The insider-trading trial of Galleon Group LLC co-founder Raj Rajaratnam next month is the culmination of U.S. investigations dating back 12 years that involved blind alleys, anonymous tips, wiretaps and a trip into the Tamil Tiger underworld before prosecutors got their man, Bloomberg News’ Patricia Hurtado reports.
Rajaratnam, 53, stands accused by Manhattan U.S. Attorney Preet Bharara of leading an insider-trading conspiracy that earned his fund about $45 million. He has pleaded not guilty.
Testimony at a four-day hearing in October to consider the admissibility of wiretaps showed what evidence the U.S. is likely to rely on at trial, set for March 8, as well as much of the inside story of how investigators cracked the case.
The government began pursuing the Sri Lankan-born Rajaratnam as long ago as 1999. Federal prosecutors in California and New York, as well the Securities and Exchange Commission, would eventually carry out what became the largest insider-trading probe of hedge funds. To date, at least 26 people have been charged; 19 have pleaded guilty.
The Federal Bureau of Investigation said it considered placing an undercover agent inside the New York-based Galleon firm, before opting instead to tap his phones because it had no viable candidate. The case was woven from other threads, including a former Intel Corp. (INTC) employee’s confessions; a 2006 regulatory probe of his brother Rengan, instant messages from Rajaratnam; and a March 2007 anonymous letter to the SEC.
Jim McCarthy, a spokesman for Rajaratnam, declined to comment.
The case is U.S. v. Rajaratnam, 1:09-cr-1184, U.S. District Court, Southern District of New York (Manhattan).
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Allstate Sues JPMorgan Over Mortgage-Backed Securities
Allstate, based in Northbrook, Illinois, bought more than $700 million of the securities from JPMorgan and other defendants, including WaMu Asset Acceptance Corp. and Bear Stearns Asset Backed Securities LLC, according to the lawsuit filed Feb. 15 in New York state Supreme Court in Manhattan.
“Allstate was made to believe it was buying highly rated, safe securities,” according to the complaint. “Defendants knew the pool was a toxic mix of loans given to borrowers that could not afford the properties and thus were highly likely to default.”
A spokeswoman at New York-based JPMorgan, Jennifer Zuccarelli, declined to comment on the lawsuit.
The case is Allstate Bank v. JPMorgan Chase Bank, 650398/2011, New York state Supreme Court (Manhattan).
NYSE Euronext Sued Over Deutsche Boerse Takeover
NYSE Euronext, the parent company of the New York Stock Exchange, was sued by a shareholder seeking to block its planned $9.53 billion sale to Deutsche Boerse AG (DB1), a deal that would create the world’s largest owner of equities and derivatives markets.
The all-stock transaction is “grossly inadequate” and resulted from a flawed process, lawyers for shareholder Samuel T. Cohen claimed in the complaint made public yesterday in Delaware Chancery Court in Wilmington. The proposed sale values NYSE at less than targets in similar deals, such as London Stock Exchange Group Plc (LSE)’s purchase of Canada’s TMX Group Inc., according to the lawsuit.
“There appears to have been no sales process, and the proposed transaction did not emerge from an auction,” Cohen’s lawyers said in the complaint. “A board that provides a would-be acquirer with an exclusive opportunity to bid on a company and fails to conduct a market-check, does not act in the interests of shareholders.”
Ray Pellecchia, a spokesman for New York-based NYSE Euronext, had no immediate comment on the complaint.
The deal, announced Fe. 15, would give Deutsche Boerse 60 percent of the combined entity. Deutsche Boerse, which runs the Eurex futures platform and Frankfurt Stock Exchange, is swapping one share of its own stock for one share in the company, while every NYSE Euronext share will be converted into 0.47 share, the companies said in a statement.
The case is Cohen v. NYSE Euronext, CA6198, Delaware Chancery Court (Wilmington).
