Madoff, Citigroup, BP, SAC, SocGen, Galleon in Court News

A judge was asked by victims of Bernard Madoff’s Ponzi scheme to void a $220 million settlement with the heirs of Norman F. Levy, a Madoff investor referred to as his “surrogate father.”

New information has surfaced showing “Norman Levy financed Madoff’s Ponzi scheme during the period from 1992 through 2001 in an amount exceeding $100 billion,” Helen Davis Chaitman, a lawyer who represents hundreds of Madoff victims, said in court papers filed Feb. 18 in Manhattan.

Levy, who died in 2005 at age 93, transferred $90 billion between 1997 and 2001, including $35 billion in 2001 and $23 billion in 2000, which Bernard L. Madoff Investment Securities LLC returned in the same amount each year, according to court documents. The transfers were eight times larger than all other Madoff customer combined transfers for that period.

Irving Picard, named as the trustee to liquidate Madoff’s firm, settled with the estate and family of Levy last January for $220 million, the amount of money Levy and they allegedly profited from their accounts.

Chaitman, an attorney with the New York City firm of Becker & Poliakoff LLP who was a Madoff investor, said she represents about 500 Madoff victims, including about 100 who were sued by Picard in so-called “clawback” lawsuits.

The request to vacate the settlement “is without merit” and the trustee “will respond in court at the appropriate time,” Amanda Remus, a spokeswoman for Picard, said in an e- mail.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

New Suits

Allstate Sues Citigroup, Deutsche Bank Over Securities

Allstate Corp., the largest publicly traded U.S. home and auto insurer, sued units of Citigroup Inc. and Deutsche Bank AG over claims they fraudulently sold hundreds of millions of dollars of mortgage-backed securities.

Allstate is seeking to recover the lost market value of the securities, as well as principal and interest payments, according to complaints filed Feb. 18 in New York state Supreme Court in Manhattan.

The insurer said it bought more than $200 million of the securities, backed by residential mortgages, from the Citigroup defendants and about $185 million from the Deutsche Bank units after relying on misrepresentations and omissions regarding underwriting standards, owner occupancy data and loan-to-value ratios.

“Allstate was made to believe it was buying highly rated, safe securities,” the Northbrook, Illinois-based company said in its complaint against New York-based Citigroup. “Defendants knew the pools were toxic mixes of loans extended to borrowers who could not afford the properties and thus were highly likely to default.”

Alexander Samuelson, a Citigroup spokesman, and Scott Helfman, a spokesman for Frankfurt-based Deutsche Bank, declined to immediately comment.

Allstate, which accuses the banks of common-law fraud and negligent misrepresentation, filed a similar complaint Feb. 15 against JPMorgan Chase & Co. over $700 million of mortgage- backed securities.

The cases are Allstate Insurance Co. v. Ace Securities Corp., 650431/2001, and Allstate Insurance Co. v. Citimortgage Inc. 650432/2011, New York state Supreme Court (Manhattan).

Viking Global Sues Porsche Over Short-Selling Losses

Viking Global Investors sued Porsche Automobil Holding SE over short-selling losses, claiming Porsche misrepresented its plans to take over Volkswagen AG, causing the New York hedge fund run by Andreas Halvorsen $390 million in losses.

The New York state court suit follows others that accuse Porsche of deceiving investors by denying through much of 2008 that it intended to acquire Volkswagen. Porsche said on Oct. 26, 2008, that it controlled most of Volkswagen’s common stock, causing the shares to surge as short-sellers raced to cover their positions.

Now that VW shares have fallen back to levels last seen in 2007, the short sellers’ assessment of the value of the shares has proven correct, according to the complaint filed in state Supreme Court in Manhattan. German market regulators also have been investigating Porsche’s market manipulation and top executives have lost their posts and are the subject of an insider trading probe in Germany, according to the complaint.

“All of this is of little solace for Viking, however, which lost at least $390 million terminating and/or hedging its short positions in the two days following Porsche’s surprise announcement,” Viking Global said in the complaint. Viking Global made similar claims in a complaint filed Oct. 22 in federal court in Manhattan.

