Bank of New York Mellon Corp. (BK), targeted by New York for allegedly violating state law while representing mortgage-bond investors, was accused by Knights of Columbus of damaging its investment in mortgage securities.
Knights of Columbus, a charitable organization that invested in mortgage-backed securities, seeks to recover losses and demands punitive damages from the bank, according to an amended complaint filed yesterday in New York state court in Manhattan.
Bank of New York, which serves as trustee for trusts holding loans underlying mortgage securities, mismanaged the trust assets, Knights of Columbus said in a statement yesterday. It accused the bank in the complaint of gross negligence and recklessness and said the bank’s actions caused a “substantial” loss.
“It is apparent that the defendant knowingly failed in its obligation to receive, process, maintain, and hold all or part of the mortgage files,” Knights of Columbus, based in New Haven, Connecticut, said. As a result, it didn’t acquire mortgage-backed securities, “but instead acquired securities backed by nothing at all,” the organization said.
Kevin Heine, a spokesman for Bank of New York, said the complaint “is without merit.”
“We are confident we have fulfilled our responsibilities as trustee,” he said.
The case is Knights of Columbus v. Bank of New York Mellon, 651442-2011, New York State Supreme Court (Manhattan).
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Dexia Suit Against Deutsche Bank Moved to Federal Court
Dexia SA (DEXB)’s lawsuit against Deutsche Bank AG claiming fraud in connection with more than $1 billion in residential mortgage- backed securities was moved to federal from state court.
Dexia, the lender to local governments rescued by France and Belgium in 2008, sued Deutsche Bank in New York State Supreme Court in July. The case was moved to U.S. District Court in Manhattan Aug. 15 at Deutsche Bank’s request, according to court documents filed yesterday.
Germany’s biggest bank played a “ubiquitous role” in the mortgage origination and securitization process while betting against the U.S. housing market as far back as 2005, Dexia said in its complaint. Deutsche Bank spokeswoman Renee Calabro said last month that the Frankfurt-based company would fight the lawsuit. The bank hasn’t responded to the complaint.
By the end of 2007, Deutsche Bank had amassed a $10 billion short position that paid off when the loans backing the securities failed, Brussels-based Dexia claims.
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.
Deutsche Bank and its MortgageIT unit were sued by the U.S. in federal court in New York in May and accused of lying to qualify thousands of risky mortgages for a government insurance program. The bank has asked a judge to dismiss that complaint, saying that the alleged conduct occurred before it acquired MortgageIT.
The case is 11-cv-05672, Dexia SA/NV v. Deutsche Bank AG (DBK), U.S. District Court, Southern District of New York (Manhattan).
Madoff Trustee Picard Wins Ruling on Calculating Losses
The trustee liquidating Bernard L. Madoff’s former firm won an appeals court ruling that affirmed his method of determining which investors can recover money lost in the Ponzi scheme.
The federal appeals court in New York said yesterday that trustee Irving Picard can calculate losses by subtracting the amount withdrawn from an investor’s account from the total placed with Madoff, the so-called net investment method.
A group of Madoff victims urged the court to require Picard to use their final account statements, reflecting fictitious profits on money Madoff never invested, to determine losses. Yesterday’s ruling limits the number of victims who can claim money from the fund Picard oversees and reduces the amount of many eligible claims.
“Mr. Picard’s selection of the net investment method was more consistent with the statutory definition of ‘net equity’ than any other method advocated by the parties or perceived by this court,” Chief U.S. Circuit Judge Dennis Jacobs wrote in the opinion.
Picard has sued investors, banks and others he claims profited from Madoff or should have known of his fraud, seeking a total of about $100 billion. He has raised more than $8.6 billion, or almost half the $17.3 billion in principal he calculates investors lost in the fraud, including a $1 billion settlement with hedge-fund firm Tremont Group Holdings Inc. announced on July 28.
Madoff investors who removed more from their accounts than they invested, including the owners of the New York Mets baseball team, stand to lose from yesterday’s ruling. Picard has claimed $300 million in fictitious profits from a group of defendants tied to Mets owners Fred Wilpon and Saul Katz. He is also seeking $700 million in principal from Wilpon and Katz, claiming they should have known Madoff was running a fraud.
Karen Wagner, a lawyer for Wilpon and Katz, didn’t immediately return calls seeking comment on the ruling.
Picard’s loss calculation method also reduces the amount of payouts to Madoff investors by the Securities Investor Protection Corp., which reimburses defrauded investors as much as $500,000 per account. Picard represents SIPC.
“The Second Circuit’s ruling will destroy investor confidence in the capital markets because the promise of SIPC insurance is illusory,” said Helen Chaitman, a lawyer for many Madoff victims. “The message to every American who invests in the stock market is clear: Invest at your own risk and assume that SIPC insurance does not exist.”
Ron Stein, president of the Network for Investor Action and Protection, said in a statement that the decision is “another blow to small investors who merely relied on the information their broker gave them.”
Amanda Remus, a spokeswoman for Picard, said in a statement that the trustee has “maintained all along that our definition of net equity -- which is supported by longstanding precedents in bankruptcy and securities laws -- is the fairest approach to the determination of claims.”
