“The issue of JPMC’s misconduct belongs before the bankruptcy court as the court most versed in the nuances of the Ponzi scheme and the roles of other, related wrongdoers in that scheme,” Irving Picard, the trustee, said in a filing March 30 in U.S. District Court in Manhattan. “JPMC seeks refuge in this court to escape the scrutiny of the bankruptcy court,” he said.
Picard sued JPMorgan in December, claiming the bank aided the confidence man’s fraud. Denying wrongdoing, New York-based JPMorgan said it had a right to a jury trial in the district court. Picard’s suit raised “unsettled questions” of law beyond the expertise of a bankruptcy court, the bank said.
JPMorgan “no doubt hopes to distance itself both from the thousands of victims of that scheme and from other alleged wrongdoers,” Picard said in the filing. “Yet there is no escaping the fact that JPMC was at the very center of Madoff’s Ponzi scheme. It was the debtor’s primary banker for over two decades and touched virtually every cent that flowed through the Ponzi scheme.”
Joseph Evangelisti, a JPMorgan spokesman, declined to comment.
Madoff, 72, pleaded guilty to orchestrating the biggest Ponzi scheme in history. He’s serving a 150-year sentence in federal prison in North Carolina.
The case is Picard v. JPMorgan Chase & Co., 1:11-cv-00913, U.S. District Court, Southern District of New York (Manhattan).
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Mortgage Brokers Win Bid to Block Fed’s Loan Fee Rule
Two trade groups representing mortgage brokers won an appeals court ruling temporarily blocking a Federal Reserve rule that limits commissions for loan officers in mortgage transactions from taking effect today.
The U.S. Court of Appeals in Washington granted emergency motions from the National Association of Mortgage Brokers and the National Association of Independent Housing Professionals which argue the rule unfairly penalize brokers, who won’t be able to pay loan officers from consumer-paid fees.
“The purpose of this administrative stay is to give the court sufficient opportunity to consider the merits of the motions for emergency relief,” the court said in its order.
U.S. District Judge Beryl Howell on March 30 rejected the groups’ request to stop the provision from taking effect, finding that public policy interests outweighed harm to the mortgage-broker industry.
“The board has reasonably concluded that the rule will further public policy interests, a position that is further supported by the Dodd-Frank Act, which also includes provisions restricting certain loan-compensation practices,” Howell said in a 46-page opinion, referring to the law that overhauled the financial industry last year.
The trade groups filed separate lawsuits and appeals challenging the regulation.
The Fed rule, part of the central bank’s effort to fix weaknesses in mortgage finance, is aimed at preventing mortgage originators from receiving more compensation for selling home loans with higher interest rates.
Susan Stawick, a spokeswoman for the Federal Reserve, didn’t immediately respond to an e-mail message seeking comment after regular business hours yesterday.
Marc Savitt, president of the National Association of Independent Housing Professionals, said “We’re glad the judges issued the stay.”
“Once they have the opportunity to review the entire case, we think they’ll agree with us that the Fed did not have the authority” to issue the rule,” Savitt said.
The cases are National Association of Mortgage Brokers v. Board of Governors of the Federal Reserve System, 11-5078 and National Association of Independent Housing Professionals Inc. v. Board of Governors of the Federal Reserve System, 11-5079, U.S. Court of Appeals for the District of Columbia (Washington).
Toyota Agrees on Handling of Its Secret Code in Lawsuits
Toyota Motor Corp. (7203) and lawyers suing the carmaker over alleged unintended sudden acceleration reached an accord on how to handle evidence involving the source code Toyota uses in its vehicles, a lawyer said.
“We do have an agreement,” said Mark Robinson, one of the lead lawyers for the plaintiffs in the consolidated federal lawsuits in Santa Ana, California. “The judge has approved the plan between Toyota and the plaintiffs to allow us access to Toyota’s source code with security protection given to Toyota.”
Access to the source code for Toyota’s electronic throttle- control system has been an obstacle in moving the first of the hundreds of cases involved to trial by early 2013, U.S. District Judge James V. Selna has said. Selna, who is overseeing the case, yesterday ordered the details of the agreement sealed.
The two sides have been wrestling for several months over how the plaintiffs’ attorneys and their experts can analyze the source code for the automaker’s electronic system, which the plaintiffs have said in court papers is critical to determining whether it played a part in alleged sudden acceleration.
“Toyota is pleased to have reached an agreement on a source code protective order that ensures the security and strict confidentiality of this invaluable intellectual property,” Celeste Migliore, a spokeswoman for Toyota Motor Sales USA in Torrance, California, said in a statement.
