HSBC Holdings Plc’s proposed $62.5 million settlement with investors in an Irish fund that lost their money in Bernard Madoff’s Ponzi scheme was rejected by a U.S. judge.
U.S. District Judge Richard Berman in Manhattan said at a hearing yesterday that he won’t grant tentative approval to the settlement, announced in June, saying it’s “not fair, reasonable or adequate, even at this preliminary stage,” for the investors in Thema International Fund Plc. Thema acted as a so-called feeder-fund steering money to Madoff’s firm.
The investors sued Thema and other defendants, including London-based HSBC, which acted as Thema’s custodian, in January 2009. The plaintiffs are seeking to represent all Thema investors who lost money when Madoff’s scheme was exposed in December 2008. They claim HSBC, Europe’s largest bank, should have known Madoff was a fraud.
Among the “obvious deficiencies” Berman identified in denying approval was a provision setting aside $10 million to pay the fees and expenses of the investors’ lawyers in pursuing claims against non-settling defendants outside the U.S.
Lisa Sodeika, an HSBC spokeswoman, didn’t return a phone message seeking comment on the ruling.
Madoff, 73, pleaded guilty in 2009 to orchestrating what has been called the biggest Ponzi scheme in history. He’s in a federal prison in North Carolina, serving a 150-year sentence.
The case is In re Herald, Primeo and Thema Securities Litigation, 09-CV-289, U.S. District Court, Southern District of New York (Manhattan).
New York Life, Insurers Fault Madoff Trustee’s Tremont Deal
New York Life Insurance Co. and six other insurance companies assailed the $1 billion settlement the trustee liquidating Bernard Madoff’s firm forged with Tremont Group Holdings Inc., saying it didn’t treat all of Tremont’s funds equally.
As limited partners of the hedge fund’s Opportunity III fund, they said they stand to lose if a court rules that trustee Irving Picard erred in denying compensation to the Ponzi scheme’s so-called net winners. While Picard’s deal with Tremont protects the hedge fund’s other funds by letting them recalculate claims in event of such a ruling, it doesn’t protect the insurance companies, they said in a bankruptcy court filing yesterday in New York.
“The agreement contains an ambiguity that may be used by the trustee to refuse to recalculate,” they said.
A group of Madoff’s investors last week asked a U.S. appeals court to review its Aug. 16 ruling that bars them from calculating losses based on their account statements. The court’s “general approval” of Picard’s method of calculating who gets compensated may be “modified,” the insurers said.
As part of the Tremont deal, its funds will be allowed to make claims on the Madoff estate of about $3 billion. The insurers said the trustee needs to clarify their status in the arrangement.
Amanda Remus, a Picard spokeswoman, declined to comment on the insurers’ complaint.
The Tremont case is Picard v. Tremont Group Holdings Inc., 10-5310, U.S. Bankruptcy Court, Southern District of New York (Manhattan.)
GE Says FHFA Filed Mortgage-Security Suit Without Warning
General Electric Co. (GE) said it was sued “without any prior discussion” by the federal agency that controls Fannie Mae and Freddie Mac over $549 million in mortgage-backed securities and will fight the suit.
The Federal Housing Finance Agency sued 17 financial institutions including GE on Sept. 2, alleging that they made inaccurate statements about the quality of loans underlying the securities, including those issued in 2005 by WMC Mortgage Corp., which GE sold in 2007.
“These securities have since paid down to around $66 million in remaining principal,” Fairfield, Connecticut-based GE said in a statement on its website. The FHFA’s suit was filed in New York state court in Manhattan.
The FHFA also sued Ally Financial Inc., Countrywide Financial Corp. and Morgan Stanley in New York state court. The agency filed similar complaints in Manhattan federal court against Citigroup Inc., Goldman Sachs Group Inc. (GS), Merrill Lynch & Co., Barclays Plc (BARC), Nomura Holdings Ltd., HSBC Holdings Plc (HSBA), Societe Generale SA (GLE), Credit Suisse Group AG, Deutsche Bank AG and First Horizon National Corp. It sued Royal Bank of Scotland Group Plc in federal court in Connecticut.
The FHFA suit against GE was brought the same day U.S. Bank NA, a unit of Minneapolis-based U.S. Bancorp, sued WMC and EquiFirst Corp. over a pool of more than $550 million in mortgage-backed securities.
The companies originated the loans and failed to repurchase them, in violation of a 2006 agreement with securities holders, U.S. Bank said in the lawsuit, filed in Minneapolis federal court. U.S. Bank asked the court to force WMC and EquiFirst to buy back all defective loans.
