Goldman Sachs Group Inc. (GS) Chairman Lloyd Blankfein will be called by U.S. prosecutors to testify as a government witness at the insider-trading trial of Galleon Group LLC co-founder Raj Rajaratnam.
In a letter sent March 21 to U.S. District Judge Richard Holwell, who is presiding over Rajaratnam’s trial in Manhattan, prosecutors sought to limit Blankfein’s cross-examination by Rajaratnam’s lawyers.
In calling Blankfein as a witness, prosecutors in the office of U.S. Attorney Preet Bharara in Manhattan said they don’t want Blankfein to be questioned about “whether Goldman Sachs is presently the subject of any pending investigations by either the Department of Justice or the U.S. Securities and Exchange Commission” or whether the bank bears any responsibility for the 2008 financial crisis.
Rajaratnam’s lawyer, John Dowd, in a separate letter to prosecutors March 21, said, “Today, counsel learned for the first time that neither Mr. Blankfein nor Goldman Sachs has been notified that they are a target (or for that matter a subject) of any active investigation.”
Rajaratnam, 53, is on trial in the largest crackdown on hedge-fund insider trading in U.S. history. The Sri Lankan-born money manager is accused of making $45 million from tips leaked by corporate insiders and hedge fund traders. He denies wrongdoing, saying he based his trades on research.
The U.S. subpoenaed Blankfein to testify about former Goldman Sachs director Rajat Gupta and his interactions with Rajaratnam, prosecutors said in their letter. Blankfein may testify “as early as this week,” Dowd said in a March 20 letter to Holwell.
Ed Canaday, a spokesman for New York-based Goldman Sachs, declined to comment on the government’s letter.
Jim McCarthy, a spokesman for Rajaratnam, didn’t have an immediate comment.
In court yesterday, Rajiv Goel, who worked in Intel Corp. (INTC)’s treasury group, told a federal jury how he passed confidential information to his “pal” Rajaratnam.
Goel, who is testifying for prosecutors in a bid for leniency after pleading guilty to conspiracy and securities fraud, said he told Rajaratnam about Intel’s earnings in 2007 and a $1 billion transaction in 2008.
“Raj and I were very good friends,” Goel, 52, testified, as Rajaratnam watched from across the well of the courtroom in lower Manhattan. “He was a good man to me. I was a good pal, a good person to him, so I gave him the information.”
Goel, who was a managing director at Intel, is the second government cooperator to directly implicate Rajaratnam in insider trading. Anil Kumar, a former McKinsey & Co. partner who also pleaded guilty, earlier testified about information he leaked about clients. Other government witnesses have also testified about leaks to Rajaratnam.
Rajaratnam says his trades were based on legitimate research, and his lawyers say Goel is accusing Rajaratnam to save himself from a long prison term.
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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Hong Kong Regulator Says Ex-JPMorgan Salesman’s Ban Must Stay
Hong Kong’s securities watchdog wants a former JPMorgan Chase & Co. equity salesman’s life ban for insider trading reinstated, a lawyer for the city’s Securities and Futures Commission told an appeal court.
Justice Robert Tang for the Court of Appeal, heard arguments yesterday from lawyers for the regulator and for David Tsien, whose ban was reduced to 10 years in September, before ending the hearing.
Tsien, who accepted that he had told two fund managers JPMorgan was negotiating a share placement for China Overseas Land & Investment Ltd. (688) in 2004, won the reduction from the Securities and Futures Appeals Tribunal, which said a life ban for the executive in his early 50s was “manifestly excessive.” The fund managers avoided a HK$1.4 million ($179,542) loss as a result of the inside information.
Mark Strachan for the SFC said earlier that a life ban is the normal punishment for insider trading to maintain public confidence in the financial system.
Strachan declined to comment after the hearing.
Tsien’s lawyer Laurence Li said a decision from the three judges wasn’t likely for a couple of months.
