Credit Suisse Group AG (CSGN), the Swiss bank facing possible U.S. indictment for aiding tax evasion, will likely settle with prosecutors by admitting wrongdoing and paying a penalty that may exceed $1 billion, tax lawyers said.
Credit Suisse, the second-largest Swiss bank, has too much to lose by fighting the Justice Department and risking indictment, said lawyers not involved in the case. Prosecutors told the bank last month that it’s a target of a probe into its former cross-border banking services to U.S. customers.
The lawyers expect Credit Suisse to reach an agreement like that of UBS AG (UBSN), which was charged in 2009 with aiding tax evasion by U.S. clients. UBS avoided prosecution by paying $780 million, admitting it fostered tax evasion, and giving the U.S. Internal Revenue Service data on more than 250 accounts. It later turned over data on another 4,450 accounts.
“The UBS deferred-prosecution agreement is going to be a template for what happens with Credit Suisse,” said tax attorney Bryan Skarlatos of Kostelanetz & Fink LLP in New York. “It’s very likely that they’ll reach an agreement with the U.S. government, pay a fine, and possibly turn over names.”
Victoria Harmon, a spokeswoman for Zurich-based Credit Suisse, declined to comment, referring to a bank statement on July 21. Seven Credit Suisse bankers, including the former head of North American offshore banking, Markus Walder, were indicted that day in federal court in Alexandria, Virginia, on a charge of helping U.S. clients evade taxes through secret accounts.
“Credit Suisse is committed to a fully compliant cross-border business,” the bank said in that statement. “Subject to our Swiss legal obligations and throughout this process we will continue to cooperate with the U.S. authorities in an effort to resolve these matters.”
Tax attorney Robert McKenzie said “it’s an absolute certainty” that Credit Suisse will enter into a deferred-prosecution deal with the Justice Department.
“The only smart thing you can do when you’re caught is to take the best deal and pay some money,” said McKenzie, of Arnstein & Lehr LLP of Chicago. “If Credit Suisse is indicted, the government could seek to forfeit the U.S. assets of the bank. A bank that’s convicted of a felony won’t have a license to operate in this country.”
Walder and the other Credit Suisse bankers helped U.S. customers evade income tax through accounts that weren’t declared to the IRS, according to the indictment.
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Ex-Nasdaq Official Gets 3 1/2-Year Term for Insider Trading
Former Nasdaq Stock Market Managing Director Donald Johnson was sentenced to 3 1/2 years in prison for using information obtained from his position with the exchange to engage in insider trading and ordered to pay back $755,066 he made from illegal trades.
Johnson, 57, who pleaded guilty in May to one count of securities fraud, was sentenced Aug. 12 in federal court in Alexandria, Virginia. He faced as many as 20 years at sentencing, though U.S. sentencing guidelines recommend a 37- to 46-month range. The judge said Johnson deserved the 42-month sentence because he violated his duty to investors.
“The conduct fundamentally compromises the integrity of the securities market,” U.S. District Judge Anthony Trenga said, adding that Johnson’s case is “sad and tragic” and “directly undermined the confidence the investing public has in the securities exchange.”
Johnson bought and sold shares of five Nasdaq-listed companies based on inside information from 2006 to 2009, he said at his plea hearing, and often made the trades from his work computer at Nasdaq, according to a lawsuit filed by the U.S. Securities and Exchange Commission in Manhattan federal court.
At his sentencing hearing Aug. 12, Johnson, wearing a dark suit and yellow tie, expressed remorse to the judge, saying he wanted to “make amends.”
“If I had to come up with a word for what I did, it is stupidity,” Johnson said. “There aren’t any answers to explain my activity.”
Johnson, a former managing director at Nasdaq’s market intelligence desk in New York, admitted making more than $640,000 from the illegal trades. Among the shares he traded was United Therapeutics Corp. (UTHR) based on inside information about test results for the drug Viveta, now called Tyvaso, and about the approval of the drug, the Justice Department said.
“Insider trading is an insidious crime,” said Justin Goodyear, a trial attorney with the fraud section of the U.S. Justice Department’s criminal division at the hearing. “He took advantage of his position of trust and used information for his own benefit.”
