Bank of America Corp. (BAC), the lender burdened by its Countrywide Financial Corp. takeover, would consider putting the unit into bankruptcy if litigation losses threaten to cripple the parent, said four people with knowledge of the firm’s strategy.
The option of seeking court protection exists because the Charlotte, North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private. A filing isn’t imminent and executives recognize the danger that it could backfire by casting doubt on the financial strength of the largest U.S. bank, the people said.
The threat of a Countrywide bankruptcy is a “nuclear” option that Chief Executive Officer Brian T. Moynihan could use as leverage against plaintiffs seeking refunds on bad mortgages, said analyst Mike Mayo of Credit Agricole Securities USA. Moynihan has booked at least $30 billion of costs for faulty home loans, most sold by Countrywide during the housing boom, and analysts estimate the total could double in coming years.
“If the losses become so great, how can Bank of America at least not discuss internally the relative tradeoff of a Countrywide bankruptcy?” Mayo, who has an “underperform” rating on the bank, said in an interview.
A Countrywide bankruptcy could halt legal proceedings and consolidate litigation into one court that would split up the subsidiary’s remaining assets for creditors, said Jay Westbrook, a law professor at the University of Texas at Austin. In effect, this would trade one type of litigation for another, one of the people said.
The decision would turn on whether the potential savings of a filing outweigh the risks involved in disavowing some of the firm’s obligations, the person said.
Larry DiRita, a Bank of America spokesman, said he couldn’t comment on whether the company planned to file a Countrywide bankruptcy. The bank “took great pains to preserve the separate identity of Countrywide,” DiRita said.
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Federal AT&T Suit Joined by New York, Six Other States
The U.S. lawsuit seeking to block AT&T Inc. (T)’s acquisition of T-Mobile USA Inc. was joined by seven states as their attorneys general said the proposed $39 billion deal would hurt competition and raise wireless telephone prices.
The states joining the amended complaint filed Sept. 16 by the U.S. Justice Department in federal court in Washington were New York, California, Massachusetts, Washington, Ohio, Pennsylvania and Illinois.
Participation by the states bolsters the Justice Department’s position and means any negotiated settlement of the case would have to win the states’ approval, said Herbert Hovenkamp, a professor and antitrust expert at the University of Iowa College of Law.
“If the federal government wants to go for a settlement and the states don’t like it, they can hold out,” Hovenkamp said in an interview. “The judge would have to listen to their complaints.”
The government’s antitrust suit claims that the merger of the two companies, which would make Dallas-based AT&T the biggest wireless carrier in the U.S. and cut the number of national competitors to three from four, is anticompetitive.
Michael Balmoris, a spokesman for AT&T, said 11 state attorneys general support the deal.
“We will continue to seek an expedited hearing on the Justice Department’s complaint,” he said in an e-mail. “On a parallel path, we have been, and remain, interested in a solution that addresses the department’s issues with the T- Mobile merger.”
U.S. District Judge Ellen Segal Huvelle has set a hearing for Sept. 21 on the scheduling and told the parties to be prepared to discuss settlement options.
The case is U.S. v. AT&T Inc., 11-cv-01560, U.S. District Court, District of Columbia (Washington).
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Rakoff Will Decide If Madoff Trustee Can Sue for False Profits
U.S. District Judge Jed Rakoff said that he rather than a bankruptcy judge will initially decide whether the trustee for Bernard L. Madoff Investment Securities Inc. has the right to sue customers for recovery of so-called fictitious profits.
One of Madoff’s customers, James Greiff, argued on July 29 Rakoff should take a lawsuit away from the bankruptcy court in which Irving Picard, the Madoff trustee, sued Greiff for taking more cash out of the Madoff firm that he put in. Picard has sued hundreds of other Madoff customers on the same grounds. Rakoff said in a ruling yesterday that he would make initial decisions on two issues.
Rakoff told Greiff and the Madoff trustee to explain whether the profits shown on Greiff’s account statements represent valid debt to counter a fraudulent transfer claim. Rakoff also wants the parties to explain whether a provision in bankruptcy law known as the safe harbor bars suits because they stem from trades in securities.
Rakoff said he will later file a written opinion giving reasons for his ruling in detail.
Rakoff is revisiting the same issues that were decided in a 26-page opinion on Aug. 31 by U.S. District Judge Kimba M. Wood, another federal district judge in Manhattan. Wood ruled that the Madoff trustee is using valid theories to recover money customers took out of the Ponzi scheme before the fraud was discovered.
Wood said that U.S. Bankruptcy Judge Burton L. Lifland was correct last year when he ruled Picard was justified in bringing $34 million in claims against the Ariel and Gabriel funds controlled by Ezra Merkin. Wood said Picard’s claims withstand attack at the early stages of the lawsuit.
The Greiff case in district court is Picard v. Greiff, 11- 03775, U.S. District Court, Southern District of New York (Manhattan). The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The criminal case is U.S. v. Madoff, 09-cr- 00213, U.S. District Court, Southern District of New York (Manhattan).