The cases are combined as In re Toyota Motor Corp. Unintended Acceleration Marketing, Sales Practices and Products Liability Litigation, 8:10-ml-02151, U.S. District Court, Central District of California (Santa Ana).
J&J Shareholders Missing Bull Market With Hip Recalls Mounting
In November 2005, Lance Corporal Cody Perkins, a 20-year- old U.S. Marine, was injured by a roadside bomb outside Haditha, Iraq, Bloomberg News’s David Voreacos, Alex Nussbaum and Greg Farrell report.
Perkins suffered scrapes, bruises and a fractured femur, or thigh bone. About a year later, he received a metal-on-metal prosthetic hip made by DePuy Orthopaedics, a unit of Johnson & Johnson. (JNJ) The new hip was being promoted as tough and durable -- and thus perfect for younger, physically active patients like Perkins. By late 2009, however, he began experiencing pain.
The cause of his trouble, his current physician said, isn’t a complication from his original injury but the replacement hip. Perkins has been told he’ll need to undergo “revision” surgery to replace the ASR hip with another implant -- a highly invasive procedure with a heightened risk of infection and joint dislocations down the road.
Perkins has joined more than 1,000 other people who are suing Johnson & Johnson over its DePuy ASR implants, Bloomberg Businessweek reports in its April 4 issue. Those plaintiffs seek damages for medical costs, lost wages, and pain and suffering.
With $28 billion in holdings of cash and short-term securities at the end of 2010, J&J will likely weather the financial blowback from the bad hips. More troubling to customers and stakeholders, however, is that the DePuy recalls may be symptoms of a systemic quality-control problem at the 125-year-old corporation: a pattern of behavior that is distinctly at odds with the comforting image long enjoyed by the creator of brands like Band-Aid and “No More Tears” Baby Shampoo.
The DePuy crisis is one of more than 50 voluntary product recalls that J&J has issued just since the start of 2010, covering brand names that read like an inventory of the family medicine cabinet. Tylenol and St. Joseph Aspirin were recalled for foul odors that people said made them sick. Benadryl and Zyrtec were recalled for botched amounts of ingredients. Rolaids were recalled for containing bits of wood and metal.
Johnson & Johnson management, from Chief Executive Officer William Weldon on down, maintains that the company’s quality- control issues are aberrations. Any suggestion of a broader malaise, said Weldon, “is just Monday-morning quarterbacking.”
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Winifred Jiau Withdraws Bail Application, to Remain Jailed
Winifred Jiau, the expert-network consultant charged in a U.S. probe of insider trading, withdrew her bail application and the judge presiding over her case ruled she will remain jailed because she is likely to flee if freed.
U.S. District Judge Jed Rakoff, in New York, who held two bail hearings for Jiau that lasted more than four hours last month, said in his order issued yesterday that it was “unlikely” that even if Jiau found more or different people to co-sign her bond, it “would be sufficient to change the court’s view that no combination of conditions would reasonably assure defendant’s appearance if she were not detained.”
Jiau, a former consultant for Primary Global Research LLC, was indicted March 9 on insider-trading charges along with former SAC Capital Advisors LP portfolio manager Donald Longueuil.
Both have pleaded not guilty. Her lawyer, Joanna Hendon, wrote to Rakoff on March 28 saying she was withdrawing the request to grant Jiau bail. The letter was publicly filed yesterday.
Jiau, of Fremont, California, has been in custody since she was arrested Dec. 28. She was initially granted release on $500,000 bond, U.S. District Judge Robert Patterson in New York on March 2 ordered Jiau held without bail, saying it was “unmistakably clear” she would flee the U.S. if released. The case was later reassigned to Rakoff.
The case is U.S. v. Jiau, 11-cr-00161, U.S. District Court, Southern District of New York (Manhattan).
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Ex-Taylor Bean CEO Allen Named as Defendant in U.S. Case
The former chief executive officer of Taylor, Bean & Whitaker Mortgage Corp., Paul R. Allen, was named as a criminal defendant in federal court in Virginia four days before the company’s ex-chairman is scheduled for trial on accusations of fraud.
No charges were specified on the court’s electronic docket against Allen, a former senior executive at Freddie Mac, the government-supported mortgage lender. Another former Taylor Bean official identified Allen in court yesterday as a co-conspirator in a fraud scheme that deceived financial firms by covering up cash shortfalls at the company.
