Gupta, Goldman Sachs, Morgan Stanley, Galleon in Court News

A 2008 conversation between then- Goldman Sachs Group Inc. (GS) Director Rajat Gupta and Galleon Group LLC co-founder Raj Rajaratnam about the bank’s talks on buying Wachovia Corp. or AIG Inc. isn’t enough to support prosecuting Gupta for insider trading, several lawyers said.

Prosecutors in the trial of Rajaratnam this week played a tape of the call in which the former Goldman Sachs board member chatted casually with the hedge fund manager about the discussions. It’s the only tape the government will use in court that includes Gupta, said a person familiar with the case.

The exchange, along with additional government allegations divulged in recent weeks, isn’t a smoking gun that shows Gupta meant to break the law, said Tom Dewey, a lawyer at New York’s Dewey Pegno & Kramarsky LLP. Gupta is the subject of an administrative action by the Securities and Exchange Commission; the SEC hasn’t sued him in district court and no criminal charges have been brought against him.

“If they were interested in criminally charging him, they would have done it by now,” said Richard Scheff, chairman of Philadelphia-based Montgomery, McCracken, Walker & Rhoads LLP. Scheff, who practices criminal law and isn’t involved in the case, called the prospect of charges “unlikely.”

The SEC action filed March 1 accused Gupta of leaking stock tips to Rajaratnam. Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara in New York, and Anne Granfield, a spokeswoman for Gupta, declined to comment on the prospect of criminal charges against him. John Nester, an SEC spokesman, declined to comment.

U.S. District Judge Jed Rakoff in Manhattan, who oversees a related SEC lawsuit against former Galleon trader Adam Smith, said March 16 that the agency’s decision to file only an administrative action, and not a civil suit, was “bizarre.”

Gupta’s name has been mentioned almost daily at the Rajaratnam trial since it started March 8. Rajaratnam is accused of earning $45 million by using illegal tips from traders, corporate insiders, and others including Gupta, the former worldwide director of McKinsey & Co. He faces as many as 20 years in prison if convicted on the most serious charges.

The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

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New Suits

Goldman Sachs Engaged in Fraud, Korean Life Insurer Claims

Goldman Sachs Group Inc. hid from the South Korean Heungkuk Life Insurance Co. that it had bet against the viability of a collateralized debt obligation the bank sold as safe, according to a lawsuit filed in New York.

The insurer seeks more than $47.3 million in damages from the New York-based banking firm, according to its 56-page complaint accusing Goldman Sachs of fraud and negligent misrepresentation.

“Goldman had utilized its specialized knowledge of the subprime mortgage market to make a massive, concealed bet against the very CDO that it sold to Heungkuk,” the insurer said in its complaint.

The complaint focuses on the bank’s Timberwolf I CDO Ltd., a $1 billion CDO Heungkuk claims was marketed as “highly rated, secure and profitable.”

Timberwolf was called “one shitty deal,” by a bank executive in a 2007 internal e-mail written eight days after the Heungkuk investment, according to the complaint. The e-mail by now-former Goldman executive Thomas Montag was released publicly by U.S. Senate lawmakers last year.

Michael DuVally, a spokesman for the New York-based investment bank, yesterday declined to comment on the Heungkuk case.

The case is Heungkuk Life Insurance Co. v. The Goldman Sachs Group Inc., 11cv1856, U.S. District Court, Southern District of New York (Manhattan).

Morgan Stanley (MS) Sued by Employees for Stock-Plan Losses

Morgan Stanley, the sixth-largest U.S. bank by assets, was sued by employees who alleged their stock-option and retirement- savings plans sustained losses in 2008 because the company invested too heavily in its own shares.

G. Kenneth Coulter of Florida and five other participants in the plans said in a complaint in Manhattan federal court that the New York-based bank and its directors breached their fiduciary duty by failing to manage the plans’ assets and by not providing accurate information.