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Stanford Brokers Claim Receiver Mismanaged Firm Fate
R. Allen Stanford’s court-appointed receiver was countersued by a group of the indicted financier’s securities brokers, who allege the receiver mismanaged the firm, causing them $100 million in damages.
The securities brokers, who were affiliated with Stanford Group Co., allege receiver Ralph Janvey destroyed the company’s value by barring the brokers from contacting clients, interfering with their abilities to get new jobs and allegedly failing to accept a $500 million offer for the business.
“Janvey ignored the recommendation of his industry consultant,” the brokers said in a Dallas federal court filing yesterday. The unnamed suitor “eventually gave up.”
Stanford Group Co. was one of the businesses Janvey was appointed by the court to operate two years ago when the U.S. Securities and Exchange Commission sued Stanford for allegedly running a $7 billion investment fraud scheme.
Stanford has denied the SEC’s allegations as well as those contained in a 21-count indictment returned by a Houston grand jury in 2009. He is being held without bail awaiting trial.
The receivership has sued 329 former Stanford employees, seeking to recoup $265 million, including $114 million in commissions earned selling allegedly fraudulent certificates of deposit issued by the Antigua-based Stanford International Bank Ltd.
Janvey’s outside counsel, attorney Kevin Sadler, said the countersuit wasn’t unexpected. Their claim the securities firm could be sold “is something that defies logic, common sense and the facts under these circumstances,” he said in a phone interview.
The case is Janvey v. Alguire, 3:09-cv-00724, U.S. District Court, Northern District of Texas (Dallas).
The criminal case is U.S. v. Stanford, 09cr342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09cv298, U.S. District Court, Northern District of Texas (Dallas).
Rajaratnam May Be Guilty of Conspiracy Without Trade
Galleon Group LLC co-founder Raj Rajaratnam can be convicted of joining in an insider trading conspiracy even if he didn’t trade in particular stocks, a prosecutor said at a pretrial hearing in Manhattan.
Assistant U.S. Attorney Reed Brodsky told U.S. District Judge Richard Holwell yesterday that prosecutors can prove Rajaratnam “violated the conspiracy law” merely by taking a single act to further an illegal scheme. He needn’t have made an actual trade, he said.
The argument came as Holwell denied requests from Rajaratnam’s lawyers to exclude certain testimony that prosecutors plan to offer at the March 8 trial. Prosecutors may present proof of illegal trades in 35 stocks and portions of 173 wiretap recordings that may be vague or don’t explicitly refer to an insider-trading scheme, the judge said.
“It’s the agreement that’s the nub” in an insider trading conspiracy, and not the actual illegal trades, Holwell said.
Rajaratnam faces five counts of conspiracy and nine counts of insider trading. To prove insider trading, prosecutors will have to show actual trades. He denies wrongdoing.
The case is U.S. v. Rajaratnam, 09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
Commerzbank Asks to Dismiss U.K. Banker Bonus Lawsuits
Commerzbank AG (CBK) asked a London appeals court to dismiss a lawsuit from 104 current and former bankers at its Dresdner Kleinwort unit in the largest U.K. bonus dispute stemming from the financial crisis.
The bankers, who are seeking as much as 50 million euros ($67 million), also asked the appeals court to overturn a decision from May that dismissed part of their case. That ruling prevents them from using any evidence prior to a December 2008 letter to staff of the investment bank regarding their bonuses.
“There are a number of aspects of this case that require all of the evidence possible,” a lawyer for the bankers, Andrew Hochhauser said at a hearing yesterday. “It requires a proper trial of the issues rather than summary disposal of them.”
Lawyers for Commerzbank have said the collapse of Lehman Brothers Holdings Inc. and its affect on the financial markets made it impractical for the bank to pay what it considered to be discretionary bonuses. The bankers say they were paid a 10th of what they were owed in a contract with Dresdner before it was acquired by Commerzbank.
“Our position is that it was not appropriate for us to provide large sums in bonuses for employees of a unit that had lost catastrophically large sums of money,” said Jonathan Sumption, a lawyer for the bank. “Our position is not that we could not afford it.”
