FrontPoint, Galleon, JPMorgan, Wells Fargo in Court News
Ex-FrontPoint Partners LLC portfolio manager Chip Skowron joined those accused in a U.S. crackdown on insider trading of hedge funds when he was charged with conspiracy, securities fraud and obstruction.
Skowron, 41, of Greenwich, Connecticut, surrendered yesterday to agents at the Federal Bureau of Investigation’s New York office, said James Margolin, an FBI spokesman. Information Skowron obtained from an insider about hepatitis C drug trials enabled FrontPoint to avoid more than $30 million in losses, prosecutors said.
Skowron was linked to the case brought in November by U.S. Attorney Preet Bharara in Manhattan and the U.S. Securities and Exchange Commission against Dr. Yves Benhamou, an expert in hepatitis drugs and a former adviser for Human Genome Sciences Inc., prosecutors said. He pleaded guilty April 11 to federal charges and is cooperating with the U.S., prosecutors said.
“This case is also an example of insider trading gone global,” Bharara said at a news conference yesterday. “The alleged trail of cash and trade of information took the defendants from Manhattan to Milan and from Boston to Barcelona,” he said. “When Dr. Skowron needed information, Dr. Benhamou was always on call, helping Skowron and his hedge fund illegally benefit to the tune of $30 million.”
Benhamou acted as a paid consultant to hedge funds while also working as an adviser to HGSI and serving on its steering committee for trials of Albuferon, a hepatitis treatment, the U.S. said.
Skowron appeared briefly yesterday before U.S. Magistrate Judge Ronald Ellis, who agreed to release him on $6 million bond secured by his Connecticut home and the signatures of three financially responsible people. He declined to speak to reporters as he left the courthouse.
“Dr. Skowron intends to plead not guilty,” his lawyer James Benjamin Jr. said in a statement. “We look forward to responding to the allegations more fully in court at the appropriate time.”
The SEC yesterday separately accused Skowron of insider trading. Six hedge funds previously named as defendants in the case agreed to settle and pay more than $33 million in disgorgement and interest, without admitting or denying wrongdoing, the SEC said.
FrontPoint, which manages several hedge funds, closed its health-care funds last year because of the probe. It was subsequently spun off from Morgan Stanley (MS) in February.
Skowron, whose employment contract at FrontPoint was terminated in December, was previously an analyst at hedge funds Millennium Partners LLC in New York and SAC Capital Advisors LLC in Stamford, Connecticut, according to FrontPoint’s marketing documents dated September.
FrontPoint yesterday said in an investor letter that it had entered into a settlement with the SEC and that the payment won’t have any financial impact on the fund.
“The alleged conduct of the former portfolio manager is completely contrary to FrontPoint’s principles and represents a clear violation of FrontPoint’s policy against insider trading,” the hedge fund said yesterday in the letter.
Mark Lake, a spokesman for New York-based Morgan Stanley, declined to comment. Steve Bruce, a FrontPoint spokesman, declined to comment.
The case is U.S. v. Skowron, 11-MAG-997, U.S. District Court, Southern District of New York (Manhattan).
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Ex-Och-Ziff’s Fancy Sues Lawyers Over Failed Singapore Deal
Zain Fancy, the former head of Och-Ziff Capital Management Group LLC’s Asian real estate unit, sued the lawyer who acted for him in several Singapore deals after the collapse of a home purchase in the city state.
Fancy, who has sued hedge fund manager Och-Ziff for unfair dismissal, asked Singapore’s High Court to assess the damages he’s owed by law firm Tan Peng Chin LLC and its head of real estate Gwendoline Ong after his agreement to buy a bungalow for S$18.5 million ($14.7 million) in June was terminated in August. A closed hearing is scheduled for April 15.
The Singapore law firm has countersued to cap its liability to the forfeited deposit of S$184,600, “reasonable” legal costs and any difference to the property’s value in August. Ong has also asked the court to remove her as a defendant in the lawsuit, which was intended to embarrass her personally, according to court papers. Fancy has indicated he’s seeking damages including a S$10 million difference with the house’s current valuation, according to Ong’s filing.
Tan Peng Chin, managing director of the law firm, declined to comment, as did Alvin Yeo, who’s representing Fancy.
The cases are Tan Peng Chin LLC v Zain Asif Fancy OS68/2011 and Zain Asif Fancy v Tan Peng Chin LLC S117/2011 in the Singapore High Court.