At the end of 2007, the plans held about $2.2 billion worth of Morgan Stanley stock, according to the complaint. The value of the company stock in the plans fell to about $673 million by the end of 2008, the plaintiffs said. The plaintiffs are seeking proceed on behalf of employees who participated in the plans from Jan. 2, 2008, to Dec. 31, 2008.

Mark Lake, a spokesman for Morgan Stanley, declined to comment on the lawsuit, which is related to a class-action suit filed in federal court in New York in 2007 being presided over by U.S. District Judge Deborah Batts.

The case is Coulter v. Morgan Stanley, 11-cv-1849, U.S. District Court, Southern District of New York (Manhattan).

US Bancorp (USB) Sued Over Mortgage-Backed Securities Losses

US Bancorp, the fifth-biggest U.S. commercial bank by deposits, was sued by an insurer over $47 million in losses tied to investments in mortgage-backed securities.

Woodmen of the World, an Omaha, Nebraska-based insurer, contends a trust overseen by US Bancorp improperly invested in asset-backed commercial paper and mortgage-backed securities, which plummeted in value during the 2008 economic crisis, according to a lawsuit filed in Delaware Chancery Court.

“The tale of wrongdoing in this action is as simple and old-fashioned as a frontier stagecoach heist,” the insurer said in the 42-page complaint filed March 15. “Once these investments turned bad, defendants took steps to protect themselves” at the insurer’s expense, the suit contends.

“U.S. Bank believes strongly that it acted properly in the management of that portfolio and performed its services in accordance with our prescribed duties,” Steve Dale, a spokesman for the bank, said in an e-mailed statement.

The Delaware case is Woodmen of the World Life Insurance Society v. US Bancorp, 6260-CC, Delaware Chancery Court (Wilmington).

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FDIC Sues Ex Washington Mutual CEO Killinger for Bank Losses

Former Washington Mutual Inc. (WAMUQ) Chief Executive Officer Kerry Killinger and ex-Chief Operating Officer Stephen Rotella took extreme risks with the bank’s home loans portfolio, causing billions of dollars in losses, the Federal Deposit Insurance Corp. said in a complaint.

Rotella, Killinger and David Schneider, Washington Mutual’s home loans president, showed reckless disregard for the bank’s long-term safety and instead focused on short-term gains to increase their compensation, the FDIC said in the complaint filed March 16 in federal court in Washington. The agency seeks unspecified damages and an order freezing the assets of Killinger and Rotella and their wives.

The trio “should be held accountable for the losses that the bank suffered as a result of their negligence, gross negligence and breaches of fiduciary duty in mismanaging the risks of WaMu’s HFI residential loan portfolio,” the FDIC said in the complaint.

Federal regulators seized Washington Mutual, once the nation’s biggest savings and loan, in September 2008 and sold it to New York-based JPMorgan Chase & Co. (JPM) for $1.9 billion.

Bank executives blamed Killinger during hearings before the U.S. Senate last year for ineffective management controls and lax lending standards.

Killinger was CEO for 18 years before he was ousted on Sept. 8, 2008. He told senators in April that his company became the largest bank failure in U.S. history in part because it was excluded from a group of financial institutions favored by U.S. policy makers.

“This action runs counter to the facts about my relatively short time at the company,” Rotella wrote in a letter e-mailed to Bloomberg by his spokesman, Daniel Hilley. “As you might imagine, I am angered by this abuse of power by the FDIC.”

JPMorgan spokesman Joseph Evangelisti declined to comment. No phone number is listed for Kerry Killinger in Washington State and Schneider couldn’t immediately be reached for comment. Their lawyers in the WaMu bankruptcy case didn’t immediately return calls.

The case is FDIC v. Kerry K. Killinger, 11-00459, U.S. District Court, Western District of Washington (Seattle).

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Lawsuits/Pretrial

Airbus Charged With Manslaughter Over Fatal Air France Crash

Airbus SAS was charged with manslaughter over the fatal crash of an Air France jetliner into the Atlantic while en route to Paris from Brazil in June 2009.