Tsien was accredited to JPMorgan or its predecessor companies from 1988 to 2006. His securities dealing and advisory license was revoked by the regulator in April, 2006, when he left his job at the bank, according to Li.
Marie Cheung, a Hong Kong spokeswoman for the bank declined to comment on the case.
SFC spokesman Ernest Kong declined to comment on the case.
The case is between Tsien Pak Cheong David and the Securities and Futures Commission, CACV226/2010, Hong Kong Court of Appeal.
Drugmaker Investor Lawsuits Backed by U.S. Supreme Court
The U.S. Supreme Court, allowing a lawsuit over the withdrawn Zicam cold remedy, gave shareholders more power to sue drugmakers and biotechnology companies for failing to reveal indications about dangerous side effects.
The justices unanimously said Matrixx Initiatives Inc. (MTXX), acquired in February by HIG Capital LLC, must defend against accusations that it should have told investors that some Zicam users had lost their sense of smell.
Matrixx argued that drugmakers need not say anything until reports of side effects become statistically significant. The high court yesterday rejected that argument, saying that less definitive evidence in some cases is enough to require disclosure under the federal securities laws.
“Given that medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well,” Justice Sonia Sotomayor wrote for the court.
Matrixx stopped selling its Zicam nasal spray and gel in June 2009 after the Food and Drug Administration warned consumers the treatments may cause a loss of smell, a condition known as anosmia. Matrixx says it disagrees with the FDA’s findings.
A lawyer representing Matrixx said the company is confident it will be able to refute the allegations when the case returns to a federal trial court in Arizona.
“There was certainly no intentional or reckless failure to disclose any information to the public,” said the lawyer, Michael Yoder, a partner at O’Melveny & Myers LLP in Newport Beach, California.
The case is Matrixx Initiatives v. Siracusano, 09-1156, U.S. Supreme Court (Washington).
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BT Loses U.K. Appeal Over $68.3 Million Wireless Overcharges
BT Group Plc (BT/A), Britain’s largest phone company, lost an appeal to a regulator’s finding that it overcharged wireless providers such as Virgin Media Inc. (VMED) by 41.7 million pounds ($68.3 million) for access to circuits.
The Competition Appeal Tribunal in London yesterday rejected BT’s claim that the regulator, Ofcom, misused a dispute resolution process by seeking repayment of the overcharges instead of setting fair prices for the future.
“Ofcom’s use of the dispute resolution process in this case was unimpeachable,” the tribunal said in the 106-page ruling. The regulator correctly used its power “by ordering that the entire amount of BT’s overcharge should be repaid.”
Ofcom said in October 2009 that London-based BT should repay with interest money overcharged from 2004 to 2008 for access to so-called partial private circuits, which wireless companies use to connect some customers to phone networks. BT said in a May 2010 statement that it set aside 52 million pounds to cover potential repayments in the case.
“BT is disappointed with the outcome of the appeal” and will now “consider the range of options open to us for what we might do next,” Gemma Thomas, a spokeswoman for BT, said in an e-mail.
At a hearing in the appeal in May, BT’s lawyer said the watchdog’s finding was “inherently wrong.”
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Google’s $125 Million Digital Library Settlement Rejected
Google Inc. (GOOG)’s $125 million settlement with publishers and authors was rejected yesterday by a U.S. judge who said the deal to create the world’s biggest digital book library would be unfair to authors.
The expansive nature of the settlement, calling for copyright owners to opt out or be automatically included, “would simply go too far,” said U.S. Circuit Judge Denny Chin in Manhattan, who was a district-court judge when the case first came before him. He suggested the settlement would have a better chance at approval were it revised to cover only those who opt into the agreement.
As written now, the settlement “would grant Google significant rights to exploit entire books, without permission of copyright owners,” Chin wrote. It “would give Google a significant advantage over competitors, rewarding it for engaging in wholesale copying of copyrighted works without permission, while releasing claims well beyond those presented in the case.”
Google, based in Mountain View, California, was sued in 2005 by authors and publishers who said the company was infringing their copyrights on a massive scale by digitizing books. The agreement includes a Book Rights Registry to compensate copyright holders.
Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT) and Yahoo! Inc., along with the German and French governments, said the agreement would give Google unfair control over digitized works and expand its power in the search engine market. Some author groups who weren’t part of the settlement said they would lose control of their copyrights.
“He shoots down the settlement on three important grounds, which are the same three grounds that Google is under siege from around the world,” said Gary Reback, co-founder of the Open Book Alliance, the group formed with Amazon.com, Microsoft and authors groups to oppose the deal. “It would give Google dominance in the search area. There are intrusions into the privacy of people. And Google is taking the copyrighted work of other people without permission.”
The case is Authors Guild v. Google Inc., 05-cv-08136, U.S. District Court, Southern District of New York (Manhattan).
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J&J’s Risperdal Letter Violated Consumer Law, Jury Finds
A Johnson & Johnson (JNJ) unit violated consumer-protection laws by sending South Carolina doctors a misleading letter about the safety and effectiveness of the antipsychotic drug Risperdal, a jury concluded.
Jurors in state court in Spartanburg, South Carolina, deliberated more than six hours before finding yesterday that J&J’s Ortho-McNeil-Janssen Pharmaceuticals unit engaged in “unfair and deceptive acts” by sending a 2003 letter touting Risperdal as better and safer than competing drugs to more than 7,000 doctors across the state. A judge will decide later whether the drugmaker should pay $360 million in penalties over the mailings.
“The verdict they handed down is just and speaks the truth,” John White, a Spartanburg-based lawyer representing the state, said in an interview. Jurors also found that J&J’s warning label information on Risperdal was deceptive.
The state’s case centered on drug-safety claims that New Brunswick, New Jersey-based J&J and Janssen made in November 2003 correspondence to about 700,000 doctors across the U.S., including 7,200 in South Carolina.
The U.S. Food and Drug Administration responded with a warning letter saying J&J made false and misleading claims that minimized the potentially fatal risks of diabetes and overstated the drug’s superiority to competitors’ products.
“We are disappointed,” Greg Panico, a J&J spokesman, said in a statement. “Janssen acted responsibly and believes it did not violate” South Carolina law, he said.
South Carolina officials argued in the case that J&J sent the letter to protect billions of dollars in sales of the antipsychotic drug.
The case is State of South Carolina v. Janssen Pharmaceuticals, 2007-CP-4201438, Circuit Court for Spartanburg County, South Carolina (Spartanburg).
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Bank Leumi Wins $19 Million U.K. Ruling Over Wachner Trades
Bank Leumi Le-Israel Ltd., the country’s biggest lender, won a U.K. lawsuit against ex-New York Stock Exchange board member Linda Joy Wachner over 13.4 million euros ($19 million) she lost in foreign-exchange trades.
Wachner, 65, must repay the bank’s U.K. unit what she lost in 2008 through dollar-euro transactions that went “disastrously wrong,” Justice Julian Flaux ruled yesterday in the High Court in London. Flaux rejected Wachner’s claim that Bank Leumi irresponsibly classified her as a professional client with direct access to dealers on the lender’s U.K. trading floor.
“Despite the somewhat helpless image she now seeks to portray, that was certainly not her self-assessment at the time as to her foreign-exchange experience and expertise,” Flaux said in the 88-page ruling. “One suspects that any attempt to reclassify her and restrict her access to the dealing room would have been met by indignation bordering on outrage.”
The dispute involves so-called reverse knock-in options, both in the form of calls and puts, which had losses during the collapse of Lehman Brothers Holdings Inc. (LEHMQ) in September 2008, according to the ruling. Wachner, a NYSE director from 1997 to 2000 who had traded foreign exchange with the bank since 2003, portrayed herself in the case as a “novice” who was led into trades she didn’t understand, according to the ruling.
Wachner may take legal action in New York in response to yesterday’s ruling, her lawyer Sue Prevezer, with the firm Quinn Emanuel Urquhart & Sullivan LLP in London, said in an e-mailed statement.