“The penalties of these actions are nothing short of crushing,” said Johnson’s defense lawyer Jonathan Simms, who asked for a jail term of no more than 18 months during the Aug. 12 hearing. “This man has endured a lot.”
The case is U.S. v. Johnson, 11-00254, U.S. District Court, Eastern District of Virginia (Alexandria.)
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Lawyer Should Get Up to 46 Months in Insider Case, U.S. Says
Jason Goldfarb, an attorney who pleaded guilty to passing inside information from two other lawyers to ex-Galleon Group LLC trader Zvi Goffer, should spend as long as three years and 10 months in prison, the U.S. said.
Prosecutors from the office of U.S. Attorney Preet Bharara in Manhattan said Goldfarb should be sentenced within the range prescribed by federal sentencing guidelines and forfeit $1.1 million, the amount they claim was gained in the scheme. The minimum term under the guidelines is three years, one month.
“Goldfarb’s crimes were particularly egregious because of his status as an attorney,” prosecutors said in court papers filed Aug. 12. “While working as an attorney obligated to protect client confidences, Goldfarb engaged in a scheme to misappropriate information protected by the attorney-client privilege in order to enrich himself.”
U.S. District Judge Richard Sullivan is free to disregard the guidelines when he sentences Goldfarb.
Goffer was convicted of all 14 criminal counts against him in June, in the second trial of defendants charged in a nationwide investigation of insider trading at hedge funds. Goffer’s former boss, Galleon Group co-founder Raj Rajaratnam, was convicted of insider trading in May. Prosecutors are seeking a sentence of more than 24 years when Rajaratnam is sentenced Sept. 27.
Harvey Greenberg, a lawyer for Goldfarb, didn’t return a voice-mail message seeking comment on the government’s sentencing request.
The case is U.S. v. Goffer, 10-cr-00056, U.S. District Court, Southern District of New York (Manhattan).
Lanco Infratech Wins Dismissal of Perdaman Bid to Block Loan
Lanco Infratech Ltd. (LANCI), an Indian power producer, won a dismissal in Australia of a bid by Perdaman Chemicals & Fertilizers Ltd. to block the use of a supplier’s coal assets as collateral for an $800 million loan.
Supreme Court of Western Australia Justice Andrew Beech dismissed Aug. 11 the request for an injunction to block the use of Perdaman supplier Perth-based Griffin Coal Mining Co.’s assets to help finance Lanco’s purchase of the miner, according to the ruling posted on the court’s website.
The injunction was rejected because it would “prevent or substantially inhibit Griffin from raising additional funds necessary to develop and expand its mine,” Beech wrote in the ruling.
Lanco acquired Griffin in February using financing from ICIC Bank Ltd.’s Singapore branch and Bank of New York Mellon’s London branch, according to the judgment. Lanco’s Australian unit, which now owns Griffin, agreed to provide its assets as collateral to Bank of New York Mellon to a maximum of $2.3 billion, according to the judge.
Perdaman has a 25-year supply agreement with Griffin and has sued the coal-miner for breach of contract. Perth-based Perdaman said Griffin’s assets would not be available to fulfill any judgment in the breach-of-contract.
The case is Perdaman Chemicals & Fertilizers Ltd. v. Griffin Coal Mining Co. 2011/WASC189 Supreme Court of Western Australia (Perth).
Operator of Fake Hedge Fund Sentenced to 63 Months in Prison
Benjamin Koifman, who pleaded guilty to conspiracy for his role in a scheme to cheat investors with a phony New York-based hedge fund, was sentenced to five years and three months in prison.
Prosecutors in the office of Manhattan U.S. Attorney Preet Bharara claimed Koifman and William Shternfeld ran A.R. Capital Global Fund LP, an unregistered investment adviser, and ARC Global Fund, a hedge fund that claimed to invest in equity of international real estate.
Koifman was sentenced by U.S. District Judge Sidney Stein in a hearing in Manhattan Aug. 12.
Prosecutors claimed that, from 2004 to 2006, Shternfeld and Koifman engaged in a scheme with co-conspirators to get at least 70 investors to invest about $20 million in the ARC Global Fund by making false statements about it.
Two other men in the case, Igor Levin of Brooklyn, New York, and Yevgeny Shvartsshteyn of Belle Harbor, New York, pleaded guilty to conspiracy in December.
