Goldman Sachs, Madoff, HP, BGC, Lehman, IBM in Court News

Ex Goldman Sachs Group Inc. (GS) Director Rajat Gupta sued the U.S. Securities and Exchange Commission, claiming an administrative action for insider trading it filed against him bars him from a jury trial.

Gupta, 62, said the SEC should have filed a lawsuit in federal court instead. He denied the agency’s claims that he gave tips to Galleon Group LLC co-founder Raj Rajaratnam.

The SEC filed the action March 1, alleging Gupta tipped the hedge fund manager about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs, about the New York-based bank’s quarterly earnings and earnings at Procter & Gamble Co., where Gupta was also a director.

“Gupta denies all allegations of wrongdoing and stands ready to mount a defense against each and every one of the commission’s charges,” his lawyer, Gary Naftalis, said in the complaint filed March 18 in Manhattan federal court.

In filing his lawsuit, Gupta seeks a jury trial, to have the SEC barred from seeking civil penalties against him and a court order keeping it from pursuing administrative claims.

Under SEC rules, Gupta isn’t allowed a jury trial in an administrative action, or the right to use federal court rules on discovery, which require the exchange of evidence with the government, Naftalis said.

Florence Harmon, an SEC spokeswoman, declined to immediately comment.

Gupta’s name has been mentioned almost daily at the criminal insider trading trial of Rajaratnam, which began March 8 in Manhattan. The hedge fund manager 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. Rajaratnam, 53, faces as many as 20 years in prison if convicted on the most serious charges.

The case is Gupta v. SEC, 11-cv-1900, U.S. District Court, Southern District of New York (Manhattan).

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Lawsuits/Pretrial

HSBC Was Told About Madoff ‘Fraud Risks’ in Two KPMG Reports

HSBC Holdings Plc (HSBA), Europe’s biggest lender, was warned twice by auditors that entrusting as much as $8 billion in client funds to Bernard Madoff opened it up to “fraud and operational risks.”

KPMG LLP told the London-based bank about the risks in 2006 and 2008 reports. The firm was hired to review how Madoff invested and accounted for the funds, for which HSBC served as custodian. KPMG reported 25 such risks in 2006, and in 2008 found 28, according to copies of the reports obtained by Bloomberg News.

Twenty-five “fraud and related operational risks were identified throughout the process whereby Madoff LLC receive, check and account for client funds,” KPMG said in the 56-page report dated Feb. 16, 2006. The limited controls in place “may not prevent fraud or error occurring on client accounts if management or staff at Madoff LLC either override controls or undertake activities where appropriate controls are not in place,” according to the report.

A 66-page KPMG report dated Sept. 8, 2008, cited 28 risks and described them in the same words as the 2006 document.

Irving H. Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC, sued HSBC and a dozen feeder funds for $9 billion in December in U.S. Bankruptcy Court in Manhattan. The suit was partly based on the KPMG reports and alleges the bank knew of concerns Madoff’s business was a fraud and didn’t protect investors. KPMG’s reports haven’t been made public. Picard has filed more than $50 billion in so-called clawback suits to compensate victims.

HSBC confirmed hiring KPMG in 2005 and 2008 to review Madoff’s firm, adding it now believed Madoff had tricked the auditors. “It appears from U.S. government filings that Madoff and his employees foiled these reviews by, among other things, providing forged documentation to KPMG,” the bank said in an e- mailed statement.

“KPMG did not conclude in either of its reports that a fraud was being committed by Madoff,” HSBC said. “HSBC did not know that a fraud was being committed and lost $1 billion of its own assets as a victim.”

HSBC Spokesman Patrick Humphris, KPMG spokesman Mark Hamilton and Amanda Remus, a spokeswoman for Picard’s lawyers Baker & Hostetler LLP, all declined to confirm the authenticity of the reports obtained by Bloomberg.

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Hurd Letter in HP Lawsuit Must Be Unsealed, Judge Says

Hewlett-Packard Co. (HPQ) was ordered by a judge to release most of a letter about Chairman Mark Hurd’s involvement with contractor Jodie Fisher, the relationship that led to his departure from the company.