“Our client does not view this matter as closed,” Prevezer said. “She maintains that she was incorrectly classified by Bank Leumi and treated as a professional trader which exposed her to unjustified levels of risk.”
“We are pleased that the court vindicated our position, rejected Ms. Wachner’s counterclaims and found that the bank properly discharged its regulatory responsibilities in this matter,” Bank Leumi (U.K.) Plc said in a statement.
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MBIA Loss Forecast Was at Least $12 Billion Short, Banks Say
MBIA Inc. (MBI)’s projected losses on structured-finance guarantees were at least $11.8 billion short when New York regulators approved the bond insurer’s 2009 split, 11 banks seeking to annul the move claimed.
A BlackRock Inc. (BLK) unit, hired by the banks for their lawsuit to analyze potential claims against the insurer at the time of the regulators’ review, estimated MBIA faced at least $13.8 billion in possible losses on $50.1 billion of securities backed by home loans and commercial real estate, according to filings yesterday in New York state Supreme Court. The regulators lacked a basis to approve the restructuring because MBIA at the time had loss reserves of about $2 billion, the banks argue.
The banks, including UBS AG (UBSN), Bank of America Corp. (BAC) and Royal Bank of Scotland Plc, are fighting a split that moved more than $5 billion from the company’s MBIA Insurance Corp. unit into a new insurer in a bid to jumpstart its business of guaranteeing state and municipal debt. MBIA and other bond insurers, which sold guarantees to the banks, were shut out of the market after rising losses on mortgages they backed prompted ratings firms to strip them of their top rankings in 2008.
“According to BlackRock’s analysis, the expected insurance losses on less than one quarter of MBIA Insurance’s portfolio rendered MBIA Insurance deeply insolvent as of December 31, 2008,” the banks said.
Chuck Chaplin, MBIA Inc. president and chief financial officer, said the banks’ arguments “are without merit and we remain confident that the court will affirm the New York State Insurance Department’s decision to approve MBIA’s transformation, which came after a thorough and careful analysis.”
“MBIA Insurance Corp. was solvent then and remains so today, two years and two unqualified audit opinions later,” he said in an e-mailed statement.
The banks sued under New York state’s Article 78, which allows court review of state administrative decisions, to challenge former insurance Superintendent Eric Dinallo’s authorization of the split in February 2009. The approval was based on a “rushed, cursory and inadequate” review of facts and on assumptions that at times were outdated and inflated, the banks claimed in a 187-page court filing.
Ron Klug, a spokesman for the state insurance department in Albany, New York, declined to comment. Dinallo couldn’t be reached for comment, said Suzanne Elio, a spokeswoman for Debevoise & Plimpton LLP, the law firm Dinallo joined in December.
The banks separately sued the bond insurer to challenge the restructuring in a lawsuit dismissed by a lower court. The appeal of that suit, which claimed MBIA made the split to avoid its obligations to policyholders and to defraud creditors, will be argued in the state’s highest court May 31.
The Article 78 case is ABN Amro Bank NV v. Dinallo, 601846- 2009, New York state Supreme Court (Manhattan).
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Foreclosure Terms May Cause ‘Moral Hazard,’ Four States Say
Four more Republican state attorneys general are opposing a plan to resolve a nationwide probe of foreclosure and mortgage- servicing practices because the terms may foster a “moral hazard.”
In a letter yesterday to Iowa Attorney General Tom Miller, a Democrat who has taken the lead in the investigation, the officials objected to new documentation requirements and principal reductions outlined in the proposed settlement submitted to the country’s top mortgage-servicing companies this month.
The letter, a copy of which was obtained by Bloomberg News, was signed by attorneys general Kenneth Cuccinelli of Virginia, Greg Abbott of Texas, Pam Bondi of Florida and Alan Wilson of South Carolina. The attorneys general of Oklahoma, Alabama and Nebraska sent Miller a letter with their objections on March 16.