The case is U.S. v. Shternfeld, 10-cr-00031, U.S. District Court, Southern District of New York (Manhattan).
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Ex-Hypo Alpe CEO Kulterer Charged Over Loans for Share Deal
Wolfgang Kulterer, former chief executive officer of Hypo Alpe-Adria-Bank International AG, was charged by Austrian prosecutors in a second case over misuse of funds linked to loans given to buyers of Hypo Alpe shares.
Kulterer and Guenter Striedinger, a former board member, arranged loans by the bank to companies in Liechtenstein who used it to buy stakes in Hypo Alpe’s leasing subsidiary, according to a statement by Gabriele Lutschounig, spokeswoman for the prosecutors’ office in Klagenfurt, Austria. That was a misuse of their authority to manage Hypo Alpe’s funds as well as violating capital rules in Austrian banking law, she said.
Kulterer’s lawyer Ferdinand Lanker declined to comment on the charge, saying in a telephone interview that he hasn’t yet received the indictment. Striedinger’s lawyer Norbert Wess said his client rejected the charges. The prosecutors also charged a lawyer and a tax consultant for aiding Kulterer and Striedinger.
Austria’s finance ministry installed a task force of lawyers, police, prosecutors and central bank auditors to find out who was responsible for the losses that resulted in Hypo Alpe’s 2009 nationalization. Kulterer and two other managers were acquitted in a separate criminal case in March, in which an appeal by prosecutors is pending.
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Facebook Documents Can’t Be Kept Confidential, Judge Rules
U.S. Magistrate Judge Leslie Foschio in Buffalo, New York, ruled Aug. 12 that Ceglia’s lawyers improperly designated all 120 of the documents, including versions of the contract Ceglia claims he signed with Facebook co-founder Mark Zuckerberg in 2003, as confidential.
Foschio removed the confidential designation from 85 of the documents. He gave Ceglia’s lawyers until Aug. 17 to turn over four copies of the contract, which they claimed were subject to attorney-client privilege.
Foschio last month ordered Ceglia to let Facebook run forensic tests on his computers, hard drives and electronic storage media, as well as on the contract and the e-mails he says support his claim. In court papers filed last week, Palo Alto, California-based Facebook said its inspection, by the computer forensics firm Stroz Friedberg LLC, turned up “smoking gun” evidence of fraud.
Ceglia, 38, sued Facebook and Zuckerberg last year, claiming that a two-page contract Zuckerberg signed in 2003 gave Ceglia half of the company when the service was started the following year. Facebook has grown to become the world’s biggest social-networking site, valued at as much as $69.2 billion, according to Sharespost.com, an online marketplace for investments in companies that aren’t publicly traded.
In the order Aug. 12, Foschio left in place confidentiality designations that Ceglia’s lawyers placed on 27 e-mails between Ceglia, Zuckerberg and people involved with developing the website for StreetFax, a company Ceglia was trying to launch at the time.
Facebook lawyer Orin Snyder had no immediate comment on Foschio’s ruling. Jeffrey Lake, a lawyer for Ceglia, didn’t return a voice-mail message seeking comment.
The case is Ceglia v. Zuckerberg, 1:10-cv-00569, U.S. District Court, Western District of New York (Buffalo).
BofA Defeats Arizona Bid for Private Ex-Employee Interviews
Bank of America Corp., which the Arizona Attorney General’s Office sued for consumer fraud, defeated the state’s attempt to gather information by interviewing former bank employees in private.
The state can’t interview former call-center employees, who dealt with borrowers about their mortgages, outside the presence of bank attorneys, Superior Court Judge Arthur Anderson in Phoenix ruled in a decision filed Aug. 12.
The attorney general’s office said the interviews are necessary to investigate claims against Bank of America and learn about its operations. The state accuses the bank in a lawsuit of misleading borrowers who sought loan modifications to reduce their mortgage payments.
The state said it fears Bank of America will interfere in the interviews if not conducted privately because the bank hindered a federal investigation into its foreclosure practices, according to court papers. Bank of America said it cooperated with the U.S. inquiry.
Amy Rezzonico, a spokeswoman for Arizona Attorney General Tom Horne, said in an e-mail that the office is “disappointed” with the decision.