The case is The Parties Named in Schedule A v. Dresdner Kleinwort Ltd. & anr, U.K. Court of Appeal, A2/2010/1599.
Judge Orders Hearing Into U.S. Wiretaps of Trader Drimal
A federal prosecutor will take the witness stand when a judge weighs whether the government properly recorded telephone conversations between former Galleon Group LLC trader Craig Drimal and his wife.
Drimal is among five men who face a May trial for trading with inside information. U.S. District Judge Richard Sullivan yesterday ordered a hearing on March 9 into whether the prosecutors who secretly taped Drimal’s phone conversations “demonstrated a high regard” for Drimal’s privacy rights by not listening into conversations between him and his wife.
The judge previously ruled that Drimal’s other phone conversations may be admitted into evidence.
“The court expects to hear testimony from the agents who monitored” more than a dozen taped phone calls, Sullivan said in a one-page order. “The court also expects to hear testimony from the Assistant U.S. Attorney who supervised the agents.”
Drimal and the other defendants, who all deny any wrongdoing, face charges in an insider-trading case involving Galleon Group co-founder Raj Rajaratnam. Also charged are traders Zvi Goffer, Emanuel Goffer and Michael Kimelman and lawyer Jason Goldfarb.
Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara, declined to comment. Drimal’s lawyer, Jane Anne Murray, didn’t immediately return a call.
The case is U.S. v. Goffer, 10-cr-00056, U.S. District Court, Southern District of New York (Manhattan).
Starr Lawyer Says Restitution Deal Reached With U.S.
Kenneth I. Starr, the money manager who admitted to defrauding his celebrity clients of as much as $50 million, has reached a restitution agreement with the U.S. government, his lawyer said in a letter to a federal judge.
The amount to be repaid to the victims wasn’t specified in the Feb. 8 letter from Flora Edwards to U.S. District Judge Shira Scheindlin in Manhattan. Starr, who pleaded guilty in September to wire fraud, money laundering and investment adviser fraud, faces 121 to 151 months in prison when he’s sentenced March 2.
“We’re filing a letter next week that sets down the details of the restitution agreement,” Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara, said in a telephone interview. Victims will have until April 4 to submit documents related to their losses, she said.
Starr, 67, was arrested in May and accused of defrauding clients including heiress Rachel “Bunny” Mellon. Actors Sylvester Stallone and Wesley Snipes were also clients. Edwards and the government agreed, for sentencing purposes, that the amount lost in the fraud totaled from $20 million to $50 million.
At a hearing yesterday, Assistant U.S. Attorney William Harrington told Scheindlin that some of Starr’s victims are entitled to more than they are promised in the restitution agreement, the New York Post reported. The judge said she would give victims as long as 30 days after the sentencing date to file objections to the deal, the Post said.
According to a Dec. 22 court document, there were nine victims of Starr’s fraud, owed $47 million. Three of the victims were repaid a total $11.5 million, leaving a balance of $35.5 million, “much of which is contested.”
Edwards didn’t return messages seeking comment.
The criminal case is U.S. v. Starr, 10-00520, U.S. District Court, Southern District of New York (Manhattan). The civil suit is SEC v. Starr, 1:10-CV-04270, U.S. District Court, Southern District of New York (Manhattan).
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Billionaire Ho Files New Suit to Regain Casino Stake
Billionaire Stanley Ho filed a new lawsuit against some family members to regain control of his assets, extending a three-week public dispute over Asia’s biggest casino company.
A writ filed yesterday in Hong Kong’s High Court by law firm Oldham, Li & Nie accuses Ho’s daughters Pansy Ho and Daisy Ho of seizing the tycoon’s holding in Sociedade de Turismo e Diversoes de Macau SA. Yesterday’s complaint follows a Jan. 26 lawsuit that was withdrawn after an oral agreement by them to return the stake, according to the new claim.