A spokesman for the automaker couldn’t be reached Feb. 18 after regular business hours.

The case is Viking Global Equities v. Porsche Automobil, 650435/2011, New York state Supreme Court (Manhattan).

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Lawsuits/Pretrial

Barclays Added as Defendant in Del Monte Shareholders Lawsuit

Del Monte Foods Co. shareholders added Barclays Capital, the company’s financial adviser, to a lawsuit seeking to stop a $5.3 billion takeover led by KKR & Co.

The shareholders’ law firm, Grant & Eisenhofer, told the Delaware Chancery Court of the move in a Feb. 18 letter. Also that day, Del Monte said it will seek takeover offers following a Delaware judge’s decision to delay the deal. Barclays had a conflict in handling the auction of the company because it also helped finance the KKR-led offer, the judge said.

Barclays said in an e-mailed statement that its sale process included 53 potential buyers for Del Monte and didn’t yield a higher price. The $19 a share price is 40 percent more than the average trading price for the three months prior to the possibility of a sale becoming public, Barclays said.

“We look forward to the opportunity to set the record straight in court,” Barclays said. “Barclays Capital was not named as a defendant when the Delaware Chancery Court made its preliminary ruling on February 14, and as a result, has not had the opportunity to provide the court with all of the facts relating to its work for Del Monte or refute the plaintiffs’ version of events.”

The ruling by Judge J. Travis Laster postponed a shareholder vote of the KKR deal until March 7. Del Monte was sued in December by a shareholder seeking more than the $19 a share offered. A buyout would give New York-based KKR access to Del Monte’s pet-food business, which has more than doubled sales in the past four years.

The case is In re Del Monte Foods Co. Shareholder Litigation, CA6027, Delaware Chancery Court (Wilmington).

U.S. Said to End Criminal Investigation of Mozilo

The U.S. Justice Department has ended a criminal investigation of former Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo and won’t bring charges, a person familiar with the investigation said.

The person asked not to be identified because the investigation hadn’t been made public.

The Federal Bureau of Investigation started a probe of possible securities fraud at the mortgage lender in 2008, people familiar with the case said at the time. Mozilo, 72, last year agreed to pay $67.5 million to settle a U.S. Securities and Exchange Commission lawsuit accusing him of misleading investors.

Brendan Sullivan, a lawyer for Mozilo, didn’t return a call to his office outside regular business hours.

The SEC sued Mozilo and two other former Countrywide executives in June 2009. The agency said the three publicly reassured investors about the quality of Countrywide’s loans while knowing that the lender was fueling its growth at least since the beginning of 2005 by letting its underwriting guidelines deteriorate, and by originating an increasing number of risky subprime loans.

Mozilo’s penalty was the biggest ever to be paid by a senior executive of a publicly traded company in an SEC settlement, the agency said last year.

The SEC alleged that Mozilo sold $140 million in Countrywide shares from November 2006 through October 2007 at an inflated price because he hadn’t disclosed the increasing risk he knew the company faced from defaulting mortgages.

Mozilo, along with former Countrywide Chief Operating Officer David Sambol, also agreed to a $6.5 million settlement to resolve a predatory lending lawsuit filed by California, state Attorney General Kamala Harris said Feb. 2 in a statement.

BP Says Feinberg Fund ‘Exceeds’ Law Requiring Spill Payments

BP Plc’s $20 billion oil-spill damages fund, run by Kenneth Feinberg, “far exceeds” the company’s legal obligations to compensate victims of the worst offshore oil spill in U.S. history, company lawyers said in a court filing.

U.S. District Judge Carl Barbier of New Orleans, who is overseeing more than 350 lawsuits seeking damages for economic and personal injuries from the BP oil spill, asked for opinions on whether the company is doing enough to satisfy a U.S. law requiring a party responsible for an oil spill to compensate victims.