“We will go forward and conduct interviews or depositions with former employees in accordance with the decision and hope that the bank’s lawyers don’t use their presence at the interviews to impede our ability to gather information,” she said.
Jumana Bauwens, a Bank of America spokeswoman, said in an e-mail that the Charlotte, North Carolina-based bank was pleased with the ruling.
The case is Arizona v. Countrywide Financial Corp., CV2010-033580, Arizona Superior Court, Maricopa County (Phoenix).
Blue Cross Must Face Michigan, U.S. Hospital-Pricing Suit
Blue Cross Blue Shield of Michigan lost a bid for dismissal of a joint U.S.-state lawsuit accusing the state’s biggest health insurer of driving up competitors’ costs through preferential-pricing hospital contracts.
U.S. District Judge Denise Page Hood in Detroit denied Aug. 12 the carrier’s request to throw out the lawsuit, filed last year. The governments are challenging Blue Cross’s so-called most favored nation, or MFN, contracts requiring hospitals to charge its competitors at least as much as it pays, if not more, for services.
“It is plausible that the MFNs entered into by Blue Cross with various hospitals in Michigan establish anticompetitive effects as to other health insurers and the cost of health services,” Hood said in a 23-page opinion that put in writing a June oral ruling.
The decision means the case will move toward a trial.
Blue Cross of Michigan had revenue of more than $10 billion in 2009 and insures more than 3 million state residents, according to Hood’s opinion,
The governments said in the Oct. 18 complaint that the nonprofit insurer contracted with 70 of the state’s 131 general acute-care hospitals, comprising more than 40 percent of the state’s acute-care beds. In some cases, those hospitals charged rivals 30 percent to 40 percent more than Blue Cross, the U.S. Justice Department said in a statement when the suit was filed.
Since filing the Michigan case, the U.S. expanded its investigation into Blue Cross practices in states including Kansas, Missouri and Ohio.
The company told the court earlier it will appeal.
The case is U.S. v. Blue Cross Blue Shield of Michigan, 2:10-cv-14155, U.S. District Court, Eastern District of Michigan (Detroit).
Mechel Wins Dismissal of Class Action Suit Over Stock Drop
OAO Mechel, Russia’s largest producer of coking coal, won its bid to have a U.S. judge dismiss a class action suit filed in 2009 by investor Dean Frederick and four pension funds over share-price declines.
Judge Richard Sullivan in the District Court of the Southern District of New York ruled in Mechel’s favor on Aug. 9, court documents show.
Mechel, controlled by billionaire Igor Zyuzin, was sued by investors over the drop in its share price after Russian authorities said in 2008 the company was engaged in anti-competitive conduct.
Mechel’s American depositary receipts lost half their value in New York trading in the week after Prime Minister Vladimir Putin said July 24 the company avoided taxes and sold coal to a Swiss unit at a quarter of the price charged domestically.
Mechel “failed to disclose material adverse facts about the company’s financial well-being, business relationships and prospects,” Frederick said in his complaint.
Ekaterina Videman, a spokeswoman for Mechel, declined to comment on the court decision.
The case is Frederick v. Mechel OAO, 09-cv-3617, U.S. District Court, Southern District of New York (Manhattan).
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Health-Care Law Moves Toward Supreme Court With Appeals Ruling
President Barack Obama’s health-care law moved closer to review by the U.S. Supreme Court with a federal appellate ruling that its requirement for most Americans to have insurance coverage is unconstitutional.
The 2 to 1 ruling conflicts with an earlier decision by a federal appeals panel in Cincinnati, which upheld the individual mandate. The provision exceeds Congress’s power to regulate commerce, the U.S. Court of Appeals in Atlanta ruled Aug. 12, affirming in part a lower court in a lawsuit filed by 26 states.
“This guarantees that the Supreme Court will rule on the constitutionality of the individual mandate, and makes it very likely that the court’s ruling will come by the end of June 2012,” said Kevin Walsh, an assistant professor at the University of Richmond School of Law in Virginia.
The U.S. Supreme Court often decides to accept cases where two or more of the federal appeals courts are in disagreement. Plaintiffs in the Cincinnati case have already asked the high court to review that ruling. A third federal appeals panel in Richmond, Virginia, has heard arguments in two cases brought over the health-care law and has yet to rule.