The FHFA case is FHFA v. General Electric Co., New York State Supreme Court, New York County (Manhattan).
The U.S. Bank case is MASTR Asset Backed Securities Trust 2006-HE3, 11-02542, U.S. District Court, District of Minnesota (Minneapolis).
Hands Said to Seek EMI Valuation Documents From Citigroup, PWC
Guy Hands is seeking to recover documents about reductions to EMI Group Ltd.’s debt in a move to review the deal that led Citigroup Inc. (C) to seize control of the music label, three people with knowledge of the matter said.
Lawyers for Hands’s private-equity firm, Terra Firma Capital Partners Ltd. and PricewaterhouseCoopers LLP, which was EMI’s administrator in the restructuring process, met yesterday in a London court at a so-called pre-action disclosure hearing, said two of the people, who declined to comment because the matter is private. Terra Firma will formally present a request to the High Court by December to obtain the valuation documents used as the basis of the EMI debt deal, they said.
Citigroup gained control of EMI in February as the record label struggled to meet the terms of 3.4 billion pounds ($5.4 billion) in loans used to finance its takeover by Terra Firma in 2007. New York-based Citigroup has since initiated a process to sell the 114-year-old British company.
The U.S. lender ended up owning all of EMI after the debt-for-equity swap reduced EMI’s debt by 65 percent to 1.2 billion pounds, EMI said in a statement then.
Officials at Citigroup, Terra Firma, EMI and PricewaterhouseCoopers declined to comment yesterday.
Pre-action disclosure in the U.K. allows claimants to obtain copies of documents before a possible lawsuit.
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Lehman’s Bonus Claims Against Barclays Challenged by Judge
Lehman Brothers Holdings Inc.’s bankruptcy judge said he doesn’t see how the failed investment bank was damaged by what Lehman says is Barclays Plc’s failure to pay $500 million in employee bonuses.
Lehman says Barclays was required to pay $2 billion in bonuses and paid only $1.5 billion as part of its purchase of Lehman operations in 2008. U.S. Bankruptcy Judge James Peck said at a hearing yesterday that the amount for bonuses was an estimate and that the transaction was intended to protect Lehman from employee claims for compensation.
“I don’t see how Lehman was damaged,” Peck said.
The dispute stems from the purchase by Barclays of Lehman’s North American broker-dealer in the days following the investment bank’s September 2008 bankruptcy filing. Lehman lost a bid to recover what it said was an $11 billion windfall that went to London-based Barclays.
Lehman says it should be awarded $500 million in damages resulting from Barclays’s failure to meet its obligation to pay the full bonus amount. The bonus payments were part of the consideration in the sale, and Lehman is owed $500 million, said the bankrupt firm’s lawyer, Robert Gaffey.
“Lehman is entitled to all the sale consideration paid for the assets it has indisputably delivered to Barclays,” he told Peck. “Assets were given to Barclays, and Barclays didn’t pay for them.”
Peck said Lehman employees were the ones entitled to payment. Barclays assumed those liabilities from Lehman, providing a benefit to Lehman even if the bonus payments turned out to be less than estimated, the judge said. He didn’t say when he would rule on the dispute.
“If the liability, whatever it is, is off the books how can there be a damage claim?” Peck said.
Barclays asked Peck to reject Lehman’s claim. It says the $2 billion was an estimate of the exposure assumed for all compensation, which wasn’t limited to bonuses. The bank said in court papers that it paid $1.95 billion in bonus, severance and related tax payments.
The main case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The lawsuit is Lehman v. Barclays, 09-01731, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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Omnicare Sues PharMerica and Board Over $440 Million Offer
Omnicare Inc. (OCR) sued PharMerica Corp. (PMC) in an attempt to force PharMerica directors to seriously consider Omnicare’s $440 million purchase offer and to rescind a poison pill anti-takeover defense.
Omnicare sued the directors after they rejected an Aug. 23 offer of $15 a share, 37 percent higher than PharMerica’s previous closing price on Aug. 22, according to the complaint filed yesterday in Delaware Chancery Court in Wilmington.
“The director defendants’ actions have made clear that they intend to protect their own individual positions even if this deprives PharMerica’s stockholders of their right to decide for themselves whether to realize an extremely valuable opportunity,” Omnicare said in the lawsuit.