BP is doing everything it’s legally required to do and more, through Feinberg’s Gulf Coast Claims Facility, the company’s lawyers said Feb. 18 in a filing.

“That there may be different ways to run a claims process does not mean that the GCCF’s chosen methods fail to comply” with the law, Don Haycraft, one of BP’s lawyers, said in the filing. The statute “does not give claimants, or the attorneys general, any right to demand judicial involvement in or modification of the claims process.”

The BP claims process isn’t working, public officials from Gulf Coast states and lawyers suing the company said in opposing filings with the court. Mississippi Attorney General Jim Hood asked Barbier in a filing Feb 18 to appoint the Gulf Coast state attorneys general or other independent watchdogs to monitor Feinberg’s claims-payment facility, which Hood said “is operating without sufficient oversight.”

BP has used Feinberg’s claims-payment facility to “avoid court oversight and to evade adherence to the mandates” of the Oil Pollution Act of 1990, which governs payment for offshore spill damages, Hood said in the filing.

The case is In Re. Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, MDL-2179, U.S. District Court, Eastern District of Louisiana (New Orleans).

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Credit Suisse Can Be Sued by Resort Owners in Montana, Idaho

Property owners at upscale resorts in Montana and Idaho can sue Credit Suisse Group AG for $24 billion over allegations the bank made predatory loans so it could take over the resorts when the debts couldn’t be repaid.

U.S. Magistrate Judge Ronald Bush in Boise, Idaho, refused to throw out negligence, conspiracy and breach of fiduciary duty claims, according to a recommendation and report filed Feb. 17. Bush dismissed fraud, misrepresentation and unjust enrichment claims against Credit Suisse while giving property owners an opportunity to renew those claims by adding details to the lawsuit. The bank and real estate brokerage Cushman & Wakefield Inc., also a defendant in the case, won dismissal of racketeering claims.

The lawsuit was filed in January 2010 on behalf of 3,000 investors who bought land or homes at four developments, including Tamarack Resort in Idaho and the luxury Yellowstone Club in Montana.

“We welcome the magistrate judge’s recommendations that many of plaintiffs’ claims should be dismissed,” Duncan King, a Credit Suisse spokesman, said in an e-mailed statement. “We remain confident that the remaining claims are without merit and intend to vigorously defend against them.”

Dwayne Doherty, a Cushman & Wakefield spokesman, didn’t immediately return a voice mail message left after regular business hours Feb. 17.

The case is Gibson v. Credit Suisse, 10-00001, U.S. District Court, District of Idaho (Boise).

Oracle Wins Court Review of U.S. Sharing Lawsuit Data (Update1)

Oracle Corp., the world’s second-biggest software maker, won a ruling that forces the U.S. to seek court permission before giving state prosecutors company data collected in a whistleblower lawsuit.

U.S. Magistrate Judge Thomas Rawles Jones in Alexandria, Virginia, said Feb. 18 that the Justice Department would have to show it had “good cause” for sharing any of Oracle’s confidential information with the states to get his approval.

“But if you show there was a violation of state law and you ask us to allow that, it’s difficult to imagine that I wouldn’t give you authority to do that,” Jones said during the hearing. “Another trip to court is a small price to pay to make sure it happens the right way.”

Oracle is accused in a U.S. lawsuit of overcharging the government on software contracts worth $1 billion.

“We’re pleased with the court’s ruling,” said Oracle lawyer Drew Harker of Arnold & Porter LLP in Washington.

David Wiseman, a lawyer for the Justice Department, declined to comment on the decision.

Lawyers specializing in whistleblower cases said Oracle’s bid to shield documents from state governments may be an attempt to limit the company’s liability, which lawyers not involved in the case estimate to be as much as $1 billion in the U.S. suit alone.

The lawsuit was filed under the False Claims Act in 2007 by Paul Frascella, a former Oracle employee, and joined by the Justice Department on July 29. The act lets citizens sue on behalf of the government and share in any recovery, while the government has the option of intervening in a case. The U.S. is seeking triple damages and can collect as much as $11,000 for each false billing.