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American Sues Travelport, Orbitz as Ticket Dispute Expands
American Airlines sued Travelport Ltd. to stop what it called anticompetitive behavior and retaliation against the carrier for a push to use its own technology to distribute fares and schedules to travel agents.
The legal action expands a dispute between AMR Corp. (AMR)’s American and global distribution systems that historically have compiled fare and schedule data from various airlines and distributed them to travel agents. American wants to bypass those companies, including units of Travelport and Sabre Holdings Corp., and substitute its proprietary technology.
“Travelport, Orbitz and other industry participants have undertaken attacks against American that have been swift and punitive,” said the lawsuit, which was filed April 12 in federal court in Fort Worth, Texas.
The lawsuit against Travelport and its Orbitz Worldwide Inc. (OWW) affiliate seeks triple the airline’s actual damages as well as punitive damages to be determined at trial. More than $2.7 billion in sales were booked through Travelport’s global distribution systems in the past year, the lawsuit said. American had $16.8 billion in passenger revenue in 2010.
American said on April 4 it reached a tentative agreement with Expedia Inc. that would allow the online travel agency and its Hotwire unit to immediately resume selling the airline’s tickets, resolving a dispute that started in December. American remains in talks with Sabre after the two earlier agreed to freeze a lawsuit over the matter.
The case is American Airlines Inc. vs Travelport Ltd, Travelport LP and Orbitz Worldwide LLC, 4-11-cv-00244-Y, Northern District of Texas (Fort Worth).
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LaBarge Sued by Shareholder Over $340 Million Ducommun Bid
LaBarge Inc. (LB), the electronics-manufacturing services company being bought by aerospace component maker Ducommun Inc. (DCO), was sued by a shareholder who contends the $340 million offer is too low.
LaBarge is worth more than the $19.25-a-share bid partly because of the value of future contracts, Barry Borodkin said in a Delaware Chancery Court complaint filed in Wilmington. Borodkin said he owns 25,000 LaBarge shares.
The price “fails to reflect the substantial value” of anticipated work on United Technology Corp.’s Sikorsky Black Hawk helicopter, Raytheon Co. (RTN)’s Tomahawk cruise missile and Boeing Co. (BA)’s aerial-refueling tanker, Borodkin claimed.
Ducommun, based in Carson, California, said in a statement April 4 it would acquire St. Louis-based LaBarge to add new customers and markets. Ducommun reported sales of $408.4 million last year, compared with LaBarge’s fiscal 2010 revenue of $289.3 million.
“It is LaBarge’s practice not to comment on pending litigation,” said Colleen Clements, a company spokeswoman, in an e-mailed message.
The case is Borodkin v. LaBarge, CA6368, Delaware Chancery Court (Wilmington).
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Galleon’s Schutte Won’t Say Whether Funds Are Competitive
Richard “Rick” Schutte, the former president of hedge- fund company Galleon Group LLC, sparred with a prosecutor over the nature of competition, pressure and investor expectations at the insider-trading trial of Raj Rajaratnam.
After testifying for two days in Manhattan federal court on behalf of Rajaratnam, his ex-boss, Schutte, once Galleon’s head of research, began fielding questions yesterday from Assistant U.S. Attorney Reed Brodsky, who asked him whether the hedge-fund industry is competitive.
“I’m not going to say whether it’s highly or lowly” competitive, Schutte answered. He was also noncommittal when Brodsky asked about the pressure to perform well at Galleon.
“I don’t know what you mean by pressure,” Schutte said.
Asked if Galleon investors would be content with an annual profit of 20 percent, a combative Schutte said, “I can’t speak to what investors would be happy with.”
Rajaratnam, 53, is the central figure in the largest crackdown on hedge-fund insider trading in U.S. history. The Sri Lankan-born money manager is accused of gaining $63.8 million from tips leaked by corporate insiders and hedge fund traders. He denies wrongdoing, saying he based his trades on research.
The cross-examination followed two days of questioning by defense lawyer Michael Starr, who had Schutte review analyst reports, news accounts, internal firm e-mails and other documents designed to show that Rajaratnam’s trades were based on Galleon research, not inside information.
During about 10 hours of direct testimony, Schutte sought to support the defense case that Rajaratnam’s trades were lawful. Prosecutors had claimed, for example, that Rajaratnam possessed inside information that Cisco Systems Inc. (CSCO) would acquire Starent Networks Corp.