PharMerica directors “will review the offer to determine the course of action that it believes is in the best interests of the company and its stockholders,” the Louisville, Kentucky-based company said in a statement yesterday.
Thomas Caneris, PharMerica general counsel, didn’t immediately return a call seeking comment on the lawsuit.
The case is Omnicare Inc. v. PharMerica Corp., CA6841, Delaware Chancery Court (Wilmington).
London Police Said to Arrest Times Journalist in Hacking Case
London police probing phone hacking at News Corp. (NWSA)’s U.K. operations arrested a journalist who has worked at the Times and Evening Standard in London, a person familiar with the matter said.
The arrested man is Raoul Simons, a sports editor for News Corp.’s Times newspaper, who was put on leave last year, according to the person, who declined to be identified because they aren’t authorized to speak about the case. Simons was suspended after an audio recording emerged in which a private investigator told him how to hack into mobile-phone voice mails, the person said.
Simons, who joined the Times in August 2009 from the London Evening Standard, is the 16th person arrested since the Metropolitan Police began a new probe of hacking at News Corp.’s News of the World tabloid in January. The Guardian newspaper separately said its reporter, Amelia Hill, who has written extensively about phone hacking, was questioned recently by police investigating leaks inside the force.
“Journalists would no doubt be concerned if the police sought to criminalize conversations between off-record sources and reporters,” the Guardian said in an e-mailed statement.
The police, who didn’t confirm the identity of the arrested 35-year-old man, said yesterday he was detained on suspicion of conspiring to intercept voice-mail messages. He was later released on bail.
Oliver Lloyd, a spokesman for the Daily Mail and General Trust Plc, which owned the Evening Standard when Simons worked there, declined to comment.
Andrew Mullins, the managing director of the Evening Standard, declined to comment. The paper is now majority-owned by Russian billionaire Alexander Lebedev.
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Goldman Sachs’s Pay Plan Hurts Shareholders, Lawyer Contends
Goldman Sachs Group Inc.’s compensation plan, which almost doubled top executive Lloyd Blankfein’s pay last year, unfairly rewards the investment bank’s employees at shareholders’ expense, a lawyer for investors said.
Goldman Sachs, the fifth-biggest U.S. bank by assets, has lost $50 billion in market value since 1999 while the company has paid out billions in compensation to the firm’s 31,000 employees, including Blankfein, its chairman and chief executive officer, John Harnes, an attorney for investors who have sued over the pay plan, argued yesterday.
Goldman Sachs, based in New York, “is being run for the benefit of employees rather than shareholders,” Harnes told Delaware Chancery Court Judge Sam Glasscock III. The judge heard arguments on whether shareholders’ suits seeking to recoup executive compensation should be thrown out and said he’d rule later.
The firm, which set a Wall Street pay record in 2007, was pilloried by politicians and labor unions for its compensation practices after getting taxpayer aid during the financial crisis. In July, Goldman Sachs officials set aside $8.44 billion for the company’s compensation pool in the first six months of this year, according to its website. That was 9 percent less than in the same period in 2010 as revenue tumbled 11 percent.
Blankfein’s $19 million compensation for 2010, which included a $5.4 million cash bonus, was almost double the prior year’s award even as Goldman Sach’s profits fell. Blankfein and other firm executives agreed to forgo cash bonuses in 2009 and take restricted stock grants as compensation to mute criticism of the firm’s pay practices.
Lawyers for the Southeastern Pennsylvania Transportation Authority, a Goldman Sachs shareholder, argue the firm’s lucrative compensation system is wasteful and rewards employees for taking risks that hurt the firm’s stock price.
Harness noted Goldman officials received billions in pay and bonuses last year while the firm settled claims by the U.S. Securities and Exchange Commission that executives misled investors in collateralized debt obligations linked to subprime mortgages.
The firm agreed to pay $550 million, the largest penalty ever levied by the SEC against a Wall Street firm, to resolve regulators’ claims that marketing materials about the investments had “incomplete information.”
Gregory Varallo, Goldman Sachs’s lawyer, countered investors haven’t provided any evidence that directors engaged in wrongdoing by creating the pay plan or encouraged excessive risk-taking by the firm’s traders and bankers.
Shareholder court filings seek to paint the investment bank as some kind of “vast criminal enterprise,” Varallo told Glasscock. Yet, investors can’t point to one illegal act committed by a Goldman Sachs director or employee, he said.
The case is In re the Goldman Sachs Group Inc. Shareholder Litigation, 5215, Delaware Chancery Court (Wilmington).
