Harding Advisory, Citibank, NYSE, SocGen in Court News

Author Michael Lewis was sued by Wing Chau, president and principal of Harding Advisory LLC, who accused the writer of defaming him in his 2010 book “The Big Short: Inside the Doomsday Machine.”

Chau, a manager of collateralized debt obligations, according to a complaint filed Feb. 25 in Manhattan federal court, claims the book unfairly casts him as one of the “villains” responsible for the 2008 financial collapse.

The book “depicts Mr. Chau as someone who ignored his professional responsibilities, made misrepresentations to investors, charged money for work that was not performed, had no stake in the CDOs he managed, was incompetent or reckless in carrying out his responsibilities, and violated his fiduciary duties by putting the interests of ‘Wall Street bond trading desks’ above those of his investors,” according to the complaint.

Also named in the suit, which seeks unspecified damages, are the book’s publisher, W.W. Norton & Co., and Steven Eisman, managing director of FrontPoint Partners LLC, whom Chau describes in the complaint as “one of the principal sources Lewis relied on in writing ‘The Big Short.’”

Lewis, a columnist for Bloomberg News, had no comment on the suit. Norton spokeswoman Elizabeth Riley had no immediate comment

The case is Chau v. Lewis, 11-cv-1333, U.S. District Court, Southern District of New York (Manhattan).

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NYSE, Deutsche Boerse Sued by Louisiana Fund Over Sale

NYSE Euronext, the parent company of the New York Stock Exchange, was sued by the Louisiana Municipal Police Employees’ Retirement System in an effort to stop a planned $9.53 billion sale to Deutsche Boerse AG.

The proposed deal, which would create the largest owner of equities and derivatives markets, won’t offer a fair price to NYSE’s public shareholders, the Louisiana pension fund said in a class-action complaint filed Feb. 25 in New York State Supreme Court in Manhattan. The suit also names Deutsche Boerse and the NYSE’s board as defendants.

“In light of defendants’ breach of their fiduciary duties in agreeing to an unreasonably low price for the sale of the NYSE and agreeing to unreasonable and draconian deal protections,” shareholders are “entitled to enjoin the proposed transaction or, alternatively, to recover damages in the event the proposed transaction is consummated,” according to the complaint.

Eric Ryan, a spokesman for NYSE, declined to comment yesterday. Naomi Kim, a spokeswoman for Deutsche Boerse, had no immediate comment.

The case is Louisiana Municipal Police Employees’ Retirement System v. NYSE Euronext, 650537-2011, New York State Supreme Court (Manhattan).

Massey West Virginia Mine Security Chief Charged, U.S. Says

The chief of security at the Massey Energy Co. West Virginia coal mine where an explosion killed 29 workers last year was charged with obstructing justice and making false statements to U.S. agents.

A federal grand jury’s two-count indictment against Hughie Elbert Stover, returned on Feb. 25, was unsealed yesterday as he made his initial appearance before U.S. Magistrate Judge R. Clarke VanDervort in Beckley, West Virginia. He will be arraigned on March 15.

Stover, 60, of Clear Fork, West Virginia, is accused of lying to an FBI agent and a U.S. Mine Safety and Health Administration investigator about whether he instructed security guards at the Upper Big Branch mine to announce the arrival of safety inspectors. He also allegedly ordered the disposal of security-related documents in January.

Stover’s lawyer, William Wilmoth of Steptoe & Johnson, declined to comment on the charges against his client.

“The company takes this matter very seriously and is committed to cooperating with the U.S. Attorney’s office,” Shane Harvey, Massey’s general counsel, said in an e-mailed statement.

The case is U.S. v. Stover, 11-cr-38, U.S. District Court, Southern District of West Virginia (Beckley).

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Lawsuits/Pretrial

MBIA Shareholder Lawsuit Reinstated by U.S. Appeals Court

MBIA Inc. must face a shareholder lawsuit that accuses the bond insurer of misleading investors about a 1998 transaction, an appeals court ruled in reinstating the case.

The 2nd U.S. Circuit Court of Appeals in New York yesterday reversed a 2007 ruling by U.S. District Judge Louis Stanton, who had dismissed the lawsuit, saying that the plaintiffs waited too long to file it. The statute of limitations expired because investors had notice of alleged wrongdoing in 2002, Stanton ruled.

Under the district court’s analysis, “the statute of limitations period began to run more than six months before the first stock purchase giving rise to the class’s claims,” the appeals court said. “That cannot be.”

Investors led by Southwest Carpenters Pension Trust sued MBIA in 2005, saying the company improperly accounted for proceeds of the 1998 deal as income from reinsurance rather than as a loan. The accounting enabled Armonk, New York-based MBIA to overstate reported income from 1998 to 2003, according to the complaint in Manhattan federal court.

