HSBC, MBIA-Morgan Stanley, Google, JPMorgan in Court News

Alpha Prime Fund Ltd. and Senator Fund SPC, two funds sued along with HSBC Holdings Plc (HSBA) by the trustee liquidating Bernard Madoff’s firm, filed so-called cross claims against HSBC to try to recoup damages they incurred in the fraud.

HSBC, which acted as custodian for the funds, failed in its duty to monitor Madoff and profited from his Ponzi scheme at their expense, Alpha Prime and Senator Fund said in a filing. The London-based bank is therefore “liable for any damages accrued by” the funds, they said in the May 27 filing in U.S. Bankruptcy Court in Manhattan.

HSBC is “the direct cause of the loss of hundreds of millions of Alpha Prime’s dollars and tens of millions of Senator Fund’s dollars,” they said.

Irving Picard, the Madoff firm’s trustee, sued HSBC and a dozen feeder funds for $9 billion in December, saying they should have known of the fraud. HSBC, Europe’s biggest lender, has asked a district court judge in New York to dismiss Picard’s suit, saying it didn’t know of the fraud and lost $1 billion of its own money investing in funds that in turn put money with Madoff.

The tax and advisory firm KPMG LLP told HSBC about the risks of Madoff’s business in 2006 and 2008, according to copies of the reports obtained by Bloomberg, which was allowed access to them on the condition they not be published.

KPMG identified 25 “fraud and related operational risks” in the way Madoff received, checked and accounted for client funds, it said in a 56-page report dated Feb. 16, 2006, more than two years before the fraud came to light.

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.

In an e-mailed statement to Bloomberg in March, HSBC said that “KPMG did not conclude in either of its reports that a fraud was being committed by Madoff. HSBC did not know that a fraud was being committed and lost $1 billion of its own assets as a victim,” the bank said.

HSBC spokesman Patrick Humphris and spokeswoman Juanita Gutierrez didn’t respond to an e-mail seeking comment.

Madoff is serving a 150-year sentence in federal prison in North Carolina.

The case is Picard v. Alpha Prime, 09-01364, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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Banks May Negotiate Menu of Options in Foreclosure Deal

U.S. banks and state attorneys general, seeking to avoid $17 billion in court claims over faulty foreclosures, are discussing a settlement framework that may let firms choose from a menu of options for helping borrowers, two people briefed on the talks said.

Under the proposal, Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), JPMorgan Chase & Co., Citigroup Inc. (C) and Ally Financial Inc. would pay penalties and pledge billions of dollars in relief to home buyers, one of the people said, asking not to be named because the talks are private. Firms may fulfill obligations to borrowers over time, choosing among options such as reducing loan principal, cutting fees or paying moving costs, the people said.

Stitching flexibility into settlements may help defuse opposition from a group of Republican attorneys general, who object to principal reductions sought by other states, one of the people said. The pace of talks is accelerating, with parties also nearing agreement on an industrywide overhaul of procedures for handling mortgages, that person said.

State and federal officials have been meeting with the largest U.S. loan servicers to resolve a nationwide probe into documentation lapses during home seizures. Earlier this week, attorneys general told the banks they will face an estimated $17 billion in claims if the inquiries result in civil lawsuits, according to a person with knowledge of the talks. The banks had previously offered to pay $5 billion.

Under the proposal, banks would pay the penalties to the states, which would determine how to use the funds, according to the people briefed on the talks. The separate relief funds, which banks could decide how to provide, are expected to account for a majority of the companies’ costs, one of the people said.

Dan Frahm, a spokesman for Charlotte, North Carolina-based Bank of America, and Sean Kevelighan, a spokesman for New York- based Citigroup, declined to comment. Vickee Adams of San Francisco-based Wells Fargo and Gina Proia of Detroit-based Ally also declined to comment. A representative of New York-based JPMorgan didn’t respond to a request for comment.

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MBIA Can Proceed With Morgan Stanley (MS) Fraud Claim, Judge Says

A MBIA Inc. (MBI) unit that backed mortgage-linked securities which soured during the U.S. housing crisis can proceed with fraud and breach-of-contract claims against Morgan Stanley and two of the bank’s units, a New York judge ruled.

State Judge Gerald Loehr in White Plains rejected motions to dismiss claims by MBIA Insurance Corp. that the bank fraudulently induced the insurer to issue policies covering $223.2 million in mortgage-backed securities.

MBIA also can proceed with claims that Morgan Stanley Mortgage Capital Holdings LLC failed to cover defective loans backing the bonds, and that Saxon Mortgage Services Inc. breached loan-servicing obligations, the judge said. An unjust- enrichment claim against Saxon was dismissed.

“We are pleased that the court has allowed our fraud and contract claims to move forward,” Kevin Brown, a spokesman for Armonk, New York-based MBIA, said in a statement.

Mary Claire Delaney, a spokeswoman for Morgan Stanley in New York, declined to comment. The ruling was dated May 26 and posted on MBIA’s website May 27.