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Gundlach Says TCW Contracts Protected Him Against Firing
Jeffrey Gundlach testified in a trial against TCW Group Inc. over his 2009 firing that he had negotiated in contracts going back to 1992 specific conditions under which the firm could terminate him “for cause.”
“I wanted to make sure I couldn’t be fired out of the blue,” Gundlach told jurors yesterday in state court in Los Angeles. He also said that his contracts allowed him to take care of an alleged breach of his employment agreement within a fixed time period and that, since 1989, he’s been entitled to accrued compensation if he was fired by TCW.
Gundlach, who last month testified for four days during TCW’s case against him, was a witness yesterday in support of his counterclaims. He said he wouldn’t have set up TCW’s distressed-asset funds in 2007 and 2008 if he hadn’t thought he was protected against getting terminated before the funds started generating performance fees in 2010 and 2011.
“You don’t want to create a lot of forward value and not be there to earn it,” he said.
Gundlach, 51, who worked at TCW for 25 years and was named Morningstar’s Fixed Income Manager of the Year in 2006, claims the Los Angeles-based unit of Societe Generale SA 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.
Ten days after he was fired, Gundlach started his own money management firm, DoubleLine Capital LP. TCW sued in January 2010 alleging that Gundlach and three other former employees stole TCW’s trade secrets to start DoubleLine.
TCW’s damages expert testified that the company suffered $344 million in damages from Gundlach’s alleged interference with contracts and $222 million from a claimed breach of fiduciary duty.
Gundlach said under questioning from DoubleLine’s lawyer, Mark Helm, that the distressed-asset funds were set up to take advantage of the collapsing market for mortgage-backed securities. A profit-sharing agreement with TCW entitled Gundlach and his fixed-income group to 60 percent of the performance fees.
In December 2009, when TCW fired him, Gundlach expected the funds to double in value and generate about $1 billion in fees for TCW, he said. Gundlach said Bob Beyer, a former TCW chief executive officer, told him in 2007 that the $64 million that he could make yearly from the funds under an “ultra dream” scenario “could be a problem with Paris.”
TCW has said that Gundlach was an at-will employee because he never signed the five-year contract that was negotiated in 2007. Gundlach testified he “absolutely” thought he had a valid agreement about how much he got paid, the term for which he would be paid, and the reasons TCW could stop paying him.
The case is Trust Co. of the West v. Gundlach, BC429385, California Superior Court (Los Angeles).
J&J Vaginal Mesh Faces FDA Panel as Number of Lawsuits Rise
Marci Sutin Levin says U.S. regulators failed her by not requiring extensive testing before allowing Johnson & Johnson (JNJ) to sell the type of surgical mesh implanted in her in 2007.
The U.S. Food and Drug Administration used an abbreviated process known as 510(k) to clear the mesh, which supports weakened muscles that can’t hold a woman’s pelvic organs in place. Levin, a 65-year-old New York marketing executive, endures pain so intense that she can’t work, sleep through the night or have sex with her husband, she said. Levin said the endless pain hurts worse than natural childbirth.
“The pain of childbirth was finite, and you’re delivering a child,” Levin said in an interview. “This was very, very different. It’s relentless, and it’s untenable. And it doesn’t lead to anything.”
Levin filed one of about 270 lawsuits pending against J&J, based in New Brunswick, New Jersey. C.R. Bard Inc. (BCR), of Murray Hill, New Jersey, and other mesh makers also face litigation around the U.S. About 75,000 women a year have the devices inserted vaginally to treat pelvic organs that bulge, or prolapse.
The FDA warned July 13 of a rise in injuries related to the mesh, and it said last month the devices should be reclassified from moderate risk to high risk, a change that would typically require new clinical data.
A panel of outside FDA advisers begins a two-day hearing today on whether transvaginal mesh for pelvic organ prolapse, or POP, is safe and effective, and whether makers must submit more safety data to keep their products on the market. The panel also will discuss mesh used for stress urinary incontinence.
An industry working group disputes the FDA’s suggestion that the devices should be reclassified. Its members include mesh makers J&J; Bard; Boston Scientific Corp. (BSX) of Natick, Massachusetts; and American Medical Systems, acquired in June by Endo Pharmaceuticals Holdings Inc. (ENDP) of Chadds Ford, Pennsylvania. The Advanced Medical Technology Association, the manufacturers’ lobbying arm in Washington, is also a member.