The preliminary charges, filed after a French investigating judge met with Airbus’s lawyers, allow the continuation of a probe into the crash of Flight 447, which killed all 228 people on board. The judge will meet with Air France today.

“On behalf of Airbus, I have noted the absence of facts supporting this step and stated our strong disagreement,” Tom Enders, the Toulouse, France-based company’s chief executive officer, told reporters as he left the judge’s office in Paris.

Airbus, which made the A330 plane, is focused on finding the cause of the accident, something that requires further searches for missing “black boxes,” or flight recorders, Enders said. The criminal investigation is running parallel with a probe by safety experts into the reasons for the crash.

Three searches have so far failed to locate either further wreckage or the recorders, which should contain critical information about the flight’s last moments.

Kentucky Bank Takes on FDIC in Last Stand for Tax Refund Loans

A Kentucky bank’s legal challenge against regulatory efforts to banish “refund-anticipation loans” for taxpayers may be the last stand for a product that has generated millions of dollars for firms including H&R Block Inc. (HRB) and Jackson Hewitt Tax Service Inc. (JTX), analysts said.

Republic Bancorp Inc., based in Louisville, sued the Federal Deposit Insurance Corp. last month after the agency subpoenaed tax preparers for “immediate access to and copies” of files, customer disclosures and communications as part of a probe of “unsafe or unsound banking practices” by the bank.

The requests, outlined in a confidential subpoena obtained by Bloomberg News, followed efforts by the Internal Revenue Service and the Office of the Comptroller of the Currency to curb use of the tax-refund loans known as RALs. HSBC Holdings Plc and JPMorgan Chase & Co. stopped offering them amid claims the loans take advantage of low-income taxpayers.

“Unless Republic is successful in its lawsuit, I do think we’ve seen the end of the refund anticipation loan in its current form,” said Chi Chi Wu, staff attorney at the National Consumer Law Center. “Regulators have sent a signal that they don’t want the banks they regulate to do this.”

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Trials/Appeals

Rajaratnam Prosecutors Show How Fund Manager Tapped Sources

Prosecutors in the Raj Rajaratnam insider-trading case began to lay out for jurors how Galleon Group LLC allegedly tapped sources within companies for secret data and learned in advance about a sale of PeopleSupport Inc.

Lance Rosenzweig, a founder and ex-chairman of PeopleSupport, testified yesterday that Galleon, owner of 25.5 percent of the outsourcing company’s shares, placed Krish Panu on the board in April 2008. After his testimony, prosecutors played a wiretapped recording for the federal jurors in Manhattan of Panu briefing Rajaratnam on the company’s performance and Rosenzweig’s secret trip to India to meet potential suitors.

“The good news, Raj, is they’re going to generate free cash flow 30 million this year,” Panu told Rajaratnam in a May 2, 2008, conversation that the government secretly recorded of Rajaratnam’s mobile phone.

Was news of Rosenzweig’s trip to India public, Assistant U.S. Attorney Reed Brodsky asked him after the tape was played?

“No, it was not,” Rosenzweig testified.

Did PeopleSupport’s board members know about talks about the sale? “Yes,” Rosenzweig said.

Rosenzweig was the fourth witness summoned by prosecutors to show how and from whom Rajaratnam got inside tips, a charge the Galleon co-founder denies. Earlier yesterday, Alexander Lenke, an ex Intel Corp. (INTC) investor-relations official, concluded testifying that Rajiv Goel, then an Intel treasury executive, asked him about Intel’s performance in early 2007.

Anil Kumar, a former McKinsey & Co. partner who finished testifying March 16, said he gave Rajaratnam inside tips, including earnings information for Advanced Micro Devices Inc. (AMD) and planned firings at EBay Inc. (EBAY)

Rajaratnam, 53, is on trial in the largest crackdown on hedge-fund insider trading in U.S. history. The Sri Lanka-born money manager is accused of making $45 million from tips leaked by corporate insiders and hedge-fund traders.