Delaware Chancery Court Judge Donald Parsons Jr. ruled March 17 in Wilmington that Hurd hadn’t shown good cause why the letter should be kept secret. HP has 10 days to file a mostly public version of the letter, giving Hurd “ample time” to appeal, Parsons said. Several narrow portions of the letter will remain sealed, the judge said.

“Whether or not to seal a document allegedly containing confidential information does not turn on whether its disclosure would cause embarrassment,” Parsons said in the 70-page ruling in a lawsuit by shareholder Ernesto Espinoza.

Hurd, 54, had argued that he should have a say in Espinoza’s demand for company books and records because the letter, sent by lawyer Gloria Allred on Fisher’s behalf, was personal and his alone.

“We are disappointed with the court’s ruling and will appeal the matter,” Hurd’s lawyer, Amy Wintersheimer, said in an e-mailed statement. “We believe the letter, which was clearly marked ‘confidential,’ should remain that way.”

Hurd is now a co-president of software maker Oracle Corp. (ORCL)

Hurd resigned as HP’s chairman and chief executive officer on Aug. 6 after a company investigation determined that he violated its standards of business conduct. Palo Alto, California-based HP said it didn’t find that Hurd had violated its sexual-harassment policy.

The company’s decision to grant Hurd a severance package valued at as much as $40 million prompted Espinoza to sue HP on Nov. 18. In his sealed complaint, Espinoza seeks company books and records as part of an investigation into possible wrongdoing by directors.

The case is Espinoza v. Hewlett-Packard Co., CA6000, Delaware Chancery Court (Wilmington).

Citic Pacific Must Give Police Lawyers’ Letters, Judge Rules

Citic Pacific Ltd., which delayed reporting a potential HK$14.7 billion ($1.9 billion) loss, must turn over records of legal advice to Hong Kong police it got before disclosing a failed derivatives bet, a judge ruled.

Hong Kong’s Department of Justice said it suspects the steelmaker and property developer defrauded four banks when it sought financing without disclosing losses on currency bets.

Based on a review of six documents being contested, “there is a prima facie case of the existence of both a conspiracy to defraud” and of directors or officers of the company making false statements, Hong Kong High Court Judge Alan Wright said in a ruling March 18.

Citic Pacific’s wrong-way bets on the Australian dollar in 2008 prompted a bailout from its parent Citic Group, backed by China’s cabinet, and the resignation of its chairman Larry Yung.

Wright dismissed Citic Pacific’s bid to block police access to the documents and delayed implementing the order until April 1 to give the company an opportunity to file an appeal. False statements made by officers or directors of a company with the intent to deceive creditors carries a maximum sentence of 10 years in jail.

Citic Pacific is reviewing the judgment “and considering its response,” the company said in an e-mailed statement.

Paul Shieh, a lawyer representing Citic Pacific, argued at a hearing last week that the company could have had “entirely proper, innocuous, and relevant considerations” in relation to the delayed disclosure.

The case is Citic Pacific Ltd. (267) and Secretary of Justice, Commissioner of Police, HCMP 767/2010 in Hong Kong’s Court of First Instance.

Christie’s Wins Dismissal of Koch’s Counterfeit Wine Suit

Christie’s International Plc won dismissal of a lawsuit filed by billionaire collector William Koch that claimed the auction house “induced” him into buying counterfeit wine.

The complaint was filed last year in Manhattan federal court. Koch, who lives in Florida, claimed London-based Christie’s has sold counterfeit wine “for many years.”

U.S. District Judge Barbara Jones, in New York, on March 18 granted Christie’s motion to dismiss Koch’s suit, which included claims of fraud, civil conspiracy and aiding and abetting.

Jones said in her ruling that while Koch said he was injured by Christie’s “misrepresentations,” she concluded he also knew that the bottle “was counterfeit prior to making the purchase.”

Koch alleged in his suit that he bought a bottle of 1870 Lafite for $4,200 at a Christie’s auction in order to prove that it was counterfeit. The judge rejected Koch’s arguments in his lawsuit. Koch has filed lawsuits against others claiming they sold him counterfeit wine that allegedly belonged to Thomas Jefferson and was marked “Th.J.”