The case is U.S. v. Oracle Corp., 07-cv-00529, U.S. District Court, Eastern District of Virginia (Alexandria).

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Bloxham Must Defend Swaps Suit by Nuns With Morgan Stanley

Irish brokerage firm Bloxham must defend a lawsuit filed by nuns, a veterinary fund and 85 other investors claiming they lost money when Morgan Stanley failed to sell notes soon enough after they were downgraded.

Judge Elizabeth Gloster in London Feb. 18 granted a request by Morgan Stanley’s lawyer, Laurence Rabinowitz, to add Bloxham as a defendant to the lawsuit. She separately declined the plaintiffs’ request to order the bank to hand over more evidence, saying it was “not right to put the onus on the defendants at this stage.”

The Sisters of Charity of Jesus and Mary, the Holy Faith Sisters, the Irish Veterinary Benevolent Fund and other individual investors sued Morgan Stanley and Saturns Investments Europe Plc, a special-purpose vehicle set up by the New York- based bank, in August.

The investors bought 5.88 million euros ($8 million) of the notes through Bloxham in 2005 and 2006, according to the lawsuit. The claimants said Morgan Stanley “deliberately or carelessly failed to redeem the notes” when they were downgraded to junk status in January 2009, allowing Morgan Stanley to reap a profit for itself.

Morgan Stanley and Saturns waited until June 2009, after the price of underlying bonds had risen significantly, to redeem the notes in which the nuns invested, according to the suit. Waiting secured for “Morgan Stanley a profit of at least $11.2 million on the sale of the notes by way of a termination payment,” lawyers for the nuns said in the lawsuit. The notes were sold to “a related Morgan Stanley entity” at a profit.

A call and e-mail to Bloxham seeking comment weren’t immediately returned.

The case is The Sisters of Charity of Jesus and Mary & ors v. Morgan Stanley & Co., 2010/960, High Court of Justice, Queen’s Bench Division (London).

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Trials/Appeals

Cop-Turned-Judge Challenges Banks to Clear Foreclosure Backlog

Judge Israel Reyes is giving the biggest U.S. banks a choice: Wrap up the home foreclosure cases clogging his Miami court, or dismiss them and walk away. Most are walking away, Bloomberg News’ David McLaughlin reports.

“Listen, it’s either settlement or trial today. That’s it,” Reyes, 51, a former homicide detective, said two weeks ago to one lawyer who sought an extension after the homeowner received a temporary loan modification. “This case is over a year old.”

Reyes, a judge for Florida’s 11th Judicial Circuit, is forcing banks to take their cases to trial to clear his backlog of almost 3,000 foreclosures. Instead of moving ahead, the companies are backing down. They’re dismissing their own cases or not showing up to trial because they’re not prepared or, according to lawyers for homeowners, they can’t come up with the evidence required to seize the properties.

Meanwhile, foreclosure activity across the U.S. is plummeting. Default notices, scheduled auctions and bank repossessions affected about 261,000 properties in the U.S. in January, a 17 percent decrease from a year earlier, according to RealtyTrac Inc. Lenders are “bogged down” reviewing foreclosure procedures and grappling with accusations of improper home seizures, RealtyTrac said in a Feb. 10 statement.

Florida’s foreclosure rate -- the proportion of housing units in foreclosure or bank-owned -- dropped 54 percent from a year ago, according to Irvine, California-based RealtyTrac, which collects foreclosure data.

Foreclosures in Florida are typically approved at the summary judgment stage, before trial. At trial, a bank that’s unprepared to prove its case risks losing. Banks can voluntarily dismiss a case once and refile it. Generally, a second dismissal is final and the case can’t be refiled, preventing the lender from seizing the home, according to Mike Wasylik, a Florida attorney who defends homeowners in foreclosure cases.

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Court Upholds Regulator Appeal Against Fortescue

An Australian court ruled Fortescue Metals Group Ltd. and its Chief Executive Officer Andrew Forrest misled investors over iron ore project accords with China, upholding an appeal from the corporate regulator.