Yesterday’s ruling “remands the case back to the lower court and directs it to apply recent Supreme Court precedent when reconsidering our motion to dismiss,” Kevin Brown, a spokesman for MBIA, said in an e-mailed statement.

“It also directs the lower court to consider other multiple grounds on which we contended that the case should be dismissed. We remain confident that on reconsideration, the district court will once again dismiss this litigation,” Brown said.

Samuel Rudman, a lawyer for the plaintiffs, didn’t immediately return a voice-mail message left at his office seeking comment.

The case is In re MBIA Inc. Securities Litigation, 05- cv-3514, Southern District of New York (Manhattan).

Lehman’s Marsal, After $11 Billion Defeat, Faces Tough Path

Lehman Brothers Holdings Inc. Chief Executive Officer Bryan Marsal, after losing a court battle to recover an alleged $11 billion “windfall” from Barclays Plc, may face difficulties if he decides to appeal to a higher court, Bloomberg News’ Linda Sandler reports.

U.S. Bankruptcy Judge James Peck in Manhattan told Lehman last week he found no “willful misconduct” as Barclays bought defunct Lehman’s brokerage in the 2008 credit crisis. He awarded Lehman no money, concluding after more than 30 days of court testimony the sale was fair.

Under bankruptcy law, a district court must accept a bankruptcy’s judge’s findings of fact unless they are clearly erroneous. Marsal’s other option is to fight for some of the money Peck awarded on Feb. 22 to the trustee liquidating the remnants of the brokerage, as Lehman previously said it might do.

“It seems difficult for Lehman on both fronts,” said Stephen Lubben, a bankruptcy professor at Seton Hall University School of Law in Newark, New Jersey. “This will be a difficult ruling to appeal from, given that Judge Peck has so much discretion in a matter like this, and the trustee can argue that the funds that are left are for broker-dealer customers.”

Marsal said he still needs to review Peck’s decision with lawyers.

Michael O’Looney, a Barclays spokesman, said he couldn’t comment on the trustee’s calculations.

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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Citibank Agrees to Withdraw From MBIA Restructuring Suits

Citibank NA agreed to withdraw from lawsuits against MBIA Inc. challenging the bond insurer’s restructuring, according to a stipulation filed yesterday in New York state Supreme Court.

Eleven other institutions including UBS AG and Bank of America Corp. will continue legal action against MBIA. The banks are set to go before New York’s highest court on May 31 to argue why a lower court erred in throwing out a lawsuit in response to the restructuring. A second lawsuit by the banks, brought under New York’s Article 78 statute, also is pending in state court.

“Eleven global financial institutions remain committed to undoing MBIA’s illegal restructuring,” Sullivan & Cromwell LLP lawyer Robert Giuffra Jr., who represents the banks, said in an interview.

Citibank, a unit of Citigroup Inc., discontinued the proceedings with prejudice, according to the stipulation. Danielle Romero-Apsilos, a spokeswoman for the bank, declined to comment. Kevin Brown, a spokesman for Armonk, New York-based MBIA, also declined to comment.

The banks claim the restructuring, approved by New York’s insurance department in 2009, transferred $5 billion in cash and securities out of MBIA’s primary operating unit, MBIA Insurance Corp., to another entity now known as National Public Finance Guarantee Corp., according to court papers.

The banks claim the move left MBIA Insurance undercapitalized and possibly unable to pay out future claims.

The cases are ABN Amro Bank NV v. MBIA Inc., 601475-2009, and ABN Amro Bank NV v. Eric Dinallo, 601846-2009, New York state Supreme Court (Manhattan).

Morgan Stanley Loses Bid to Dismiss Taiwanese Bank Claims

Morgan Stanley lost a bid to dismiss fraud claims by Taipei-based China Development Industrial Bank, which seeks to recover losses from an investment tied to U.S. residential mortgage-backed securities.

The Taiwanese bank claims Morgan Stanley made an investment linked to U.S. subprime mortgage bonds in mid-2006 and “dumped those losses” on CDIB in April 2007 after learning of problems with the investment.

New York state Supreme Court Justice Melvin L. Schweitzer’s decision was posted yesterday on the state’s court filing system.

“CDIB has alleged in sufficient detail that Morgan Stanley knew the Supersenior Swap was a highly risky, if not troubled, investment and also that the ratings process which made it appear to be safe, or even more secure than a ‘AAA’ rated security, was deeply flawed,” Schweitzer wrote.

Pen Pendleton, a spokesman for Morgan Stanley, declined to comment on the decision.

CDIB claims it was fraudulently sold a $275 million interest in what the bank called the STACK 2006-1 Ltd., a hybrid collateralized debt obligation. CDOs are pools of assets such as mortgage bonds packaged into new securities.

CDIB said in its lawsuit it had lost $228 million on the transaction.