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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Tobacco Industry Owes Millions for Care, Hospitals Say
Tobacco companies cost Missouri hospitals millions of dollars to care for patients with smoking-related illnesses who can’t pay their medical bills, a lawyer said in closing arguments of a lawsuit.
The city of St. Louis, along with more than 40 area hospitals, sued Altria Group Inc. (MO), R.J. Reynolds Tobacco Co., Lorillard Tobacco Co. and other cigarette makers, claiming they manipulated the nicotine content in cigarettes and misrepresented the health effects of smoking.
The tobacco companies “sell their defective products here and they take their money back to North Carolina, Virginia or wherever,” Kenneth Brostron, a lawyer for the hospitals, said yesterday in St. Louis. “They are responsible for what they did and it’s about time they take responsibility.”
The industry’s actions boosted the amount spent on “unreimbursed and uncompensated tobacco-related health care,” the hospitals said in court papers. The tobacco companies deny any responsibility for patient care costs at the hospitals or any financial losses by the hospitals. The suit, which doesn’t include patients as plaintiffs, went to trial in January.
“Mr. Brostron wants to punish companies for making perfectly legal cigarettes,” Andrew McGaan, lawyer for Reynolds, told the jury yesterday. “Even after this lawsuit was filed, some hospitals sold cigarettes in their gift shops. Should they be penalized?” he asked,
Attorneys for other defendants will give closing arguments today.
The case is the third such health-care cost-recovery claim to reach trial, according to regulatory filings by Altria. The industry won the first, in Ohio, in 1999. The second initially resulted in a $17.8 million award for a health insurer by a New York jury in 2001. That was reversed on appeal in 2004.
The case is City of St. Louis v. American Tobacco Co., CV 982-09652-01, Circuit Court, City of St. Louis, Missouri.
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TCF Appeals Court’s Refusal to Stop Limits on Swipe Fees
TCF National Bank appealed a lower-court decision rejecting its request to block forthcoming federal rules limiting the amount of money the largest U.S. banks can collect for debit- card transactions.
TCF, a unit of TCF Financial Corp. (TCB), sued Federal Reserve Chairman Ben S. Bernanke and the Fed’s Board of Governors in October, challenging the legislation included in last year’s Dodd-Frank financial regulation overhaul bill. TCF claims the rules, which aren’t final, are unconstitutional.
U.S. District Judge Lawrence L. Piersol, in Sioux Falls, South Dakota, on April 4 denied TCF’s request for a preliminary injunction, while rejecting the defendants request to throw out the suit.
TCF filed its notice April 12.
The case is TCF National Bank v. Bernanke, 10-cv-04149, U.S. District Court, District of South Dakota (Sioux Falls).
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DirectBuy Accord Opposed by Attorneys General of 37 States
DirectBuy Holdings Inc.’s nationwide settlement of a class action over its sales practices drew opposition from attorneys general in 37 states, who said the agreement offers no real benefit to consumers.
The deal settles a lawsuit brought by members in 2009 accusing the consumer club of marking up the supplier and manufacturer’s prices they paid. DirectBuy agreed in December to provide as much as $55 million in free memberships to class members. The settlement’s value to consumers is vastly overstated, Connecticut Attorney General George Jepsen said in court papers filed April 12 in U.S. District Court in Connecticut.
“The proposed settlement is, in essence, a sales vehicle for defendants designed to drive current and former customers into membership renewal contracts,” Jepsen said in the filing on behalf of 37 states, the District of Columbia and Puerto Rico. “The proposed settlement cloaks the limited-time ‘free’ memberships and reduced-price membership extensions as having value to absent class members.”
DirectBuy, based in Merrillville, Indiana, didn’t admit any wrongdoing in the agreement, which was granted preliminary approval in December by U.S. Magistrate Judge William Garfinkel. The company is owned by Miami-based Trivest Partners LP, a private equity firm which purchased it for an undisclosed amount in November 2007.
The settlement is fair, DirectBuy said yesterday in an e- mailed statement.
A settlement hearing is scheduled for May 10 before U.S. District Judge Janet C. Hall, according to the statement.
Jeffrey S. Nobel, an attorney for the plaintiffs and the settlement class, didn’t immediately return a phone call seeking comment.
The case is Christopher Wilson v. DirectBuy Inc., 09-00590, U.S. District Court District of Connecticut.
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Banks Must Pay Victims of Botched Foreclosures, Regulators Say
The 14 largest U.S. mortgage servicers must pay back homeowners for losses from foreclosures or loans that were mishandled in the wake of the housing collapse, according to a consent decree released yesterday.