The case is In re Bernard L. Madoff Investment Securities LLC, 10-2378, 2nd U.S. Circuit Court of Appeals (Manhattan).
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Agility (AGLTY) Pleads Not Guilty to Government Contract Fraud
Agility, the Kuwaiti storage and logistics provider, pleaded not guilty to charges it defrauded the U.S. government on a multibillion-dollar contract to feed troops overseas.
Agility, also known as Public Warehousing Co., denied yesterday in federal court in Atlanta accusations that it filed false invoices or conspired to pay premium prices to inflate its profit. Prosecutors said Agility encouraged companies it did business with to inflate costs through practices such as putting hamburgers in unnecessarily expensive packaging.
“Agility welcomes the opportunity to clear its name by having an impartial jury examine its work,” Agility said in a statement. “In bringing this case, the U.S. Department of Justice has criminalized what is, at most, a civil contract dispute.”
The estimated cost of the U.S. contract with Agility at the time it was signed was $4.66 billion, according to the November 2009 indictment. The final bill came to $8.6 billion, the government said. Agility bought food and transported it to U.S. soldiers in Kuwait and Iraq, prosecutors said.
The investigation into the company and its suppliers is continuing, federal prosecutors have said. Lawyers for both sides declined to comment after yesterday’s hearing.
Agility maintains that it was open and transparent with the government, which approved its prices, suppliers and business practices for seven years and continued to do so after the indictment, according to the statement.
“From 2003 to 2010, Agility operated under the most dangerous conditions to provide American troops with plentiful, high-quality food,” the company said in its statement. “No military has ever been as well fed in a time of conflict.”
The case is U.S. v. Public Warehousing Co., 09-cr-490, U.S. District Court, Northern District of Georgia (Atlanta).
Apple Can’t Enforce Samsung Sales Ban Beyond German Borders
Apple Inc. (AAPL) won’t be able to fully enforce a sales ban against Samsung Electronics Co. over the Galaxy Tab 10.1 tablet device after a German court limited its own ruling to within national borders.
The iPad maker isn’t allowed to enforce its Aug. 9 injunction outside of Germany against the Samsung parent company, which is based in Korea, the Dusseldorf Regional Court decided yesterday. The ruling is still fully enforceable against Samsung’s German arm and the ban on sales in Germany remains unaltered for both units, court spokesman Peter Schuetz said in an interview.
“The judges decided to limit the enforceability for now because there are doubts whether a German court has so a wide a jurisdiction over a company based in Korea,” Schuetz said.
Apple, which won the German injunction a week ago, contends Samsung’s Galaxy phones and tablet computer “slavishly copy” the iPhone and iPad. Apple, based in Cupertino, California, is also seeking a court order to block sales in the U.S. until a trial can be held on patent-infringement claims there.
Samsung welcomes the German court’s decision and is “fully committed” to providing mobile devices to the market without disruption, the company said in an e-mailed statement.
Yesterday’s decision is temporary as is the Aug. 9 injunction. The court has scheduled a hearing for Aug. 25 in the case, after which it may change either ruling.
The German case against Samsung is: LG Dusseldorf, 14c O 194/11.
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Gundlach Says He, TCW Group Managers Opposed Stern’s Return
DoubleLine Capital LP’s Jeffrey Gundlach told a jury he and other group managers at TCW Group Inc. opposed the appointment of Marc Stern as chief executive officer in June of 2009, six months before Gundlach was fired.
Gundlach, testifying for a third day in the trial that pits him and three other former TCW employees against the asset- management firm, said he told Stern, who had stepped down as the company’s president in 2005, and TCW founder Robert Day that they couldn’t just “breeze” back in, after he and the other managers had kept TCW going through the financial crisis.
“I expressed my view that it was not a good idea,” Gundlach told a Los Angeles jury yesterday, referring to a meeting with Day and Stern in May of 2009 at Day’s house before the news of Stern’s return to active management was made public.
Mark Attanasio, who co-ran TCW’s leveraged finance group that separated from the firm last year, was “even more negative than me” about the appointment, Gundlach said. Five TCW managers said in a letter to Societe Generale (GLE) SA, TCW’s parent company, that bringing an executive back from retirement would be a “major step backward,” Gundlach testified.
The only concession the managers got was that Stern was named interim chief executive, Gundlach said.
Los Angeles-based TCW fired Gundlach, 51, in December 2009 and sued him the following month after more than half of its fixed-income professionals joined his new firm. TCW seeks $375 million in damages, claiming Gundlach stole its trade secrets, including client portfolio data, to start DoubleLine.
Gundlach, who had worked at TCW for 25 years and who was named Morningstar’s Fixed Income Manager of the Year in 2006, countersued, saying TCW fired him to avoid having to pay management and performance fees for the distressed-asset funds his group managed and that went “through the roof.” Gundlach seeks about $500 million.