The case is China Development Industrial Bank v. Morgan Stanley, 650957/2010, New York state Supreme Court (Manhattan).

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Trials/Appeals

Drug Industry Rebuffed by Top U.S. Court on Sales Force Wages

The U.S. Supreme Court refused to insulate the drug industry from having to pay overtime to thousands of sales representatives, turning away appeals from units of Novartis AG and Merck & Co.

The companies sought to overturn a federal appeals court’s conclusion that their salespeople are covered by a federal wage- and-hour law. The decision against the Novartis unit leaves the company with claims of as much as $100 million on behalf of 2,500 past and current employees.

Drugmakers are facing a wave of suits by sales representatives for overtime pay. More than a dozen suits have been filed, including cases against Johnson & Johnson, Bristol- Myers Squibb Co. and a GlaxoSmithKline Plc unit. Drug companies have long treated sales representatives as exempt from the overtime requirements, according to court papers filed by an industry trade group.

The lower court ruling “threatens untold costs in unforeseen liability,” the Pharmaceutical Research and Manufacturers of America argued in the Novartis case.

The rulings by the New York-based 2nd U.S. Circuit Court of Appeals came in two separate suits -- one against Novartis Pharmaceutical Corp. and another against Merck’s Schering unit.

The cases are Schering v. Kuzinski, 10-459, and Novartis v. Lopes, 10-460, U.S. Supreme Court (Washington)

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Ford Pickup Suit Revived by U.S. High Court After Mazda Ruling

The U.S. Supreme Court injected new life into a suit against Ford Motor Co. brought by the mother of a South Carolina teenager killed in a 2002 pickup truck accident.

The justices yesterday told the South Carolina Supreme Court to reconsider its rejection of the suit, pointing to their Feb. 23 ruling allowing a claim against a Mazda Motor Corp. unit over seatbelt design.

Yesterday’s order hints at the potential impact of the Mazda ruling, which said automakers can be sued for not equipping back seats with shoulder straps, even if the manufacturers were in compliance with federal regulations.

In the South Carolina suit, Mary Robyn Priester blames Ford for the death of her son, James Lloyd Priester, who was crushed after being ejected from the back seat of a 1997 Ford F-150 pickup. Priester faults Ford for its use of tempered glass, contending that some form of advanced glazing would have prevented her son from being ejected.

The South Carolina Supreme Court said the suit was preempted by a federal safety regulation that permitted tempered glass as one of several options for side windows.

“The Priester case is vastly different from the Mazda case because it involves a different federal motor vehicle safety standard with a different regulatory record,” Kristen Kinley, a spokesman for Ford, said in an e-mail. “We think it is exactly the kind of case that the Supreme Court envisioned being preempted.”

The case is Priester v. Ford Motor Co., 10-668, U.S. Supreme Court (Washington).

Glaxo Seeks Billions in AIDS Drug Trial Against Abbott GlaxoSmithKline Plc lawyers, in a trial seeking billions of dollars in damages, told jurors that Abbott Laboratories had an illegal monopoly over HIV drugs.

Glaxo’s lawyers made their opening statements to jurors yesterday in federal court in Oakland, California. In a trial expected to last three weeks, Glaxo, Rite Aid Corp. and drug distributors seek an award of triple their damages in the case.

Abbott, in December 2003, quadrupled the price of its AIDS medicine Norvir, a boosting agent for other HIV medicines such as Abbott’s Kaletra. The price increase meant that other drugmakers that used Norvir in their medicines couldn’t compete on price with Kaletra, said Brian Hennigan, a Glaxo attorney.

“Why was a price increase taken?” Hennigan asked jurors. “To stop competition from Glaxo.”

The higher cost also penalized drug customers such as Rite Aid that wanted to buy medicines that competed with Kaletra, lawyers for Rite Aid and other drug distributors said in court filings.

Abbott denies wrongdoing in the lawsuit. It has said the price increase for Norvir was fair. The company, based in Abbott Park, Illinois, contends there was strong competition for HIV drugs and Kaletra had only 30 percent of the market for such drugs.

The case is SmithKline Beecham Corp. v. Abbott Laboratories, 07-5702, U.S. District Court, Northern District of California (Oakland).

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Verdicts/Settlements

Ex Societe Generale Trader Gets 3 Years in Prison for Theft

Former Societe Generale SA trader Samarth Agrawal was sentenced to three years in prison for stealing the bank’s high- speed trading software.

A federal jury in Manhattan in November found Agrawal, 27, guilty of theft of trade secrets and transporting stolen property in interstate commerce after a two-week trial. U.S. District Judge Jed S. Rakoff sentenced him at a hearing yesterday.