The settlement offer “appears to reach well beyond the scope of our enforcement role, and, in some instances, far exceeds the scope of the misconduct which was the subject of our original investigation,” according to the letter, which was verified by Brian Gottstein, a spokesman for Cuccinelli.
A key objection is the “moral hazard” created by the proposal to reduce homebuyers’ loans because it “rewards those who simply choose not to pay their mortgage,” the attorneys general said.
Geoff Greenwood, a spokesman for Miller, said by e-mail that while there are disagreements among the states, there is consensus on the need to work together on the foreclosure problems. The current proposal is “a starting point,” he said.
Gottstein and Lauren Bean, a spokesman for Abbott, declined to comment, as did Mark Plowden, a spokesman for Wilson.
Jennifer Meale, a spokeswoman for Bondi, didn’t immediately respond to an e-mail message seeking comment after regular business hours.
Federal agencies and state attorneys general on March 3 delivered a 27-page settlement proposal that would set standards for how mortgage servicers conduct foreclosures and service loans. Those banks include Bank of America Corp., JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC)
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Apple’s Jobs Must Answer Questions in ITunes Antitrust Suit
A federal magistrate judge ordered Apple Inc. (AAPL) Chief Executive Officer Steve Jobs to answer questions in an antitrust dispute alleging the company operated a music-downloading monopoly.
Lawyers for consumers who filed the 2005 complaint won permission to conduct limited questioning of Jobs, under an order issued March 21 by U.S. Magistrate Judge Howard R. Lloyd in San Jose, California. The deposition can’t exceed two hours and the only topic allowed is changes Apple made to its software in October 2004 that rendered digital music files engineered by RealNetworks Inc. (RNWK) inoperable with Apple’s iPod music player.
“The court finds that Jobs has unique, non-repetitive, firsthand knowledge about the issues at the center of the dispute over RealNetworks software,” Lloyd wrote.
Apple spokeswoman Kristin Huguet declined to comment.
ITunes customer Thomas Slattery sued Apple in 2005 seeking class-action status on behalf of consumers claiming the Cupertino, California-based company illegally limited consumer choice by linking the iPod to its iTunes music store.
Slattery asserted antitrust claims allegedly arising from Apple encoding its digital music files with proprietary software called FairPlay. This allowed music files purchased from the iTunes Store to be played only on iPods, and not using products by other manufacturers. FairPlay also prevented digital music sold by other companies’ online stores from being played on iPods, according to the complaint.
The case is Apple iPod, iTunes Antitrust Litigation, C05- 0037JW, U.S. District Court, Northern District of California (San Jose).
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Belvedere Asset Seizure by Hedge Funds Approved by Court
Belvedere SA (BVD) Chief Executive Officer Jacques Rouvroy and his deputy Christophe Trylinski lost an appeals court bid to recover shares in the French vodka-maker seized by hedge funds in June.
Hedge fund firms Maple Leaf Capital LLP and Astin Capital Management Ltd. may get as much as 15 million euros ($21.3 million) from the men under yesterday’s ruling by an appeals court in Dijon, France, a lawyer for the funds said.
“It is a question of weeks until they are out of Belvedere’s capital structure,” said Fabrice Marchisio, a lawyer for the funds. The shares have been frozen pending the appeals court decision.
The Maple Leaf funds seized the shares, which directly and indirectly account for about 15.5 percent of Belvedere’s share capital. They were executing a 2009 ruling by the High Court in London ordering the men to compensate the funds for losses incurred on stock options they had subscribed to in exchange for financing the executives’ efforts to regain control of the beverage company in 2007.
The order can’t be enforced because the assets are owned jointly with Rouvroy’s and Trylinski’s wives, Belvedere lawyer Alain Ribeyre said in a telephone interview.
“Maple Leaf cannot touch any of their estates,” Ribeyre said. “Neither their shares, nor the buildings, nor any of their assets” because all are jointly owned with the men’s wives, who weren’t parties to the contract with the funds.
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