Prosecutors have charged six people in the conspiracy, which allegedly was masterminded by the company’s former chairman, Lee Farkas. Five people, including two officials from Colonial Bank, have pleaded guilty and agreed to testify against Farkas, whose trial on 16 counts of bank, wire and securities fraud is scheduled to begin April 4.
Sean Ragland, 37, a former senior financial analyst at Taylor Bean, said in court yesterday in Alexandria, Virginia, that Allen, who lives in Oakton, Virginia, was aware that a Taylor Bean entity created to fund mortgage loans was running up a significant deficit. Ragland pleaded guilty to single charge of conspiracy to commit bank and wire fraud.
Allen didn’t return a telephone message seeking comment.
The cases are U.S. v. Allen, 11-cr-00165; U.S. v. Ragland, 11-cr-00162, and U.S. v. Farkas, 10-cr-00200, U.S. District Court, Eastern District of Virginia (Alexandria).
Cephalon Accused of Failing to Weigh Valeant Buyout Bid
Cephalon Inc. (CEPH) officials were accused in a lawsuit by a Pennsylvania pension fund of “failing to act” in the best interests of investors regarding a $5.7 billion buyout bid by rival Valeant Pharmaceuticals International Inc. (VRX)
Cephalon, a maker of sleep and pain drugs, said yesterday that it will consider the bid next week. In its complaint, the pension fund claimed the company has been shortchanging shareholders by not considering the $73-a-share hostile offer.
The company’s directors are “failing to act in the interest of Cephalon stockholders” by turning away repeated offers by the Canadian drugmaker, lawyers for the Dauphin County pension plan said in a Delaware Chancery Court suit filed yesterday in Wilmington. “The company and its board of directors have repeatedly refused duly to consider acquisition proposals from Valeant.”
Cephalon, based in Frazier, Pennsylvania, surged more than 28 percent on March 30 in Nasdaq Stock Market trading after Mississauga, Ontario-based Valeant made its cash offer public. The acquisition would be the largest hostile takeover in the industry since Sanofi-Aventis SA bid for Genzyme Corp. last year. Cephalon closed at $76.08 yesterday.
“Our board of directors will meet early next week to consider Valeant’s proposal,” Natalie de Vane, a Cephalon spokeswoman, said yesterday in a phone interview.
Cassandra Bujarski, a spokeswoman for Valeant, didn’t immediately return a call seeking comment on the suit or the statement by Cephalon.
The fund wants a Delaware judge to force Cephalon’s board to consider Valeant’s offer and bar use of the company’s so- called poison-pill defense to frustrate the buyout bid, according to the lawsuit. That defense makes acquisitions more expensive.
The case is County of Dauphin Retirement Plan v. Winger, CA NO. 6332, Delaware Chancery Court (Wilmington).
Ex-WestLB Employees Charged Over Volkswagen Trading Losses
Three former WestLB AG traders and two external brokers were charged by Dusseldorf prosecutors over speculation on Volkswagen AG (VOW) shares during 2006 and 2007.
The WestLB employees were betting on the gap between the carmaker’s common and preferred shares and their trading resulted in damages of 48 million euros ($68 million), Ralf Moellmann, spokesman for the Dusseldorf prosecutors’ office said in an e-mailed statement yesterday.
The former WestLB traders, who worked in the bank’s global markets section, are charged with share-price manipulation and breach of trust. The two external brokers helped the three WestLB workers make the trades, according to the statement. The suspects weren’t identified.
The losses stem from transactions in which WestLB’s traders bet the gap between common and preferred shares would narrow. The probe led to former executives who were investigated for failing to inform the lender’s supervisory board about the trading risks agreeing last year to pay 445,000 euros to settle the claims. Prosecutors at the time said the probe looked into 600 million euros in losses WestLB had from speculative trading by its own staff.
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Microsoft Complaint May Expand Scope of Google Antitrust Probe
Google bars rivals from search boxes on websites, hinders advertisers from transferring campaign data between search ad platforms and blocks phones running Microsoft’s operating system from working properly with YouTube, Redmond, Washington-based Microsoft said in a blog posting by General Counsel Brad Smith.
The complaint to EU regulators in Brussels threatens to widen a probe started last year after a Microsoft unit and two other rivals last year complained that the company’s dominance chokes off advertising revenue. Google has almost 95 percent of the search market in Europe, Microsoft’s Smith said, citing data from regulators.