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Mortgage Debacle Costs Banks $66 Billion as Suits Sap Profit
Faulty mortgages and foreclosure abuses have cost the nation’s five biggest home lenders at least $65.7 billion, according to a tally by Bloomberg News, and new claims may push the industrywide total to twice that amount, Bloomberg News’ James Sterngold reports.
Bank of America Corp., the largest U.S. lender, had the biggest costs, totaling $39.1 billion since the start of 2007, according to data compiled by Bloomberg. JPMorgan Chase & Co. (JPM), ranked second by assets, followed with $16.3 billion, and Wells Fargo & Co. (WFC), the biggest U.S. home lender, had $5.09 billion, the data show.
The costs have eclipsed predictions from bankers and analysts that lenders would suffer only modest damage from what Bank of America Chief Executive Officer Brian T. Moynihan has called “the mortgage mess.” Paul Miller, the FBR Capital Markets & Co. analyst, said costs for all banks could surpass $121 billion as the bill comes due for lax lending practices.
“You’re not talking about improperly stapling together two documents, you’re talking about systematic fraud in the system,” Neil Barofsky, the former special inspector general for the U.S. Treasury’s Troubled Asset Relief Program, said in an interview. “What this shows is that before the financial crisis, the banks were essentially lying to the purchasers of the mortgages about the quality.”
Bloomberg’s tally was compiled from regulatory filings, company statements and financial presentations by the nation’s five biggest mortgage lenders. The data cover provisions and expenses attributable to repurchases, foreclosure errors and abuses, payments to reimburse investors for lost value on faulty mortgages, legal settlements and litigation expenses.
The compilation also includes writedowns of assets, such as mortgage-servicing rights, when the company attributed the loss in value to problems in mortgage underwriting or foreclosures and the costs of remedies. The figures may increase as more detailed breakdowns become available.
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Costco Workers’ Group Case Blocked After Wal-Mart Ruling
Costco Wholesale Corp. (COST) won a ruling voiding a judge’s decision to expand a sex-bias lawsuit filed by three women to include hundreds of female workers.
A federal appeals court in San Francisco said Sept. 16 that the lower-court judge applied the wrong legal standard and sent the case back with instructions to apply the standards set by the U.S. Supreme Court in its June ruling throwing out a group gender-bias lawsuit against Wal-Mart Stores Inc. (WMT)
Costco, the biggest U.S. warehouse-club chain, was sued in 2004 for allegedly limiting promotions of female employees to assistant general manager and general manager by failing to post job openings. The original plaintiffs won class, or group, status for the case in 2007. Costco’s appeal of that order was put on hold while the Supreme Court considered Bentonville, Arkansas-based Wal-Mart’s appeal of a similar ruling.
Jocelyn Larkin, an attorney for the workers, said she was delighted with the ruling because employees had argued that the case should go back to the lower court for further consideration while Costco claimed that no national class of company employees could be certified on the evidence in the case.
“The panel rejected Costco’s position and remanded as we proposed,” Larkin said in an e-mail.
Jeff Elliott, a spokesman for Issaquah, Washington-based Costco, declined to comment on the ruling.
The case is Ellis v. Costco, 07-15838, U.S. Court of Appeals, San Francisco.
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News Corp. (NWSA) Ex-Employee Said to Be Contacted for U.S. Probe
Prosecutors investigating hacking and bribery allegations at Rupert Murdoch’s News Corp. are seeking to interview a former employee of a U.S. unit who claims knowledge of illegal activity at the company, according to a person familiar with the matter.
U.S. prosecutors in Manhattan this month contacted a lawyer for Robert Emmel, a former account director at News America Marketing In-Store LLC, about allegations of hacking and possible violations of the Foreign Corrupt Practices Act, said the person, who wasn’t authorized to discuss the matter.
Emmel said in court papers that he had evidence of “widespread illegal activity” at News Corp.’s retail marketing unit and gave it to federal lawmakers and regulators in 2006, the year the company fired him. Emmel made the allegations in a lawsuit News America Marketing brought against him.
Carly Sullivan, a spokeswoman for U.S. Attorney Preet Bharara in New York, declined to comment on whether prosecutors had made the contact. Emmel declined to comment.
Philip Hilder , a lawyer for Emmel, said in an interview that “authorities have reached out” to him. Hilder declined to identify the investigators or what they are seeking.
Suzanne Halpin, a spokeswoman for News Corp., declined to comment on the development.
The breach of contract case is News America Marketing In- Store LLC v. Emmel, 07-cv-00791, U.S. District Court, Northern District of Georgia (Atlanta).
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Gundlach Wins TCW Pay Claim, Is Found Liable on Trade Secret
Jeffrey Gundlach, who was fired from TCW Group Inc. and started his own firm, won a $66.7 million jury award against his former employer for unpaid wages.
Gundlach, who has to share the money with three of his colleagues, was also found Sept. 16 to have breached his fiduciary duty to TCW and misappropriated its trade secrets. The Los Angeles jury awarded the company no damages on the breach claim. A judge will determine damages on the trade-secret claim.
Susan Estrich, a lawyer for TCW, said the company will ask the judge to award it $89 million on the trade-secret claim. The company also won a claim for intentional interference with contractual relations. The jury awarded no damages.