In the Aug. 12 ruling, the majority wrote that the “mandate represents a wholly novel and potentially unbounded assertion of congressional authority.” The law requires “Americans to purchase an expensive health insurance product they have elected not to buy, and to make them repurchase that insurance product every month for their entire lives.”
While throwing out the mandate, the panel overruled the lower court’s decision in that case to reject the entire health-care law as a result.
“Excising the individual mandate from the act does not prevent the remaining provisions from being fully operative as a law,” Chief U.S. Circuit Judge Joel Dubina, a Republican appointee, and U.S. Circuit Judge Frank M. Hull, a Democratic appointee, wrote. Hull is the first judge appointed by a Democratic president to rule against the law.
Dissenting in part, U.S. Circuit Judge Stanley Marcus, a Republican lower-court appointee later elevated by President Bill Clinton, said he would have upheld the act in its entirety.
Stephanie Cutter, a deputy senior adviser to Obama, said in an Internet posting that “we strongly disagree with this decision and we are confident it will not stand.”
Florida Attorney General Pam Bondi, a Republican, said in an e-mailed statement Aug. 12 that the “ruling by the Eleventh Circuit Court of Appeals upholds our position that the federal health care law exceeds Congress’ power.”
The case is State of Florida v. U.S. Department of Health and Human Services, 11-11021, U.S. Court of Appeals for the Eleventh Circuit (Atlanta).
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Mattel to Appeal Award to MGA Entertainment in Bratz Case
Mattel Inc. (MAT) said in a court filing that it will appeal a judge’s award of punitive damages and fees to MGA Entertainment Inc., the maker of Bratz dolls.
Mattel said it will ask the U.S. Court of Appeals in San Francisco to review an Aug. 4 ruling awarding MGA $225 million in punitive damages, attorney fees and costs. That ruling by U.S. District Judge David Carter in Santa Ana, California, brought the total award in the trial over the doll’s origins to $310 million.
A jury in April agreed with closely held MGA that El Segundo, California-based Mattel stole its trade secrets when company employees got into MGA’s showrooms at toy fairs using phony business cards.
The jurors awarded MGA $3.4 million for each of 26 instances in which they found Mattel misappropriated a trade secret, a total of $88.4 million. In August, Carter lowered the jury award to $85 million.
The jury rejected a claim that MGA stole Mattel’s trade secrets in 2000 when it made an agreement with Carter Bryant, a toy designer. Mattel said Bryant was working for it when he came up with the idea for the Bratz dolls and made the first sketches.
The case is Bryant v. Mattel, 04-09049, U.S. District Court, Central District of California (Santa Ana).
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On the Docket
Boiler-Room ‘Mastermind’ Marsh Must Wait to Learn Jail Term
Kenneth Marsh, the “mastermind” behind the Gryphon Holdings Inc. boiler-room operation, must wait until next month to learn how much prison time he will serve after a federal judge said he was leaning toward imposing five years and then postponed the decision.
U.S. District Judge Jack Weinstein in Brooklyn, New York, after deciding all aspects of Marsh’s sentence Aug. 11 except the prison term, said he would impose sentences for all 18 Gryphon defendants on Sept. 14, after holding individual hearings.
Weinstein mentioned the five years for Marsh, 44, before hearing from seven victims and listening to tapes of Marsh training members of Gryphon’s sales force.
Roger Burlingame, one of the prosecutors, told Weinstein a five-year term was “preposterous” and said there were “hundreds of people whose lives were destroyed” by the Gryphon fraud. Nonbinding federal sentencing guidelines call for 12 to 14 years for Marsh, he said.
Gryphon charged clients as little as $99 and as much as $250,000 for access to its investment recommendations, according to a related civil lawsuit by the U.S. Securities and Exchange Commission. All 18 defendants in the Gryphon scheme, including members of its sales force, pleaded guilty.
Marsh pleaded guilty in April to one count of securities fraud, admitting he misled investors into paying for phony stock tips. Gryphon defrauded almost 5,500 people out of $20 million, according to the government.
The criminal case is U.S. v. Marsh, 10-cr-00480, and the SEC case is SEC v. Gryphon Holdings Inc., 10-cv-01742, U.S. District Court, Eastern District of New York (Brooklyn).
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