“These allegations cover new and difficult ground and, if Google fights, clearly increase the likelihood of a long investigation,” said Matthew Hall, an antitrust lawyer at McGuire Woods LLP in Brussels.
Amelia Torres, a spokeswoman for the European Commission, said the antitrust investigation is “still at the preliminary stage” and that regulators would inform Google about the complaint and “ask for its views on it.”
Google “is not surprised” that Microsoft complained because its advertising subsidiary, Ciao from Bing, also filed a complaint last year, said Al Verney, a spokesman for Mountain View, California-based Google in Brussels.
“We continue to discuss the case with the European Commission and we’re happy to explain to anyone how our business works,” Verney said in an e-mailed statement yesterday.
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Ex-Galleon Manager Spars With Rajaratnam Attorney Over Trades
Former Galleon Group LLC portfolio manager Adam Smith and a defense lawyer for Raj Rajaratnam, the hedge-fund’s co-founder, sparred over why the firm bought stock in ATI Technologies before a 2006 takeover.
During cross-examination yesterday, the defense attorney, Terence Lynam, sought to show jurors that Galleon and Rajaratnam bought shares in ATI and other companies for lawful reasons and not because Smith, 39, had come into inside information, as he testified this week as a prosecution witness. Lynam said, for instance, that Rajaratnam didn’t buy stock at the same time Smith did.
“He’s not buying when you’re buying?” Lynam asked Smith about purchases of Intersil Corp. (ISIL) Smith had testified that he got leaks from an Intersil insider and passed them to his boss.
Lynam also asked questions suggesting his client didn’t grasp that Smith was referring to a source of inside information during a phone call between the two that the government secretly taped.
“You have no idea that when you got on the phone and mentioned Kamal, that he knew who that was?” Lynam asked Smith. Jurors previously heard a recording of Smith telling Rajaratnam that “Kamal” -- who he said was Kamal Ahmed, a Morgan Stanley investment banker -- said Vishay Intertechnology Inc. (VSH) may be selling itself.
Ahmed, who has not been charged, denies wrongdoing.
Rajaratnam, 53, is on trial in Manhattan federal court 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 by corporate insiders. Rajaratnam denies wrongdoing, saying he based trades on research and published sources.
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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Tony Chan Seeks Top Court Review of Ruling Over Wang Estate
Nina Wang’s former feng shui adviser and lover Tony Chan asked for a review by Hong Kong’s highest court of a ruling that denied his claim to the estate of the late property tycoon.
Chan has a right to a hearing as the amount in dispute is more than HK$1 million ($128,400), his lawyer Anderson Chow told the Court of Appeal yesterday. The court’s conclusion that Chan had forged Wang’s will is also a “grave and serious” finding, Chow said.
Judge Doreen Le Pichon adjourned the hearing after about an hour and said the three-judge panel would deliver a decision on Chan’s request in due course.
Chan, 51, is free on HK$5 million bail, having been arrested on suspicion of forgery after Hong Kong’s High Court first ruled against him in 2010. The Court of Appeal on Feb. 14 upheld that decision and ordered Wang’s estate, valued at $12 billion by lawyers for its administrators, to go to charity.
Chan claimed Wang left him her fortune after a 15-year intimate relationship that began when he was hired to help find her kidnapped husband Teddy, with whom she built the Chinachem Group.
Wang’s 2002 will, which the appeal judges said was indisputably valid, bequeathed the estate to Chinachem Charitable Foundation Ltd. that she created with Teddy in 1988. Supervision of the charity was to be entrusted to a body formed by the Secretary General of the United Nations, the premier of China and the chief executive of Hong Kong, according to the appeal ruling.
The case is between Chinachem Charitable Foundation Limited and Chan Chun Chuen and the Secretary for Justice, CACV62/2010 in the Hong Kong High Court of Appeal.
Trial Lawyers Scour Jury’s Profiles on Facebook, Twitter
When jurors were chosen for the perjury trial of baseball star Barry Bonds last month, they were barred from using social media in regards to the case. Such a ban doesn’t extend to lawyers, who mine Facebook Inc. profiles of jurors to unearth a bias that might hurt or help their side, Bloomberg’s Ryan Flinn reports.
Facebook, Twitter Inc. and other services have become a major resource for both prosecutors and defense attorneys, letting them glean more insight than they can get from jury questionnaires, said Joseph Rice, chief executive officer of Jury Research Institute in Alamo, California.
“Social media has given us an incredible tool, because it’s something jurors voluntarily engage in, and they post information about their activities or affiliations or hobbies,” Rice said. That reveals “their life experience or attitude that may have an impact on how they view the facts of the case.”