The agreement between the servicers and U.S. regulators imposes more substantial penalties than early reports of the deal indicated. It could also help the U.S. Justice Department determine the size and scope of any future fines for the flawed practices, regulators said.
The banks, including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC), agreed in the settlement to conduct a review of all loans that went into foreclosure in 2009 and 2010. They also agreed to improve their foreclosure, loan modification and refinancing procedures by hiring staff, upgrading document-tracking systems, assigning a single point of contact for each borrower and policing lawyers and vendors.
The Office of the Comptroller of the Currency, the Federal Reserve, Office of Thrift Supervision and the Federal Deposit Insurance Corp. released the consent decrees in Washington.
Regulators took action against the companies for “unsafe and unsound” practices, said acting Comptroller of the Currency John Walsh, who called the settlement “comprehensive.”
“Our enforcement actions are intended to fix what is broken, identify and compensate borrowers who suffered financial harm, and ensure a fair and orderly mortgage servicing process going forward,” Walsh said in a written statement.
The sanctions are the first to arise from state and federal investigations into mortgage servicers’ lapses in foreclosure procedures. Unprepared for the record number of loan delinquencies brought by subprime loans and the collapse of housing prices, servicers relied on inexperienced workers who failed to track paperwork or improperly signed legal documents.
The banks didn’t admit or deny regulators’ findings, according to the orders.
Under the consent decree, banks must hire outside consultants to identify borrowers who improperly lost their homes, failed to get loans rewritten or were forced into court in 2009 and 2010 because of mistakes made by mortgage servicers or their vendors.
Banks must determine the financial injury to borrowers and, within the next six months, submit a plan for reimbursing them, according to the decrees.
In addition to JPMorgan and Wells Fargo, Bank of America Corp. (BAC), Citigroup Inc. (C), the GMAC unit of Ally Financial Inc., Aurora Bank FSB, EverBank Financial Corp., HSBC Holdings Plc (HSBA), OneWest, MetLife Inc. (MET), PNC Financial Services Group Inc. (PNC), Sovereign Bank, SunTrust Banks Inc. (STI), and US Bancorp also signed consent agreements with regulators.
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BGC, Tullett Settle U.K. Broker-Poaching Damages Lawsuit
The firms settled at a hearing in London yesterday, one month into a trial. Tullett lawyer Daniel Oudkerk told the judge the agreement was confidential and terms wouldn’t be disclosed. BGC lawyer Andrew Hochhauser said he had nothing to add.
Tullett, based in London, sued BGC in 2009 claiming Anthony Verrier, BGC’s executive managing director, spent tens of millions of pounds to convince the heads of various Tullett trading desks to breach their contracts by getting colleagues to defect. A year ago Justice Raymond Jack ruled against New York- based BGC and ordered a second trial on damages.
“This could have been a very, very unpleasant action,” Jack said at yesterday’s hearing.
Ronnie Fox, and employment lawyer at Fox Lawyers in London, said that while it was good the parties reached a settlement, he’s disappointed not to know the figure.
“A great many lawyers and people in the financial services sector have been watching this case,” said Fox, who isn’t involved in the case. “The initial judgment against BGC was extremely damning, so I’m sure a substantial figure is involved.”
Tullett sought to recoup lost profits, legal fees, “wasted management time,” the cost of steps “to safeguard its interests” and the gardening-leave pay to 10 brokers who were prevented from working while the lawsuit was going on, Oudkerk said at a hearing last month.
BGC spokesman Richard Oldworth said he couldn’t immediately comment. Tullett spokesman Nigel Szembel didn’t immediately respond to a message seeking comment.
The case is: Tullett Prebon Plc v. BGC Brokers LP, HQ09X01241, High Court (London).
JPMorgan Wins Dismissal of Ex-Deutsche Bank Executive’s Suit
JPMorgan Chase & Co. didn’t violate law or breach a contract when it fired the Australian head of its corporate derivatives marketing in 2008, after he objected to changes in the job, a judge ruled.
Colin Keays sued JPMorgan, claiming the bank lured him from Deutsche Bank AG (DBK) in 2005 and then deceived him and breached his contract by limiting him to dealing only with JPMorgan clients. He had sought more than A$6 million ($6.3 million) for his expected pay to January 2018, when he would be 60 years of age.
JPMorgan, the second biggest U.S. bank by assets, had the right, under its contract with Keays, to fire him by giving him three months notice or pay in lieu of the notice, Australia Federal Court Judge Robert Buchanan wrote in a 34-page ruling released yesterday. The bank abided by the terms of the contract, the judge said.
