Henning said Rajaratnam could still plead guilty on the eve of trial.

Rajaratnam is accused of using secret tips from hedge fund executives, corporate officials and other insiders to trade in more than a dozen stocks, including Intel Corp., International Business Machines Corp., Akamai Technologies Inc., Google Inc. and Advanced Micro Devices Inc.

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

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News Corp. Unit Broke Antitrust Law, Jury Is Told

A News Corp. unit disparaged a smaller rival and broke antitrust law while attempting to dominate the U.S. in-store advertising market, a lawyer said at the start of a trial.

The rival, Minneapolis-based Insignia Systems Inc., sued News America Marketing In-Store Inc. in federal court in Minneapolis in 2004, alleging violations of U.S. antitrust law and the Lanham Act, which prohibits unfair disparagement of competitors.

“This trial will show how News set out to be not just the largest company, it wants to be the only company that can put the sign in the aisle,” Julian Solotorovsky, Insignia’s lawyer, said yesterday at the start of the trial. “News is using illegal conduct to obtain a monopoly.”

News Corp. previously settled unfair-competition suits brought by two other rivals in the in-store advertising and promotions market. The New York-based company agreed last year to pay $500 million to Valassis Communications Inc. It also paid $29.5 million in 2009 to settle a claim of anti-competitive behavior brought by Floorgraphics Inc.

“Insignia’s losses were significant and devastating,” Solotorovsky told the Minneapolis jury. “It cost them a bundle in sales. Insignia has lost hundreds of millions of dollars while News has profited.” He didn’t specify how much the company is seeking.

News Corp. has denied any unfair or illegal behavior.

The case is Insignia Systems Inc. v. News America Marketing In-Store Inc., 04-cv-04213, U.S. District Court for the District of Minnesota (Minneapolis).

Airgas Improperly Using Takeover Defense, Suitor Says

Airgas Inc., the gas company fighting a $5.9 billion hostile buyout bid, is improperly using an anti-takeover defense to bar investors from accepting any offer, lawyers for Air Products & Chemicals Inc. told a judge.

A majority of Airgas shareholders want to accept Air Products’ $70-a-share offer and are being wrongfully blocked by the company’s poison-pill takeover defense, Kenneth Nachbar, one of Air Products’ lawyers, said in closing arguments in the case. Air Products is seeking to have Airgas’s poison pill thrown out.

By using the defense to frustrate investors, Airgas executives are “protecting shareholders from themselves,” Nachbar told Delaware Chancery Court Judge William B. Chandler III in Georgetown, Delaware.

Chandler said he was “reluctant” to rule yesterday from the bench and instead will issue a written opinion in the next few days.

“I don’t make snap judgments,” Chandler said after closing arguments ended. “It would be more prudent of me to digest the arguments you just made.”

Air Products, which has been pursuing Radnor, Pennsylvania- based Airgas for more than a year, raised its bid on Dec. 9 to $70 a share from $65.50 and called it the company’s “best and final offer.” Airgas rejected the offer that same month.

Chandler must decide whether Airgas officials are acting reasonably by refusing to deactivate the poison pill, which is designed to make hostile takeovers of the gas distributor prohibitively expensive.

Marc Wolinsky, a New York-based lawyer for Airgas, countered that the directors are keeping the pill in place so the gas company can continue to generate good earnings from its businesses.

The case is Air Products and Chemicals Inc. v. Airgas Inc., CA5249, Delaware Chancery Court (Wilmington).

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Verdicts/Settlement

UBS Buys Back $1.5 Billion in Auction Rate Securities

Two UBS AG units agreed to repurchase $1.5 billion in auction rate securities sold in New Jersey, resolving allegations that the firms failed to fully disclose risks, state Attorney General Paula T. Dow said.

“Disclosure of material facts to the investing public is not only the law, but is necessary for consumers to make fully informed decisions about investing their hard-earned money,” Dow said in a statement announcing the agreement.

In addition to the repurchases by UBS Securities LLC and UBS Financial Services Inc., Zurich-based UBS will pay New Jersey $3.7 million in civil penalties, representing the state’s pro rata share of an agreement negotiated by a multistate task force of regulators, Dow said.

Auction-rate securities are municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through auctions. Underwriters and broker- dealers have been sued since the February 2008 collapse of the $330 billion market for auction-rate securities.

UBS, according to Dow, marketed the securities as safe and liquid when they were actually long-term investments subject to the since-failed auction process.

“UBS is pleased this matter has been resolved,” the investment bank said in an e-mailed statement. “This is part of UBS’s ongoing effort to restore liquidity to its ARS clients who were adversely affected by the failure of the ARS market.”

Citigroup Settles Fraud Cases Tied to Texas Mortgage Assigner

Citigroup Inc., the third-largest U.S. bank, settled or lost at least five claims in 2010 brought by borrowers who accused the bank of filing fraudulent mortgage documents provided by a Texas firm.

In the most recent settlement in December, a bankrupt homeowner in Wappingers Falls, New York, challenged Citigroup’s use of a mortgage “assignment,” which shows the transfer of ownership of a mortgage. It was signed by an employee at Orion Financial Group Inc., a Southlake, Texas, firm that provides document services to lenders.

The document was “of fraudulent nature and questionable origin,” the borrower’s attorney, Linda Tirelli, wrote in an August objection to the bank’s claim at U.S. Bankruptcy Court in New York. Citigroup created and filed the assignment after proceedings began because it otherwise couldn’t prove its right to collect the debt, she wrote in an e-mail. The bank denied the allegations and didn’t admit liability in the settlement.