The practice adds fuel to the debate over social-networking privacy and whether Internet postings should be used to reject someone from a job or academic program -- or a seat in the jury box. Facebook has more than 500 million users, while Twitter members post 140 million messages daily. That yields a wealth of data that lawyers can use to screen people or hone arguments.
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Fed Releases Discount-Window Loan Records Under Court Order
The Federal Reserve released thousands of pages of secret loan documents under court order, almost three years after Bloomberg LP first requested details of the central bank’s unprecedented support to banks during the financial crisis.
The records -- 894 files in PDF form that must be individually opened and read -- reveal for the first time the names of financial institutions that borrowed directly from the central bank through the so-called discount window. The Fed provided the documents after the U.S. Supreme Court last month rejected a banking industry group’s attempt to shield them from public view.
“This is an enormous breakthrough in the public interest,” said Walker Todd, a former Cleveland Fed attorney who has written research on the Fed lending facility. “They have long wanted to keep the discount window confidential. They have always felt strongly about this. They don’t want to tell the public who they are lending to.”
The central bank has never revealed identities of borrowers since the discount window began lending in 1914. The Dodd-Frank law exempted the facility last year when it required the Fed to release details of emergency programs that extended $3.3 trillion to financial institutions to stem the credit crisis. While Congress mandated disclosure of discount-window loans made after July 21, 2010, with a two-year delay, the records released yesterday represent the only public source of details on discount-window lending during the crisis.
The Fed documents released yesterday show the central bank providing credit to borrowers large and small. A page described as “Primary Credit Originations, February 5, 2008” lists the New York branch of Deutsche Bank AG with a loan of $455 million from the New York Fed. On the same day, Macon Bank is listed with a $1,000 loan from the Richmond Fed.
Lending through the discount window soared to a peak of $111 billion on Oct. 29, 2008, as credit markets nearly froze in the wake of the bankruptcy on Sept. 15, 2008, of Lehman Brothers Holdings Inc. (LEHMQ) While the loans provided banks with backstop cash, the public has never known which banks borrowed or why. Fed officials say all the loans made through the program during the crisis have been repaid with interest.
Former Fed officials, lawyers representing the central bank, and even some Fed watchers have expressed concern that revealing the names of discount-window borrowers could keep banks away from the facility in the future.
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High Lehman, Madoff Fees Might Deplete SIPC, Official Says
High fees paid to the trustees of bankrupt Lehman Brothers Holdings Inc.’s brokerage and of Bernard Madoff’s collapsed firm might deplete the $2.5 billion fund of the Securities Investor Protection Corp., according to a report by the Securities and Exchange Commission’s Inspector General.
The report assesses how well the SEC is doing in overseeing SIPC, which liquidates bankrupt brokerages to pay creditors. There is “significant criticism and concern” over the brokerage trustees’ fees in the Lehman and Madoff bankruptcies, according to the report. The SEC must make “systematic” inspections to ensure cost-effective liquidations, it said.
Lehman brokerage trustee James Giddens and his law firm were paid about $108 million in the 24 months from Lehman’s September 2008 bankruptcy through September 2010, the report said, citing court documents. Madoff trustee Irving Picard and his law firm were paid about $102 million in the 21 months from December 2008, when Madoff was arrested, through September 2010, it said.
As the liquidations are far from over, “fees paid to date for both the Lehman and Madoff liquidations are a mere fraction of the amounts that will eventually be sought,” the report said.
The last time the SEC inspected SIPC thoroughly was in 2003, with a follow-up in 2005, it said.
“In the SEC’s inspection of SIPC, the SEC identified several deficiencies in SIPC’s operations regarding its controls over fees, an improperly denied claim, internal policies and guidance, education initiative and funding options,” it said.
Yet the SEC failed to set up a review schedule and scope for inspections, the Inspector General said. As a result, 14 liquidations from 2003 until today haven’t been scrutinized by the SEC, according to the audit report.
SIPC’s board “constantly monitors the SIPC fund to assure that the corporation has sufficient assets to fulfill all of SIPC’s statutory missions,” Stephen Harbeck, SIPC’s president, said in an e-mail. Adding to resources, “SIPC’s members are currently paying assessments of one quarter of one percent of their net operating revenues to SIPC,” he said.
Neither Amanda Remus, a Picard spokeswoman, nor Jake Sargent, a Giddens spokesman, responded to e-mails requesting comment.
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