Forrest and Fortescue have to pay the costs of the appeal by the Australian Securities and Investments Commission, or ASIC, according to a faxed copy of the court orders Feb. 18 by three judges of the Federal Court of Australia. The judges overturned a Dec. 23, 2009, judgment in favor of Forrest and his Perth-based company, who both denied the allegations.

The regulator had alleged Forrest and Fortescue engaged in misleading and deceptive conduct in 2004 by overstating agreements with three Chinese companies for the development of its A$2.8 billion ($2.84 billion) ore project. Forrest also had breached duties as a director, the regulator claimed.

“There’s been no decision from the Federal Court in relation to penalties, that will be dealt with at a later date,” Emma Forhan, a spokeswoman for ASIC said Feb. 18 by phone. Forrest faces possible penalties, including being barred as a director and paying a fine.

Fortescue and Forrest contravened parts of the Corporations Act 2001, according to the Feb. 18 ruling. The matter will be sent back to a federal court judge, it said.

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Verdicts/Settlement

BOC Hong Kong Manager Cleared of Lehman Products Fraud

A BOC Hong Kong (Holdings) Ltd. manager was found not guilty of fraudulently or recklessly inducing her retail banking customers to buy structured products linked to Lehman Brothers Holdings Inc.

Judge Garry Tallentire said in his verdict delivered in Hong Kong’s District Court Feb. 18 that he found the banker Cheung Kwai-kwai honest and some of the witnesses for the prosecution unreliable.

The Hong Kong case underscores how the fallout from the biggest bankruptcy in U.S. history continues to ripple around the world, three years after Lehman collapsed with $613 billion in liabilities. About 43,000 investors in Hong Kong bought an estimated $1.8 billion of equity-linked notes known as minibonds that were connected to Lehman and sold by commercial banks.

Cheung, 48, warned customers that they risked losing their investments in the custom-made securities, which lost their value after Lehman’s bankruptcy in 2008, Peter Duncan, her lawyer, had told the court.

Jonathan Man for the prosecution declined to comment on whether the government would appeal.

Angel Yip, a BOC Hong Kong spokeswoman, said last month Cheung is still employed by the bank. Another employee charged for the same offense, Tai Ching, is scheduled to be tried next month.

“We are disappointed,” said Chan Ho-wai of a group called the Alliance of Lehman Brothers Victims after the verdict. They will continue to seek to recover their money, he said.

The case is Hong Kong SAR v. Cheung Kwai Kwai, DCCC526/2010, in Hong Kong District Court.

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Rabbi in SAC Extortion Plot Sentenced to 4 Years in Prison

Milton Balkany, a Brooklyn, New York, rabbi, was sentenced to four years in prison for trying to extort $4 million from Steven Cohen’s SAC Capital Advisors LP.

U.S. District Judge Denise Cote sentenced Balkany Feb. 18 in Manhattan. Balkany, 64, was convicted by a federal jury in November of extortion, blackmail and other charges. His defense attorney, Alan Kaufman, had asked for leniency.

“Just because you lead a charitable institution doesn’t give you a pass to commit extortion and fraud,” Cote told Balkany in court.

At the trial, prosecutors said the rabbi, who was dean of the Bais Yaakov day school in the Borough Park neighborhood in Brooklyn, told the Stamford, Connecticut-based hedge fund that he was the spiritual adviser to a federal prisoner in Otisville, New York, who could implicate the fund in wrongdoing. Balkany then called prosecutors in an attempt to put pressure upon SAC to further his scheme.

The case is U.S. v. Balkany, 10cr441, U.S. District Court, Southern District of New York (Manhattan).

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Litigation Departments

Merck Vioxx Accord Spawns Pay-Day Scrap Among Lawyers

Plaintiffs’ lawyers involved in Merck & Co.’s $4.85 billion Vioxx settlement are accusing some of their colleagues of attempting to hog the lion’s share of more than $315 million in fees spawned by the accord.