The 89-year-old who built his casino business with a four-decade monopoly in Macau is embroiled in a family feud over a stake that’s worth at least HK$11.2 billion ($1.44 billion) based on yesterday’s prices of listed arm SJM Holdings Ltd. (880) Videos shown by his lawyer Gordon Oldham on Jan. 31 showed the patriarch saying Pansy Ho and other family members took his holdings without his consent and that he’d been forced to make a televised statement saying the dispute was over.
The new writ again seeks an order declaring that the transfer of Ho’s interest in Lanceford Co., which holds a 31.7 percent of closely held STDM was made without his approval. STDM, with stakes in gambling, hotels and the former Portuguese colony’s airline, owns 56 percent of SJM, according to data compiled by Bloomberg.
Pansy and Daisy Ho “improperly and/or illegally” transferred 99.98 percent of Lanceford’s shares to a company they control along with their siblings and another controlled by Chan Un-chan, whom Ho refers to as his third wife, according to the writ.
Joseph Lo, an external spokesman for Lanceford at Brunswick Group, declined to comment in a phone interview.
The case is Dr. Stanley Ho v. Ho Chiu King, Pansy, HCA268/2011, High Court of Hong Kong.
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Milan Assumed UBS, JPMorgan Did Swaps for Free, Witness Says
The City of Milan assumed banks that sold it derivatives, and later restructured the contracts, did so for free, a former city finance official testified at a trial where four firms face fraud charges.
Angela Casiraghi, a witness for the prosecution, told a court in Milan yesterday that she believed a commission of 0.01 percent paid to the banks for a 1.7 billion-euro ($2.3 billion) bond sale in 2005 covered both the securities sale and the swaps that adjusted payments on the borrowings.
Deutsche Bank AG (DBK), Depfa Bank Plc, JPMorgan Chase & Co. and UBS AG (UBSN) are accused of misleading Milan into thinking they could save the city about 55 million euros by selling the bonds and related derivatives and earning 101 million euros in hidden fees. The banks deny the charges.
Officials for Deutsche Bank, JPMorgan and UBS declined to comment on yesterday’s testimony. Officials for Depfa didn’t immediately respond to an e-mail.
Casiraghi said the city considered the swaps part of the bond sale. She said the city assumed that the banks restructured the derivatives in subsequent years for free.
Asked whether city officials had discussed why the firms might be working for nothing, Casiraghi said she thought the banks were acting in their capacity as advisers to the municipality.
“To this day I cannot come to terms” with the fact that there may have been fraudulent activity, said Casiraghi.
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Falcone’s Harbinger Lost 19.5% in Illiquid Fund, Settles Suit
Harbinger Capital Partners LLC, the hedge-fund run by billionaire Philip A. Falcone, lost 19.5 percent last year in a pool of hard-to-sell assets that it’s divesting, according to a letter sent to investors this week.
Falcone also told clients in a separate letter this week that the so-called side-pocket would be paying $45 million to settle a civil suit involving Spectrum Brands Holdings Inc. (SPB), one of the companies in the pool, said an investor who asked not to be named because the fund is private.
Harbinger, started by Falcone in 2001, limited withdrawals from its biggest fund in 2008 to about 65 percent of assets and told clients that it may take as long as two years for the rest of the money to be returned. The losses in the illiquid pool, which held $1.3 billion of Harbinger’s $9 billion of assets as of September 2010, compare with a 15 percent gain, including reinvested dividends, by the Standard & Poor’s 500 Index.
The settlement stems from a 2006 lawsuit filed by Nacco Industries Inc. (NC), a Cleveland-based company that makes small appliances and forklifts, against Applica Inc. and Harbinger’s main fund. Nacco said Feb. 15 that Harbinger agreed to pay $60 million in total to settle claims that it tried to hamper the company’s bid for Applica, according to a regulatory filing. The case had been scheduled to go to trial Feb. 28.
Harbinger said yesterday in a statement that the parties agreed to settle the dispute on Feb. 14, while not disclosing any amount. Steve Bruce, a spokesman for the New York-based fund, declined to comment beyond the statement.