Adam Slater, the New Jersey attorney who represents Levin and about 100 other women who have sued J&J or Bard in New Jersey state court, said the agency is “at an important crossroads” over how to protect patients.
A spokesman for J&J, Matthew Johnson, declined comment on the litigation. Bard spokesman Scott Lowry declined to comment on about 190 lawsuits it faces over its Avaulta pelvic mesh.
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Ex-Primary Global Networker Chu Gets Two Years of Probation
Don Ching Trang Chu, a former consultant at Primary Global Research LLC, was sentenced to two years of probation for passing confidential information to the expert-networking firm’s hedge fund clients.
Chu, 57, pleaded guilty in June to conspiracy to commit securities fraud and conspiracy to commit wire fraud. He was the Taiwan liaison for Mountain View, California-based Primary Global, which links investors with industry experts at public companies, before he was arrested in November.
Chu, who is cooperating with prosecutors, admitted to being present at meetings between Primary Global’s clients and technology-company employees who moonlighted as consultants for the firm. In the meetings, the consultants disclosed material, non-public information, Chu said during his guilty plea.
U.S. District Judge Jed Rakoff said during yesterday’s sentencing in Manhattan that jail wasn’t warranted for Chu because of his “minimal” role in the scheme. Chu had faced as long as six months in prison.
“Your honor, I am extremely sorry for what I have done,” Chu told Rakoff before being sentencing. “I have had nightmares since last November. I will make sure I don’t repeat the same mistakes and ask you honor to forgive me.”
Chu had said the inside information he disclosed was shared with former SAC Capital Advisors LP portfolio manager Noah Freeman and Sam Barai, founder of Barai Capital Management LP. Both have pleaded guilty. Chu said he knew fund managers intended to use the secret tips to buy securities.
The case is U.S. v. Chu, 1:11-cr-00032, U.S. District Court, Southern District of New York (Manhattan).
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Ex-TSMC Manager Deserves 46-Month Prison Term, U.S. Says
A former Taiwan Semiconductor Manufacturing Co. (2330) manager who pleaded guilty to being part of an insider-trading scheme involving Primary Global Research LLC deserves a prison term of as long as three years and 10 months, the U.S. said.
Manosha Karunatilaka, of Marlborough, Massachusetts, who worked as an account manager for Taiwan Semiconductor, pleaded guilty in May to accepting about $35,000 to pass material, nonpublic information about the company’s orders while also working as a consultant for Primary Global.
An analyst at an unnamed New York-based hedge fund which used Primary Global’s services spoke to Karunatilaka frequently from 2008 to 2010, prosecutors said in court papers filed yesterday. In May 2009, acting on a recommendation from Karunatilaka to bet that Taiwan Semiconductor shares would fall, the fund made a profit of about $1.7 million, the U.S. said.
“For tens of thousands of dollars, he cheated the system and provided sophisticated stock traders with an unfair advantage over the average investor,” Manhattan assistant U.S. attorneys Antonia Apps and David Leibowitz said in the papers.
While Karunatilaka has cooperated with the U.S. and accepted responsibility for his crimes, prosecutors said he deserves a prison term ranging from 37 to 46 months “to deter Karunatilaka and other corporate employees from engaging in insider trading.”
U.S. District Judge Jed Rakoff in Manhattan set sentencing for Sept. 15.
Brad Bailey, Karunatilaka’s lawyer, didn’t return a voice-mail message left at his office seeking comment on the prosecutors’ filing.
The case is U.S. v. Nguyen, 11-CR-32, U.S. District Court, Southern District of New York (Manhattan).
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Finra Chief Counsel Riefberg Joins Fried, Frank Law Firm
Former Finra Chief Counsel Linda Riefberg joined law firm Fried, Frank, Harris, Shriver & Jacobson LLP’s enforcement and investigations practice in New York.
Riefberg, 52, oversaw a broad range of investigations and disciplinary actions while at the Financial Industry Regulatory Authority’s department of enforcement. She was a lawyer in the enforcement division of the New York Stock Exchange, which merged in 2007 with the National Association of Securities Dealers to form Finra, the law firm said yesterday in a statement.
“Linda’s wealth of knowledge coupled with her Finra and NYSE expertise will be tremendously valuable to our clients,” Carmen J. Lawrence and Dixie Johnson, co-chairs of Fried Frank’s enforcement practice, said in the statement.
Finra is the largest independent securities regulator in the U.S., overseeing more than 4,000 firms and more than 633,000 registered securities representatives, according to its website.
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