Attorneys who lead a court-appointed committee that allocates fees are arbitrarily deciding fee awards, with a small number of firms getting a rate of $2,205 an hour for their work while others are assigned a $21 hourly rate for handling depositions of witnesses and poring through records, objecting lawyers contend in court filings in New Orleans.

Objectors like Turner Branch contend the committee’s division of the Vioxx fees “is unjustified, inexcusable, and lacking any rational basis,” according to a Feb. 9 court filing. Branch, a New Mexico-based plaintiffs’ attorney, is seeking $3.9 million in fees. The committee initially awarded him about $281,000, yet listed zero in its recommendation to the judge, according to court filings. Branch didn’t return a phone call seeking comment.

Merck won 11 of 16 Vioxx lawsuits that went to trial before agreeing in November 2007 to settle almost 50,000 claims of users who blamed the drug for heart attacks and strokes. Lawyers who worked on a consolidation of Vioxx cases before U.S. District Judge Eldon Fallon in New Orleans are slated to split $315.3 million in fees for their work on the cases.

Fallon, who is overseeing all Vioxx cases filed in federal courts around the U.S., Feb. 17 appointed a special master to oversee the fee split submitted last month by the so-called Vioxx Fee Allocation Committee, said Mark Lanier, a Houston- based plaintiffs’ attorney. The committee, appointed by Fallon, includes lawyers representing nine of the 109 firms in the settlement pool.

The case is Vioxx Products Liability Litigation, MDL-1657, U.S. District Court, Eastern District of Louisiana (New Orleans).

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On the Docket

Allen Stanford Receiver to Argue for SocGen Subpoena Feb. 28

Lawyers for R. Allen Stanford’s U.S. court-appointed receiver are scheduled to appear with those for a Societe Generale unit before a federal judge to resolve a dispute over subpoenaed records.

U.S. District Judge David Godbey in Dallas set a hearing for Feb. 28 to address the disagreement between the Lausanne, Switzerland-based unit of the Paris-based bank and the receivership overseeing the indicted financier’s businesses.

Citing Swiss banking secrecy laws, Societe Generale Private Banking (Suisse) SA has objected to receiver Ralph Janvey’s Dec. 13 subpoena demanding that the bank turn over all of its records after Jan. 1, 2000, for accounts held by Stanford personally or by his businesses.

“Production of the requested documents would force SG Suisse and its officers and employees to violate Swiss substantive law,” including laws prohibiting the release of the type of records Janvey seeks, the bank said in a Feb. 7 court filing.

Stanford, 60, is civilly and criminally accused by the U.S. of leading a $7 billion investment-fraud scheme through the sale of certificates of deposit by his Antigua-based Stanford International Bank Ltd. He has denied any wrongdoing.

The U.S. Securities and Exchange Commission filed its enforcement proceeding against the Texas financier two years ago Feb. 18. The receivership is recovering money to repay Stanford’s investors and creditors.

The SEC case is Securities and Exchange Commission v. Stanford International Bank Ltd., 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas). The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston).

Rajaratnam Judge to Submit Questionnaire on March 2

The judge overseeing the insider-trading trial of Galleon Group LLC co-founder Raj Rajaratnam will distribute a questionnaire to 300 prospective jurors on March 2.

U.S. District Judge Richard Holwell in Manhattan said in an order filed Feb. 18 that prospective panelists must complete the questionnaire that day, and that prosecutors and defense lawyers will have 24 hours to review the responses to determine who should be excused from the jury.

The questionnaire will focus on the potential “hardship” to jurors asked to serve in a trial that may last several months. Rajaratnam also wanted jurors to be asked whether they are biased against Wall Street professionals.

Rajaratnam is accused of earning $45 million by trading on illegal tips from traders, corporate insiders and others. He denies wrongdoing.

Holwell said he will hold a hearing on March 3 “regarding any proposed excusal to which the other party does not agree.” The trial is scheduled to begin on March 8.

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

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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