While Koch didn’t claim in this lawsuit that Christie’s had sold him the counterfeit Jefferson wines, he alleged that Christie’s “had previously auctioned other Th.J. bottles” owned by German wine dealer and former pop music manager Hardy Rodenstock. Koch claimed he was “induced” into buying them from Rodenstock because Christie’s had described the wines “positively” in auction catalogues when the wines were sold in the 1980s.

Koch also sued Rodenstock in 2006 over the wines. A default judgment was entered against Rodenstock in that case last year.

Jones rejected Koch’s claim that if Christie’s had disclosed that the bottle was counterfeit “Koch would never have needed to spend $4,200 to purchase the bottle,” saying he was no longer acting as a reasonable consumer.

“We have great respect for Mr. Koch but have always believed his claims were without merit and are therefore grateful for the court’s decision affirming this,” Christie’s spokesman Toby Usnik said in an e-mail statement.

In the lawsuit, Koch claimed that because Christie’s has inspected so many wine cellars and bottles of wine, it knew how to identify counterfeit wine.

“Christie’s also has unique access to facts and circumstances that might call into question the authenticity of specific wines it handles,” Koch alleged in the complaint.

Koch has filed other wine-related suits. In 2007, he sued Scarsdale, New York-based Zachys Wine Auctions. In 2008, he sued Chicago Wine Co., Chicago-based Julienne Importing Co. and New York auction house Acker Merrall & Condit, accusing them of selling him fakes.

The case is Koch v. Christie’s, 10-cv-2804, U.S. District Court, Southern District of New York (Manhattan).

Mets Owners Face New Claims in $1 Billion Madoff Fraud Lawsuit

The trustee liquidating Bernard Madoff’s defunct firm filed new claims against the owners of the New York Mets, saying they “chose to look the other way” and invest with the con man after repeated warnings of fraud.

Trustee Irving Picard revised a $1 billion lawsuit filed in December to add a claim that the baseball team’s owner, Sterling Equities Inc., and Madoff created a fraudulent letter agreement, as part of Sterling’s purchase of the Mets’ broadcast rights from Cablevision Systems Corp. (CVC) in 2004, according to a filing March 18 in U.S. Bankruptcy Court in Manhattan.

“The amended complaint sheds more light on the deep dependency of the Sterling business organization on the continuation of the Madoff fraud and certain knowledge of indicia of fraud by the Sterling partners,” David Sheehan, counsel to Picard, said in a statement.

Picard claims that after Madoff’s fraud was disclosed publicly in December 2008, Sterling Equities restructured its debt in a manner that attempted to block the trustee from recovering assets on behalf of Madoff victims, according to the statement.

The new complaint, at 373 pages, adds eight pages to the original complaint, which was filed under seal in December and made public in February.

“The amended complaint is the latest chapter in the work of fiction created by the trustee,” team Chairman Fred Wilpon and President Saul Katz said in a statement. “We will pursue a vigorous legal defense that will set the record straight and vindicate us.” Wilpon and Katz said the trustee concocted his allegations against them to force a settlement.

“Let us be very clear: we did not know that Madoff was engaged in a fraud,” Katz and Wilpon said in an e-mailed news release. “There were no red flags and we received no warnings.”

In the amended complaint, Picard claims that, as the deadline for closing the Cablevision broadcast rights buyout deal approached, Sterling took a $54 million, no-interest bridge loan from Madoff, creating a fraudulent letter agreement falsely characterizing it as an investment by Madoff’s wife, Ruth Madoff.

David Cohen, general counsel for the Mets, said in an e- mailed statement that the $54 million “represented funds the Sterling partners had invested with Madoff, as the trustee acknowledges. As the trustee also acknowledges, that money was never used -- and in fact was returned the next day --because the necessary funds were received from Sterling’s lenders by the buyout deadline, and were used to fund the buyout.”

The case is Picard v. Katz, 10-AP-5287, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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Citibank Sued for $1.3 Billion by Lehman Brokerage Trustee

A Citigroup Inc. (C) unit was sued by Lehman Brothers Holdings Inc. (LEHMQ)’s brokerage trustee, who is seeking $1.3 billion for the bankrupt company’s creditors.