TCW alleges that Gundlach had become increasingly difficult to work with and was openly hostile to Stern. The company put Gundlach on leave Dec. 4, 2009, the day it announced that it had acquired Metropolitan West Asset Management LLC to manage the fixed-income portfolios of Gundlach’s group. The case is Trust Co. of the West v. Gundlach, BC429385, California Superior Court, Los Angeles County.
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Galleon’s Rajaratnam Loses Post-Trial Motion for Acquittal
Galleon Group LLC co-founder Raj Rajaratnam, who was found guilty of all 14 criminal counts against him by a jury in May, lost a bid to have his convictions thrown out.
U.S. District Judge Richard Holwell in Manhattan denied Rajaratnam’s request for a post-trial acquittal, ruling that prosecutors presented sufficient evidence of conspiracy and securities fraud for the jury to convict. Holwell’s ruling was dated Aug. 11 and filed yesterday.
Prosecutors from the office of U.S. Attorney Preet Bharara, calling Rajaratnam “the face of illegal insider trading,” have asked Holwell to give Rajaratnam as long as 24 years and five months in prison when he’s sentenced Sept. 27.
The U.S. called Rajaratnam the most “egregious violator” of insider-trading laws ever to be caught. He engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies including Goldman Sachs Group Inc. (GS), prosecutors said.
Terence Lynam, a lawyer for Rajaratnam, declined to comment on the ruling.
Rajaratnam, 54, gained $63.8 million as a result of the scheme, according to the government.
Prosecutors told jurors that Rajaratnam used inside information to trade ahead of public announcements about earnings, forecasts, mergers and spinoffs involving more than a dozen companies, according to the evidence presented to jurors in the eight-week trial. Among the companies were Santa Clara, California-based Intel Corp., Google Inc., ATI Technologies Inc. and Clearwire Corp.
The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
Ex-Brocade Chief Reyes Agrees to Pay $845,000 in SEC Case
Former Brocade Communications Systems Inc. (BRCD) Chief Executive Officer Greg Reyes, convicted of securities fraud for backdating employee stock-option grants, agreed to pay $845,251 to resolve a regulator’s lawsuit.
The settlement with the U.S. Securities and Exchange Commission, if approved by a judge, would resolve the agency’s case “in its entirety,” SEC Assistant Regional Director Robert Leach said in a filing Aug. 15 in San Francisco federal court.
The amount includes a $550,000 fine and $295,251 in disgorgement and interest, the filing said. Reyes also agreed not to violate securities laws, according to a filing signed by his attorney Neal Stephens.
Reyes was found guilty of securities fraud and other charges last year at his second trial stemming from stock- options manipulation at San Jose, California-based Brocade, the biggest maker of switches for data-storage networks. He was sentenced to 18 months in prison.
Stephens and Leach didn’t return voice-mail messages seeking comment on the settlement.
The case is SEC v. Reyes, 06-4435, U.S. District Court, Northern District of California (San Francisco).
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Rupert Murdoch ‘Confused,’ Misled U.K. Parliament, Firm Says
Rupert Murdoch was “confused or misinformed” when he gave testimony to British lawmakers probing phone hacking by News Corp. (NWSA)’s News of the World tabloid, the company’s former U.K. law firm said.
The alleged confusion resulted in News Corp.’s chairman giving “inaccurate and misleading” statements about why the company’s U.K. unit hired Harbottle & Lewis LLP in 2007 when it was faced with phone-hacking claims, the firm said in a letter to parliament made public yesterday. Murdoch had said he relied on the firm’s 2007 letter that he said gave News Corp. a clean bill of health.
Murdoch, who testified with his son James last month, may have confused Harbottle’s “narrow” focus on an employment lawsuit with that of BCL Burton Copeland, another firm that performed a nine-month review of potential privacy breaches at the News International unit, the firm said.
Harbottle & Lewis, based in London, “was not retained to provide News International with a ‘good conduct’ certificate which it could show Parliament, or anyone else, years after the event and for wholly different purposes,” the firm said in the letter. “Such use of its advice was expressly prohibited under its terms of engagement.”
A call to BCL Burton Copeland about its probe wasn’t immediately returned. News Corp. has declined to comment on the new letters published yesterday.
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On The Docket
Galleon Probe’s Danielle Chiesi Must Surrender Sept. 20
Danielle Chiesi, the former New Castle Funds LLC analyst sentenced to 2 1/2 years in prison after pleading guilty to passing inside stock tips to Galleon Group LLC co-founder Raj Rajaratnam, must surrender to begin her prison term on Sept. 20, a federal judge ruled.
U.S. District Judge Richard Holwell in Manhattan issued the order Aug. 15. He sentenced the 45-year-old former beauty queen last month after calling her crimes “deplorable.”
Holwell also sentenced Chiesi to a $25,000 fine, ordered her to do 250 hours of community service and imposed two years of supervised release after her prison term.
Chiesi pleaded guilty Jan. 19 to three counts of conspiracy, telling Holwell at the time that she was “deeply ashamed” of what she had done.
The case is U.S. v. Rajaratnam, 09-cr-1184, U.S. District Court, Southern District of New York (Manhattan).
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