Rajaratnam says his trades were based on legitimate research. In his cross-examination of Lenke, defense attorney Terence Lyman sought to show that news and analyst reports about Intel’s performance were circulating in the marketplace before the company announced its earnings in April 2007.

The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

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Tullett Says BGC Owes ‘Substantial’ Damages for Poaching

Tullett Prebon Plc (TLPR) said inter-dealer brokerage competitor BGC Partners Inc. (BGCP) owes “substantial” damages for poaching 10 of its traders.

The court should consider Tullett’s losses based on projected revenue, Daniel Oudkerk, a lawyer for the firm, said yesterday at the opening of a trial in London to determine how much BGC must pay. Last year, BGC was found by the court to be part of an unlawful conspiracy to poach Tullett’s brokers.

Tullett and BGC are keeping the damages figures in the case private and won’t state them in court, Oudkerk told Judge Raymond Jack at the hearing. The firm seeks to recoup lost profits, legal fees, “wasted management time,” the cost of steps “to safeguard its interests” and the gardening-leave pay to brokers while the lawsuit was ongoing, Oudkerk said.

Tullett, based in London, sued BGC in 2009 claiming Anthony Verrier, BGC’s executive managing director, spent tens of millions of pounds to persuade the heads of various Tullett trading desks to breach their contracts by getting colleagues to defect. Last month, BGC lost a bid at the Court of Appeal to overturn the ruling.

BGC will present arguments later. Robert Hubbell, spokesman for New York-based BGC, declined to comment.

The U.K. case is Tullett Prebon Plc v. BGC Brokers LP, HQ09X01241, High Court (London).

Kissel Schemed to Murder Banker Husband, Prosecutor Argues

Nancy Kissel schemed for months before murdering her Merrill Lynch & Co. banker husband and didn’t suffer from a depressive disorder, a prosecutor said.

“The defendant acted with thought, deliberation and calmness over a period of months, days and weeks,” David Perry, representing Hong Kong’s Department of Justice, said yesterday in the city’s High Court of First Instance in his closing statement to the jury. “She realizes the only way to avoid responsibility for murder is to lie.”

Kissel, 46, is being retried after Hong Kong’s highest court quashed a 2005 murder conviction and ordered a new trial, ruling the first one was unfair. Hong Kong prosecutors rejected the expatriate mother of three’s guilty plea to manslaughter in order to pursue the murder case.

Kissel’s lawyers had argued she suffered from a mental disorder and was provoked by Robert Kissel before she killed him on Nov. 2, 2003. Defense lawyer Edward Fitzgerald called 16 witnesses, including psychiatrists and psychologists who said she likely suffered from a major depressive disorder and battered-wife syndrome, reducing her responsibility for the killing.

“The defendant was not suffering from a depressive disorder,” Perry told the nine-member jury, pointing to evidence that she had an active social life, ran a photography business and was planning a trip to San Francisco for breast uplift surgery in the days before the murder. “This is another attempt to deceive you.”

In the first part of the retrial, which began on Jan. 11, prosecutors presented evidence to show Nancy Kissel searched online for prescription sedatives before obtaining four drugs from two psychiatrists. She blended them in a milkshake for her husband and, hours later, bludgeoned him with an eight-pound lead ornament in their bedroom, acts for which Kissel has accepted responsibility.

Nancy Kissel was having an affair at the time and was the main beneficiary of the $18 million estate. Robert Kissel was the head of Merrill’s distressed assets business in Asia.

The case is HKSAR v. Nancy Ann Kissel, HCCC55/2010 in Hong Kong’s High Court of First Instance.

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Ex-Deutsche Bank CEO Breuer to Stand Trial Over Kirch Feud

Former Deutsche Bank AG (DBK) Chief Executive Officer Rolf Breuer must stand trial on attempted fraud charges over statements made during lawsuits filed by businessman Leo Kirch against him and the bank.