More than $1.3 billion in cash and other assets now held by Citibank and affiliates should go to creditors, said the trustee, James Giddens, in a lawsuit filed in Manhattan bankruptcy court March 18. The trustee claims that Citibank has no right to keep a $1 billion deposit given to it for foreign- exchange settlement services.

Another $700 million was given to Citibank as a pledge by Barclays Plc (BARC) as security for the same foreign-exchange settlements the week the Lehman parent filed for bankruptcy, Giddens said. Lehman filed Sept. 15, 2008 and the brokerage, Lehman Brothers Inc., liquidated four days later.

The trustee asked a judge to rule that Citibank willfully violated the “automatic stay” provision of the bankruptcy law when it seized the $1 billion deposit on Sept. 19, 2008, which forbids such transfers, Giddens said.

The brokerage trustee’s suit is one of many in bankruptcy courts, after creditors seize deposits to compensate them for pending losses on their loans. The banks argue that under commercial banking laws they had a right to set off the deposits against money still owed. Using bankruptcy law, debtors try to take back the deposits.

Citigroup said earlier this month it could face demands by Lehman for $3 billion in funds taken around the time of the Lehman brokerage’s liquidation.

“The trustee’s effort to recover these monies is unjustified and without merit, and Citi will vigorously defend its right to recover its losses,” Citigroup spokeswoman Danielle Romero-Apsilos said.

Lehman benefited from Citibank’s extension of credit to it amid panic provoked by its bankruptcy filing, and Citibank suffered more than $1 billion in losses for helping Lehman, she said. The money that the Lehman brokerage trustee wants to claw back was used by Citibank to partly cover losses, she said.

The main case is In re Lehman Brothers Holdings Inc., 08- 13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan). Giddens’s suit is Lehman Brothers Inc. v. Citibank NA, 11-01681, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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Trials/Appeals

BGC Says Tullett Asking for ‘Massively Inflated Sum’

BGC Partners Inc. (BGCP) said inter-dealer brokerage competitor Tullett Prebon Plc (TLPR) is seeking a “massively inflated sum” after it won a lawsuit accusing BGC of poaching 10 traders.

There is “a great deal of hyperbole” regarding Tullett’s losses, Andrew Hochhauser, a lawyer for BGC, told a London court March 18 at a hearing to determine damages. Tullett hired “senior hands” as replacements for the brokers within six months, Hochhauser said. The 10 traders were prevented from working for BGC for a year while the lawsuit was pending.

“This was not a mass exodus,” Hochhauser said. “This is a claim where 10 brokers left Tullett Prebon in an office that employs some 600 employees on 55 desks.”

The court last year ruled that BGC participated in a conspiracy to poach Tullett brokers. March 17, a lawyer for Tullett said BGC owes “substantial” damages. Tullett and BGC are keeping the figures private and won’t state them in court, Tullett lawyer Daniel Oudkerk told Judge Raymond Jack.

Tullett is seeking 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 “asks the court to look at the desks’ performance in 2008 and to assume” that those results would have continued, Hochhauser said. “That is a defective and unreliable approach.”

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

Singapore Investors Appeal Ruling on Lehman-Related Losses

A group of 213 investors in Singapore, in a bid to recoup S$18 million ($14 million) in losses tied to Lehman Brothers Holdings Inc., urged the city’s appeal court to overturn a ruling that dismissed their claim.

DBS Bank Ltd., which sold credit default swaps linked to Lehman, had inconsistencies in the investment’s prospectus and pricing statement, the investors said in their appeal filed March 14. Singapore-based DBS, Southeast Asia’s biggest bank, had declared the investments to be worthless after Lehman collapsed in 2008.

The inconsistency stemmed from “an obvious clerical error,” Judge Lee Seiu Kin said in a Dec. 10 ruling, dismissing the lawsuit. Statements on how the investment value would be calculated in a credit event, such as Lehman’s collapse, weren’t meant to be comprehensive, mathematical formulae and were instead general descriptions, Lee said in his decision.

“While DBS insists on holding us to the strict terms of the contract, they seek to avoid liability by relying on what they call a clerical error,” the group, represented by lawyer Siraj Omar, said in an e-mailed statement March 18. DBS had sold its DBS High Notes 5 as a safe, low-risk investment, lulling the investors into having a “false sense of security,” the group said.