“We are very pleased and gratified with the verdict,” Estrich said outside the courtroom. “This was about liability, about standing up for what is right.”
TCW, the Los Angeles-based unit of Societe Generale (GLE) SA, sued Gundlach, 51, in January 2010, after more than half of its fixed-income professionals joined DoubleLine Capital LP, the asset-management firm Gundlach started within weeks after TCW fired him. TCW sought as much as $566 million in damages.
Brad Brian, a lawyer for DoubleLine, said it could be months before the judge rules on the “reasonable royalty” for TCW’s trade-secret claim.
The jury found that Gundlach and DoubleLine didn’t act willfully and maliciously in misappropriating trade secrets.
“We are very pleased the jury agreed Jeffrey Gundlach and our other clients didn’t do anything to hurt TCW,” Brian said. “This was not an easy trial.”
Michael Cahill, TCW’s general counsel, said in an e-mailed statement that the verdict “speaks directly to the principles at the heart of this case -- integrity, honesty and trust. The jury found that each of the defendants violated these principles.”
Gundlach, who had worked at TCW for 25 years and 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 sought about $500 million.
The jury heard more than six weeks of testimony as the two sides provided conflicting views of Gundlach’s falling out with TCW Chief Executive Officer Marc Stern in 2009, which ended with Stern’s buying Metropolitan West Asset Management LLC to run TCW’s fixed-income group and firing Gundlach in December 2009.
The case is Trust Co. of the West v. Gundlach, BC429385, California Superior Court, Los Angeles County (Los Angeles).
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Liberty Mutual Group Settles Suit Accusing Lawyer of Extortion
Liberty Mutual Insurance Co. settled a lawsuit the insurer filed against one of its former outside lawyers claiming he tried to extort new legal work with a threat to expose misconduct by an unidentified company executive.
U.S. District Judge Richard J. Sullivan in Manhattan ordered the case dismissed after receiving a letter on Sept. 8 from Boston-based Liberty Mutual informing the court that it had reached an agreement with Michael J. Devereaux and his law firm Devereaux & Associates, according to a court filing.
Liberty Mutual sued Devereaux in January, saying the New York lawyer threatened to file a suit claiming the executive engaged in “personal misconduct” and demanded a 5 percent kickback of all fees the company paid the law firm.
“We are pleased that the litigation has been resolved and that we have concluded our relationship with the Devereaux firm,” Liberty Mutual said in a statement.
Devereaux didn’t return a message seeking comment on the settlement.
The case is Liberty Mutual Insurance Co. v. Michael J. Devereaux & Associates PC, 11-cv-359, U.S. District Court, Southern District of New York (Manhattan).
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Adoboli Charged With Fraud, False Accounting Dating to 2008
Kweku Adoboli, the trader arrested Sept. 15 after UBS AG (UBSN) said it discovered unauthorized trades that caused a $2 billion loss, was charged with fraud and two counts of false accounting dating back to 2008 by London police.
The 31-year-old was remanded in custody at a magistrates court in London Sept. 16 until Sept. 22, when he can make an application for bail. Adoboli’s false accounting offenses started in October 2008, according to the court charge sheet. He is also charged with fraud dating back to January 2009.
Adoboli “dishonestly abused” his position as a senior trader, which required him “to safeguard, or not to act against, the financial interests of UBS,” according to court documents.
Adoboli worked for UBS’s investment bank on its Delta One desk, which handles trades for clients, typically helping them to speculate on or hedge the performance of a basket of securities. The group also takes risks with the bank’s own money in arranging trades. UBS has said that no client positions were affected.
He hired criminal law firm Kingsley Napley LLP in London to represent him. Lawyers from the same firm advised Nick Leeson, the former derivatives trader who caused the collapse of Barings Plc with $1.4 billion in losses in 1995.
Adoboli wore a sky-blue sweater over a white shirt for his appearance in court Sept. 16 and didn’t speak apart from confirming his name and date of birth. He didn’t enter a plea. Kingsley Napley said in an e-mailed statement it wouldn’t comment on behalf of its client.
The U.K. Financial Services Authority and the Swiss Financial Market Supervisory Authority said they would also investigate the UBS trading losses.
The investigation, to be carried out by a third party, will focus on “the control failures which permitted the activity to remain undetected” and “will include an assessment of the overall strength of UBS’s controls to prevent unauthorized or fraudulent trading activity in its investment bank,” the FSA said in an e-mailed statement.
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NewPage Bankruptcy Most Popular Docket on Bloomberg
The bankruptcy docket of NewPage Corp., the largest maker of coated papers in North America, was the most-read litigation docket on the Bloomberg Law system last week.
NewPage, based in Miamisburg, Ohio, filed the biggest bankruptcy of 2011 by assets listing $3.4 billion in assets and $4.2 billion in debt as of June 30.
On Sept. 8, NewPage won temporary court permission to borrow as much as $600 million to keep operating while it tries to restructure at least $2.6 billion in bonds.
The case is In re NewPage Corp. 11-12804, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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