The Nacco lawsuit accused senior management at Applica of tipping Harbinger advisers to confidential merger negotiations allowing the hedge fund to succeed in a bidding war.
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Ex-KB Home Executive Gets Probation in Backdating Case
Gary A. Ray, KB Home (KBH)’s former head of human resources who had pleaded guilty in an investigation of stock-option backdating at the homebuilder, was sentenced to three years’ probation.
Ray, who cooperated with the government in its prosecution of Bruce Karatz, KB Home’s former chief executive officer, also got four months’ home detention, a $10,000 fine, and was ordered to do 600 hours community service, Assistant U.S. Attorney Paul Stern said yesterday in a telephone interview.
Ray pleaded guilty two years ago to conspiring with Karatz in 2006 to “impede and obstruct” a probe into backdating that was being conducted by the Securities and Exchange Commission. Karatz last year was sentenced to five years’ probation, including eight months’ home detention, and a $1 million fine after a jury trial.
“He’s pleased to have this behind him,” Ray’s lawyer, Mark Beck, said in a telephone interview. “He’s prepared to go back to work and go on with his life.”
The case U.S. v. Gary Ray, CR08-1443, U.S. District Court, Central District of California (Los Angeles.)
KBR to Pay $11.3 Million to U.K. to End Bribery Probe
KBR Inc. (KBR) agreed to pay 7.03 million pounds ($11.3 million) to U.K. prosecutors to end a four-year probe into bribes paid to Nigerian officials to win a liquefied natural gas project through a company unit based in England.
M.W. Kellogg Ltd., the U.K. subsidiary of KBR, self-reported the illegal payments to the Serious Fraud Office and cooperated with the investigation, the Houston-based company said in a statement yesterday.
KBR and its former parent Halliburton Co. (HAL) paid $579 million in February of 2009 to resolve U.S. criminal and regulatory probes over claims bribes were paid to obtain contracts to build the Bonny Island liquefied natural gas facility in Nigeria.
Halliburton will reimburse KBR for 55 percent of the U.K. fine under an indemnity agreement. The penalty is equivalent to the profits generated for M.W. Kellogg by the Bonny Island project contracts, KBR said. KBR said last month the acquisition Roberts & Schaefer and M.W. Kellogg would add total 17 cents a share to its 2011 earnings.
“This settlement was expected and closes out an unfortunate part of KBR’s past,” William Utt, the company’s chief executive officer, said in the statement. “We have since moved forward, conducting our business with transparency, accountability and discipline.”
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U.K. Lawyer Wanted for Bribery Drops Extradition Appeal
A British lawyer wanted over allegations he bribed Nigerian officials to win contracts for KBR Inc. on a $6 billion natural gas project will be sent to the U.S. to face charges after dropping an appeal of his extradition.
Last month the Court of Appeal ruled Jeffrey Tesler should be sent to Houston. Tesler’s lawyers had argued he shouldn’t be extradited because the case has “strong links” to the U.K. and because British prosecutors are carrying out their own investigation.
“Jeffrey Tesler has withdrawn all appeals of his extradition,” his U.S. attorney Brad Simon said in a telephone interview. “I am currently in discussions with the U.S. Department of Justice about his situation.” He declined to give further details.
As he has dropped his appeal, Tesler will be sent to the U.S. within a month, Crown Prosecution Service spokesman Tim McAtackney said in a telephone interview. Tesler and another U.K. citizen were indicted on Feb. 17 last year by a federal grand jury in Houston, accused of violating the Foreign Corrupt Practices Act. If convicted of all charges, each faces a maximum prison sentence of 55 years.
The case is part of an investigation into Houston-based KBR over claims it paid bribes to win contracts to build a liquefied natural gas project in Nigeria. KBR in February 2009 agreed with former parent Halliburton Co. to pay $579 million to resolve related U.S. criminal and regulatory charges.
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To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York, at email@example.com.