The Munich Regional Court allowed the charges to go to trial, court spokeswoman Margarete Noetzel said in an e-mailed statement yesterday. No trial date has been set, she said. Prosecutors charged Breuer in 2009, claiming he lied to judges in an effort to avoid losing a civil suit Kirch filed over a comments Breuer made in a 2002 Bloomberg Television interview.

The case is part of a long-running fight over Breuer’s comments about the creditworthiness of Kirch’s media group. Kirch has said the comments precipitated the group’s bankruptcy and sued for 3.5 billion euros ($4.9 billion). Kirch’s suits against the bank and Breuer are pending.

“In the German system, it’s a quick move for a court to allow the charges to be tried,” Breuer’s attorney Sven Thomas said in an interview. “We will vigorously defend, and I am expecting to get an acquittal.”

A Kirch spokesman, who declined to be identified, said he was content with the decision.

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Verdicts/Settlement

Ex-UBS Banker Poteroba Deserves Up to 37 Months, U.S. Says

Igor Poteroba, a former UBS AG (UBSN) investment banker who pleaded guilty to insider trading, should get 30 to 37 months in prison when he is sentenced next week, prosecutors argued in court papers.

Poteroba, 37, pleaded in December to one count of conspiracy to commit securities fraud and three counts of securities fraud. His lawyers argued in court papers last week that the 12 months he has spent already in a federal jail awaiting sentencing is the appropriate term.

The securities fraud counts each carry a maximum of 20 years in prison. The conspiracy charge is punishable by as long as five years. As part of a plea agreement, Poteroba has agreed to forfeit the $465,000 in proceeds from his insider trading.

Poteroba is scheduled to be sentenced March 21 by U.S. District Judge Paul A. Crotty. The sentence requested by prosecutors falls within the range called for by U.S. sentencing guidelines, which aren’t binding.

The case is U.S. v. Poteroba, 10-mag-00562, U.S. District Court, Southern District of New York (Manhattan).

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Litigation Departments

Indicted Ex-Glaxo Lawyer Says Prosecutors Misled Grand Jury

A former GlaxoSmithKline Plc (GSK) lawyer, charged with obstructing a regulatory probe of the company, said U.S. prosecutors misled the grand jury that indicted her on the key element of her defense.

The lawyer, Lauren Stevens, argued that prosecutors improperly told grand jurors that a defense of relying on advice of counsel “was not relevant” to their decision whether to indict, according to a filing by her attorneys. Stevens asked U.S. District Judge Roger Titus to dismiss the case at a hearing yesterday in Greenbelt, Maryland.

Stevens, indicted in November on charges she obstructed a probe into whether London-based Glaxo marketed the antidepressant Wellbutrin for unapproved uses, has based her defense on the claim she took advice from the Atlanta law firm of King & Spalding in responding to a 2002 Food and Drug Administration inquiry, her attorney Reid Weingarten said.

“We have been troubled by the zeal and overzealousness of the effort to remove from this case the advice of counsel defense,” Weingarten said yesterday in court. “From the time the FDA sent the letter of inquiry to GSK, GSK retained the services of King & Spalding and they worked hand in hand with King & Spalding to respond.”

Les Zuke, a spokesman for King & Spalding, didn’t respond to messages left on his office and mobile phones. Mary Anne Rhyne, a spokeswoman for Glaxo, declined to comment.

Stevens is charged with one count of obstructing an official proceeding, one count of falsifying and concealing documents and four counts of making false statements.

The first two charges carry maximum prison terms of 20 years, and the others carry terms of five years.

Prosecutors contend that Stevens, who lives in Durham, North Carolina, “engaged in a yearlong effort” to deceive the FDA about the company’s off-label marketing campaign for Wellbutrin.

The case is U.S. v. Stevens, 10-cr-694, U.S. District Court, District of Maryland (Greenbelt).

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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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