Attorneys general in 50 states are investigating the industry’s use of mortgage assignments as part of a wider probe into faulty foreclosure methods, according to Geoff Greenwood, a spokesman for Iowa attorney general Tom Miller. Last month, a Massachusetts court ruled that two foreclosures by Wells Fargo & Co. and U.S. Bancorp were invalid because assignments presented in those cases failed to prove the chain of ownership of the mortgage, sending financial stocks down.

A spokesman for Citigroup, Mark Rodgers, said it doesn’t comment on individual cases. The company continues to use Orion for assignment letters, he said. While borrowers have disputed the bank’s use of assignments, they haven’t accused Orion of wrongdoing.

“We don’t create fraudulent documents,” said Orion Chief Executive Officer Mike Wileman. His firm’s documents show which company may hold the note and can be based on information from the bank, he said. “Sometimes the evidence is circumstantial,” he wrote in an e-mail.

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Pfizer Must Pay $10 Million Drug Damages, Judges Say

Pfizer Inc. must pay more than $10 million in damages to an Arkansas woman who blamed her cancer on the company’s Prempro menopause drug, after an appeals court reinstated a jury verdict.

A Pennsylvania appeals court yesterday overturned a judge’s ruling that Pfizer’s Wyeth unit deserved a new trial in connection with Mary Daniel’s claim that Prempro caused her breast cancer. A Philadelphia jury in 2007 awarded Daniel and her family $1.5 million in compensatory damages and $8.6 million in punitives on her claim, according to Esther Berezofsky, one of the family’s lawyers.

The appellate judges concluded no “fraud on the court took place here and a new trial should not have been granted,” according to the 55-page decision from the Superior Court of Pennsylvania.

Officials of New York-based Pfizer said they were disappointed with the decision and considering their legal options. Pfizer, the world’s largest drugmaker, completed its $68 billion purchase of Wyeth in 2009.

“The company disputes the fairness of the previous trial and the appropriateness of the jury’s verdict,” Christopher Loder, a Pfizer spokesman, said in an e-mailed statement.

The case is Daniel v. Wyeth, 040602368, Court of Common Pleas (Philadelphia).

Robert Bosch Settles U.K. Antitrust Claims Against SGL Carbon

Robert Bosch GmbH, the world’s biggest automotive supplier, settled a U.K. lawsuit accusing SGL Carbon SE of overcharging for graphite products during a price-fixing cartel uncovered more than a decade ago.

Terms of the accord are private and neither company was ordered to pay the other’s costs in the case, Justice Gerald Barling wrote Feb. 7 in a notice on the website of the Competition Appeal Tribunal in London.

Stuttgart-based Robert Bosch’s settlement doesn’t involve other customers or cartel participants in the four-year-old lawsuit by Valeo SA, France’s second-largest car-parts maker, and St. Louis-based Emerson Electric Co. Other defendants in the case include Morgan Crucible Co. and Schunk GmbH.

The companies sued after the European Union in 2003 fined Wiesbaden, Germany-based SGL and other cartel members a total of 101 million euros ($137 million) for fixing prices on graphite products from 1988 to 1999. While Morgan Crucible received immunity from the fines because it was the first to cooperate, its former Chief Executive Officer Ian Norris was sentenced to 18 months in prison in a U.S. case over his role in the cartel.

Achim Schneider, a Robert Bosch spokesman, and SGL spokeswoman Corinna Gemein declined to immediately comment when reached yesterday by phone.

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Litigation Departments

Chevron Wins Order Against Lawyers for Ecuadoreans

Chevron Corp. won a court order halting lawyers for Ecuadorean residents suing the second-largest U.S. oil company over environmental pollution from trying to immediately enforce an anticipated multibillion-dollar damage award outside of their home country.

U.S. District Judge Lewis Kaplan, at a hearing yesterday in Manhattan, granted a temporary restraining order for 28 days against lawyers for Ecuadorean citizens who accused Texaco Inc., acquired by Chevron in 2001, of fouling the Amazon basin. Chevron will seek at a Feb. 17 hearing to extend the judge’s order through a preliminary injunction.

“I’m persuaded that the likelihood of irreparable injury is quite high,” Kaplan said at the hearing.

Chevron, based in San Ramon, California, sued New York attorney Steven Donziger and others, alleging that they made misrepresentations to the U.S. Congress, government agencies and shareholders in a conspiracy to “force the company into making a payoff.”

Chevron said in its complaint it believes a judgment is “imminent” from a Lago Agrio, Ecuador, court that closed the evidence phase of the case in December. A judgment “for billions of dollars is a foregone conclusion,” Chevron said.

Attorneys for the Ecuadoreans plan to immediately seek to enforce a judgment in countries other than Ecuador because Chevron has no assets there, the company said.

Chevron claimed in its suit that the lawyers and activists fighting the company in the Ecuador lawsuit fabricated evidence to make their case and produced a report that was supposed to be written by an impartial expert appointed by a court in Ecuador. The lawyers now estimate damages at as much as $113 billion, Chevron said.

Donziger, who has his own law firm in New York, was representing himself in court yesterday. He had asked for an adjournment of the hearing, which the judge denied.

“I don’t feel comfortable responding without counsel,” Donziger told the judge.

Sheldon Elsen, representing Ecuadorean citizens who sued Chevron, argued against the temporary restraining order.

The case is Chevron Corp. v. Donziger, 11-0691, U.S. District Court, Southern District of New York (Manhattan).

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To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York, at eamon2@bloomberg.net.

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

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