The case is MBIA Insurance Corp. v. Morgan Stanley, 29951/2010, New York State Supreme Court, Westchester County (White Plains).

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New Suits

BP Unit Accused in Suit of Mismanaging Worker Retirement Plans

BP Plc (BP/)’s North American unit was accused in a lawsuit by its employees of mismanaging their retirement savings plans by investing heavily in its own stock before last year’s Gulf of Mexico oil spill.

BP’s safety and compliance record before the April 2010 sinking of the Deepwater Horizon drilling rig made the company’s U.S. shares an “imprudent investment,” according to a consolidated master complaint filed May 27 in federal court in Houston. BP Corp. North America Inc., its directors and members of the savings plan committee breached their fiduciary duty by buying BP stock and “failing to divest the plans” of the shares, the employees said.

“A disaster of the proportion of Deepwater Horizon and the resulting losses were both predictable and likely,” the employees said. “Because of defendants’ failure to protect the participants’ retirement savings from being imprudently invested in an excessively risky BP stock fund, plaintiffs and the class have lost hundreds of millions of dollars in retirement benefits.”

BP workers last year filed multiple lawsuits on behalf of all U.S. employees participating in the company’s retirement savings plans. The suits, combined together in the Houston court, claim losses of more than $1 billion from the stock plunge after the rig explosion and subsequent spill.

Scott Dean, a BP spokesman, didn’t return an e-mail seeking comment May 27.

The case is In re BP Plc (BP) Securities Litigation, 4:10- md-2185, U.S. District Court, Southern District of Texas (Houston).

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Lehman Sued by Real-Estate Investors for Overvaluing Assets

Lehman Brothers Holdings Inc. (LEHMQ) real estate units and executives including former Chairman Richard Fuld were sued in New York State Supreme Court by investors who said they contributed part of $640 million in 2008 to properties for which Lehman overpaid.

The investors, including Barbara J. Fried of Virginia, described themselves in a filing as limited partners of Lehman Brothers Real Estate Partners III and 10 other partnerships formed by Lehman mostly in 2007, about a year before the former investment bank’s bankruptcy. They seek unspecified damages and fees for themselves and others in a similar situation, they said in the filing May 27.

While Lehman was writing down commercial real estate in 2007, the partnerships “spoke only of future market opportunities,” according to the filing. Overvalued assets including the “toy building” at 200 Fifth Avenue in Manhattan were bought and “warehoused” for the funds, which planned to borrow $1.2 billion to buy them and didn’t disclose the risk, the investors alleged.

The suit is similar to one filed in May 2010 by plaintiffs including Glickenhaus & Co.

Kimberly Macleod, a Lehman spokeswoman, didn’t respond to an e-mail seeking comment.

The case is Fried v. Lehman Brothers Real Estate Associates, 651461/2011, New York State Supreme Court (Manhattan). The main case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Google Sued by PayPal Over Claims It Stole Trade Secrets

Google Inc. (GOOG) was sued by PayPal Inc., the fastest-growing unit at online marketplace EBay Inc. (EBAY), over claims it misappropriated trade secrets from PayPal’s mobile-payment business.

Osama Bedier, a former PayPal executive now at Google, stole PayPal’s confidential information, the company said in the lawsuit filed May 27 in state court in San Jose, California. Stephanie Tilenius, another ex-PayPal executive now at Google, violated contractual obligations by recruiting Bedier, PayPal said.

Bedier “is now leading Google’s efforts to bring point-of- sale technologies and services to retailers on its behalf,” according to the complaint. “Bedier and Google have misappropriated PayPal trade secrets by disclosing them within Google and to major retailers.”

Both companies are trying to move into storefronts from online transactions and build their mobile businesses. PayPal, based in San Jose, is working with major retailers to develop a new type of point-of-sale system -- the equipment next to cash registers where consumers swipe credit cards. download coupons with a tap of their mobile phones.

“Silicon Valley was built on the ability of individuals to use their knowledge and expertise to seek better employment opportunities, an idea recognized by both California law and public policy,” Aaron Zamost, a Google spokesman, said in an e- mailed statement. “We respect trade secrets, and will defend ourselves against these claims.”

Google, based in Mountain View, California, unveiled May 26 two services to let consumers pay merchants and download coupons with a tap of their mobile phones.

The case is PayPal v. Google Inc., 11CV201863, California Superior Court, County of Santa Clara (San Jose).

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Verdicts/Settlement

JPMorgan Wins Lawsuit Over Banker Injured on Skiing Trip

JPMorgan Chase & Co. (JPM)’s European unit won a discrimination lawsuit by a London banker who said the bank cut his bonus and fired him after he was injured on a skiing trip with clients and had to work reduced hours.

The decision, handed down at the U.K. Court of Appeal May 27, overturned a 2008 ruling by a London employment tribunal that Russell Chweidan, an executive director for the bank’s hedge-fund sales credit team, was discriminated against because of disability.