“Mr. Keays was under no obligation to accept the position at JPM,” Buchanan wrote. “When he did so it was on the terms which he had negotiated” and that included “dealing with the possibility that his employment might come to an end,” the judge said.
Keays declined to comment after yesterday’s verdict.
The case is Colin Keays v. J.P.Morgan Administrative Services Australia Ltd. (P)NSD1375/2008. Federal Court of Australia (Sydney).
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FDIC Settles Dispute Over Failed Bank Executive Documents
The Federal Deposit Insurance Corp. settled a lawsuit filed by a law firm representing former executives at four failed banks, who said they need access to bank files and records to defend against possible fraud claims.
A federal court in Atlanta dismissed April 12 McKenna Long & Aldridge LLP’s lawsuit against the FDIC after both parties requested the case be closed. McKenna Long sued in November after the FDIC demanded the law firm return records it received from its clients before the banks collapsed.
“I think the FDIC understands it is reasonable for bank officers and directors to have some access to documents,” said David L. Balser of McKenna Long in Atlanta. He declined to say in an interview how the suit was resolved.
The FDIC has a pending complaint against Bryan Cave LLP, alleging the St. Louis-based law firm broke federal privacy laws and Kansas trade secret laws by acquiring bank files while representing executives at Hillcrest Bank in Overland Park, Kansas. A federal judge in Atlanta is considering whether to end the case without a trial.
The FDIC said the records sent to Bryan Cave’s Atlanta office included customer information, as well as financial statements, business plans, and “confidential information relating to the FDIC’s regulatory activities,” according to court papers.
McKenna Long represents executives from four banks that failed last year: Darby Bank & Trust Co. in Vidalia, Georgia; McIntosh Commercial Bank in Carrollton, Georgia; Northwest Bank & Trust in Acworth, Georgia; and K Bank in Randallstown, Maryland. As part of that representation, the firm said it received copies of board and committee minutes, commercial loan files, and reports prepared by the bank executives.
Balser said the FDIC has not filed any lawsuits against his clients.
McKenna Long turned three boxes of materials over to the court shortly after asking for a ruling that the firm must have access to the materials. On Feb. 17, U.S. District Judge Richard Story ordered the documents released to the FDIC. He ruled that McKenna Long could access the documents in order to create an index, according to court records.
FDIC spokesman David Barr declined to comment on the matter.
The cases are McKenna Long & Aldridge LLP v. FDIC, 10- cv-3779, U.S. District Court, Northern District of Georgia (Atlanta) and FDIC v. Bryan Cave LLP, 10-cv-03666, Northern District of Georgia (Atlanta).
Massey Ex-Employee Pleads Guilty to Making False Statements
A former foreman at the Massey Energy Co. (MEE) coal mine in West Virginia where 29 workers died in an explosion last year pleaded guilty to a federal charge of making false statements to U.S. agents.
Thomas Harrah also pleaded guilty yesterday to a U.S. charge that he misrepresented himself as a certified foreman, qualified to conduct examinations of mining equipment. Harrah failed the test required to be certified as a foreman and used a false certification number to sign off on reports at the Upper Big Branch mine, the U.S. said.
“I signed the fire boss book knowing I didn’t have a certificate or nothing,” Harrah told U.S. District Judge Irene Berger yesterday in Beckley, West Virginia.
The fire boss inspects equipment before a shift and is required to be certified under federal mining regulations. When federal agents investigating the explosion “came to my house and talked about this situation, I lied,” Harrah said.
The allegations against Harrah, filed March 22, resulted from the continuing federal investigation into the causes of the Upper Big Branch explosion, according to the Justice Department. Harrah wasn’t employed by Massey at the time of the April 5, 2010, blast, the company said.
“When Mr. Harrah was caught having forged the certification he left before we could terminate his employment, which we intended to do,” Shane Harvey, Massey general counsel, said in an e-mail yesterday.
“It appears that Mr. Harrah forged the certification because he was unable to pass the test” required, Harvey said. “We have no tolerance for such behavior and are thankful that no one was hurt as a result of Mr. Harrah’s conduct.”
Judge Berger set sentencing for Aug. 11. Harrah faces up to 10 years in prison and a $500,000 fine, according to prosecutors.
The case is U.S. v. Harrah, 5:11-cr-00082, U.S. District Court, Southern District of West Virginia (Beckley).
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