The appeal is scheduled to be heard in the week of May 23.

Jenny Lee, a DBS spokeswoman, said the bank doesn’t comment on legal matter in progress.

The case is Soon Kok Tiang and Others v. DBS Bank Ltd. CA6/2011 in the Singapore Court of Appeal.

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Verdicts/Settlement

IBM Said to Pay $10 Million to Settle SEC Bribery Claims

International Business Machines Corp. (IBM) agreed to pay $10 million to settle accusations by the U.S. Securities and Exchange Commission that it gave cash and gifts to Chinese and South Korean officials in exchange for computer contracts, according to a person with direct knowledge of the settlement.

The company will pay $5.3 million in disgorgement, $2.7 million in interest and a penalty of $2 million to settle a lawsuit filed March 18 in federal court in Washington. The SEC alleged the bribes, which included travel and entertainment, occurred from 1998 through 2009 in violation of the Foreign Corrupt Practices Act.

The improper payments were made by employees at three subsidiaries of Armonk, New York-based IBM, as well as LG IBM PC Co., a joint venture between the company and LG Electronics Inc., according to the lawsuit.

The SEC said cash payments to South Korean officials from 1998 to 2003 totaled $207,000. In China, the IBM employees created “slush funds” at local travel agencies that were used to pay for overseas excursions by Chinese government officials.

IBM spokesman Ed Barbini said he couldn’t immediately comment on the lawsuit or settlement.

The case is SEC v. International Business Machines Corp., 11-cv-00563, U.S. District Court, District of Columbia (Washington).

3M Agrees to Pay $12 Million to Settle Discrimination Suit

3M Co. (MMM), the maker of products including Scotch tape and Post-it Notes, agreed to pay as much as $12 million to settle an age discrimination lawsuit.

Under the agreement, which is subject to approval by the Ramsey County District Court in St. Paul, Minnesota, 3M will resolve the claims of about 7,000 members of the class represented by the lawsuit.

The proposed settlement “provides a reasonable resolution that allows the company to avoid ongoing investments in time and legal fees,” Marschall Smith, 3M general counsel, said in a statement. “We believe the resolution will allow the company and our employees to focus on growing our business and serving our customers.”

The plaintiffs, all employed by 3M in Minnesota, claimed that the company systematically discriminated against workers over the age of 46 from 2001 to 2005. Management perceived older workers as “less able or willing to accept and apply new business methodologies adopted by the company,” according to the complaint.

The case is Clifford L. Whitaker v. 3M Co., 62-C4-04- 012239, Ramsey County District Court (Minnesota).

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Litigation Departments

Goldman, Law Firms Hire U.K. Lawyers for Bribery Act Work

Goldman Sachs Group Inc. and U.S. law firms are luring lawyers away from the U.K. fraud prosecutor as companies prepare to comply with the world’s “most draconian” anti-bribery law.

The U.K. Ministry of Justice has said it will introduce new proposals as soon as next week, leaving companies scrambling to hire lawyers to help prepare compliance plans. Under the law, U.K. companies without adequate controls to prevent corruption may be prosecuted if a bribe is paid by third parties on their behalf anywhere in the world, even if officials didn’t know.

Kwadjo Adjepong, who worked on the Serious Fraud Office’s probe into the collapse of London hedge fund Weavering Capital, joined Goldman Sachs as a vice president in its compliance department last month, SFO spokesman David Jones said. Covington & Burling LLP, White & Case LLP and Arnold & Porter LLP have also hired lawyers from the SFO as the Bribery Act creates work for firms preparing compliance plans.

Washington-based Arnold & Porter in February said it hired Kathleen Harris, the former head of the SFO fraud business group, as a partner in its London office. Charlie Monteith, a senior policy adviser and the head of assurance at the agency, left for New York-based White & Case.

Another former SFO prosecutor, Matthew Cowie, who oversaw an investigation of BAE Systems Plc, left in June to join the U.S. law firm Skadden, Arps, Slate, Meagher & Flom.

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To contact the reporters on this story: Elizabeth Amon in Brooklyn, New York, at eamon2@bloomberg.net; Ellen Rosen in New York at erosen14@bloomberg.net.

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

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