Chweidan seriously injured his back while skiing with a client in March 2007, according to court documents. After the injury he had to wear a back brace and work fewer hours. In January 2008, he was given a bonus of $450,000, 44 percent less than the previous year. He was fired in July 2008.

“I very much doubt whether the reduction in the respondent’s bonus, dramatic though it was, provided sufficient evidence of direct discrimination on grounds of disability,” Judge Martin Moore-Bick said in the ruling.

A lawyer for JPMorgan, Emma Smith, said at a hearing earlier this month that Chweidan lost his job after he failed to build up his “narrow” client base because he was unable to entertain prospective clients in the evening. He had worked for JPMorgan and its predecessors since 1994.

Brian Marchiony, a spokesman for JPMorgan, declined to comment. Sharon Steward, a spokeswoman for Chweidan’s lawyers at Leigh Day & Co., declined to immediately comment.

The case is Russell Chweidan v. JPMorgan Europe Ltd., 10-2193, Court of Appeal, Civil Division (London).

Barai Capital Founder Admits Insider-Trading Fraud

Barai Capital Management LP founder Samir Barai pleaded guilty to securities fraud and other charges as part of the U.S. government’s largest crackdown on insider trading at hedge funds.

Barai, 39, of New York, also pleaded guilty May 27 in Manhattan federal court to conspiracy to commit securities and wire fraud, wire fraud and obstruction for impeding a federal grand jury probe by destroying evidence. U.S. Magistrate Judge Nathaniel Fox said Barai could face as long as 65 years in prison when he is sentenced Aug. 29.

The plea came just hours after Sonny Nguyen, 39, of San Jose, California, and a former senior financial analyst for Nvidia Corp. (NVDA), pleaded guilty before U.S. District Judge Jed Rakoff to conspiracy to commit securities and wire fraud in a related case.

“I deeply regret all of my actions in this case,” Barai said.

Barai and Nguyen are among 13 people charged in a federal investigation of insider trading brought by U.S. Attorney Preet Bharara in Manhattan. The probe is part of a larger investigation by Bharara’s office of insider trading by hedge funds including Galleon Group LLC.

Barai spoke into a microphone to describe his crimes, saying he conspired with two SAC Capital Advisors LP fund managers, Noah Freeman and Donald Longueuil, to violate federal securities laws. Freeman and Longueuil have pleaded guilty to insider trading charges in the case. Freeman is cooperating with prosecutors.

Both Barai and Nguyen implicated Winifred Jiau, then a consultant at expert networking firm Primary Global Research LLC in their schemes.

Barai and his lawyer, Evan Barr, declined to comment after court.

The cases are U.S. v. Barai 11-cr-00116, and U.S. v. Nguyen, 11-CR-161, U.S. District Court, Southern District of New York (Manhattan).

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Court News

Breyer Sold Wal-Mart Shares in Advance of Supreme Court Case

U.S. Supreme Court Justice Stephen Breyer sold between $15,000 and $50,000 in Wal-Mart Stores Inc. (WMT) shares last year in a move that has let him take part in a case that may limit class-action lawsuits.

The sale, revealed May 26 in Breyer’s annual financial disclosure report, took place in January 2010, three months before a federal appeals court ruled that Wal-Mart had to face a gender-bias suit on behalf of potentially a million female workers. The justices heard arguments in March on Wal-Mart’s appeal of that decision and are scheduled to rule by the end of June.

Breyer and his wife in recent years have sold shares in more than a dozen companies so he can take part in additional cases at the Supreme Court. Justices typically disqualify themselves from cases involving companies in which they have a financial interest.

Chief Justice John Roberts has also sold a number of his individual stock holdings since joining the court in 2005. According to his disclosure report, Roberts last year sold his Pfizer Inc. (PFE) stock, valued at $15,000 or less, eliminating a holding that on several occasions prevented him from taking part in Supreme Court cases.

Breyer continues to hold stock in a number of companies, including IBM Corp., Amgen Inc. (AMGN) and Cisco Systems Inc. (CSCO) Roberts owns shares of Microsoft Corp. (MSFT), Intel Corp. (INTC) and Freddie Mac, while Justice Samuel Alito owns Exxon Mobil Corp. (XOM) and Bristol- Myers Squibb Co. Alito sold less than $15,000 in Walt Disney Co. (DIS) stock last year.

Court Filings

Smurfit-Stone Investor Lawsuit Most Popular Docket

A lawsuit by Smurfit-Stone Container Corp. (SSCC) investors asking a judge to block a $3.5 billion buyout of the packaging maker by Rock-Tenn Co. (RKT) because it doesn’t provide enough for the company’s shares, was the most-read litigation docket on the Bloomberg Law system last week.

The investors lost the bid May 20 after a judge found Smurfit-Stone executives didn’t sell the company too cheaply.

The chancery case is Marks v. Smurfit-Stone, CA-6164, Delaware Chancery Court (Wilmington). The bankruptcy case was Smurfit-Stone Container Corp., 09-10235, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York, at eamon2@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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