At trial, Agrawal testified under questioning by his own lawyer that he shared information about Societe Generale’s trading software with a Manhattan hedge fund, Tower Research Capital LLC, where he hoped to create a similar system. Rakoff said at the time that he was “puzzled” by Agrawal’s testimony and that he assumed it was part of a “sympathy defense.”

Agrawal also testified that his superiors at Societe Generale encouraged him to work at home because spending too many nights and weekends in the office would raise “red flags” for company security. He said that was why he printed copies of the computer codes in June 2009 to study at home.

The case is U.S. v. Agrawal, 10-cr-00417, U.S. District Court, Southern District of New York (Manhattan).

Elan Pleads Guilty as Part of $203 Million Accord on Zonegran

A unit of Elan Corp., the Irish drugmaker, pleaded guilty yesterday as part of an agreement to pay $203 million to resolve U.S. criminal and civil investigations into the illegal marketing of the epilepsy medicine Zonegran.

Elan Pharmaceuticals Inc. pleaded guilty in federal court in Boston to a misdemeanor violation of the Food Drug and Cosmetic Act and was sentenced to a fine of $97 million and must forfeit $3.6 million. The company previously agreed to pay $102 million to resolve civil allegations under the False Claims Act.

After the Food and Drug Administration approved Zonegran in 2000 for treatment of epileptic seizures in adults over age 16, Dublin-based Elan promoted the drug for uses including mood stabilization, bipolar disorder, migraine headaches, weight loss and seizures in children, according to prosecutors.

“Elan deliberately chose to prioritize profit over its obligation to the FDA and consumers,” U.S. Attorney Carmen M. Ortiz said in a statement. “Today’s plea and sentencing should serve as a reminder to any company engaging in off-label marketing schemes that the government is continuing to aggressively investigate and prosecute companies.”

Elan entered into a corporate-integrity agreement with the inspector general of the Health and Human Services Department. It also settled a whistleblower lawsuit filed in 2004 under the False Claims Act by Lee Chartock, a Massachusetts physician. The law allows private citizens to sue on behalf of the government and share in any recovery.

A spokesman for Elan, Paul McSharry, didn’t immediately return a call seeking comment.

The case is United States ex rel. Lee Chartock v. Elan Corp., 04-cv-11594, U.S. District Court, District of Massachusetts (Boston).

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Litigation Departments

Former SEC Lawyer Says Ethics Counsel Allowed His Madoff Work

David M. Becker, the former chief Securities and Exchange Commission lawyer being sued for inheriting money linked to Bernard Madoff’s Ponzi scheme, said he didn’t recuse himself from Madoff-related matters at the SEC on advice from the ethics counsel.

Becker, whose latest two-year stint as the SEC’s chief counsel ended Feb. 25, wrote the same day in a letter to U.S. House Republicans that he had consulted with the SEC’s ethics counsel at least twice about work related to Madoff. He said he had no recollection of having any contact with the imprisoned money manager.

Becker, 63, and his brothers inherited about $2 million from his parents’ Madoff account after their mother’s death in 2004. Irving H. Picard, the bankruptcy court trustee unwinding Madoff’s business, is seeking to recover about $1.5 million, which he alleges is fraudulent profit.

John Nester, a spokesman for the SEC, declined to comment on Lenox’s advice to Becker.

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Ex-McGuireWoods Lawyer Gets Three-Year Term in PIPEs Case

Louis Zehil, a former lawyer at McGuireWoods LLP who pleaded guilty to securities fraud for trading unregistered private-placement shares of companies that belonged to his clients, was sentenced to three years in prison.

Zehil was charged by federal prosecutors with illegally trading shares in seven companies for which he helped structure private investment in public equity, or PIPE, transactions, between January 2006 and February 2007, according to the charging document in his case. He was sentenced yesterday by U.S. District Judge Deborah Batts in New York federal court.

PIPE shares can’t be publicly traded until they’re registered with the U.S. Securities and Exchange Commission. Zehil bought his clients’ shares in the private placements and sold them into the market before they were registered. At a hearing last year he admitted that he told the issuers’ transfer agents to label as unrestricted the stock going to his two entities. The stock to the other investors was labeled as restricted.

Zehil bought the shares through two entities, Strong Branch Ventures IV LP and Chestnut Capital Partners II LLC, which he and his wife controlled and ran out of their house in Ponte Vedra Beach, Florida, according to an SEC complaint, which alleged he made $17 million in illegal profits.

McGuireWoods is a 900-attorney law firm in Richmond, Virginia. The firm said it alerted its clients to Zehil’s trades when it learned about them and cooperated with federal officials in their investigations.

Andrew Lawler, a lawyer for Zehil, didn’t immediately return an e-mail sent to him after regular business hours seeking comment.

The case is U.S. v. Zehil, 07-cr-659, 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: John Pickering at jpickering@bloomberg.net

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