Chaoda Modern Agriculture Holdings Ltd. (682)’s Chairman Kwok Ho, Chief Financial Officer Andy Chan and Fidelity Management’s George Stairs were accused of insider trading by Hong Kong’s financial secretary.
The government alleges Kwok and Chan told Stairs about a June 2009 share placement three days before it was publicly announced, according to a notice released by Hong Kong’s Market Misconduct Tribunal today.
The portfolio manager at Fidelity Management & Research Co. allegedly netted HK$1.98 million ($254,000) on behalf of the funds that he managed by selling 374,000 shares before the placement and then buying 630,000 shares at a lower price as part of the stock sale.
While insider trading can be punished by 10 years in prison and a HK$10 million fine in a criminal court in Hong Kong, the tribunal hearing this civil case only has the power to disgorge profits made or losses avoided. It can also ban individuals from being a director or manager of a corporation, and from dealing in any securities.
Nathan Dentice, a lawyer for Stairs, told the tribunal before the release of the notice that the allegations are unproven and shouldn’t be taken as facts.
Rimsky Yuen, a lawyer for Kwok, and Graham Harris, a lawyer for Andy Chan, didn’t comment on the case after the proceedings.
Rowena Kwok, spokeswoman for FIL Investment Management (Hong Kong) Ltd., said she wasn’t aware of the case and declined to comment.
Chaoda’s shares slumped 27 percent and were suspended on Sept. 26 after the misconduct proceedings were first reported. Eric Yip of Christensen, which handles investor relations for the Chinese food producer, didn’t respond to a request for comment.
Founded in 1994 by Kwok, Chaoda first listed in Hong Kong in 2000. Kwok, 55, is a member of the Chinese People’s Political Consultative Conference, China’s top political advisory body, and has a 19.6 percent stake in the company, according to data compiled by Bloomberg.
Tribunal chairman Michael Lunn said he returned to Hong Kong yesterday afternoon to convene the hearing.
Rajaratnam Judge to Consider Amount of Money Lost in Crimes
The judge who will sentence Raj Rajaratnam for insider trading will hold a hearing next week to determine the amount of losses from his crimes, a court spokeswoman said.
U.S. District Judge Richard Holwell in Manhattan is set to sentence Rajaratnam, the co-founder of Galleon Group LLC, on Oct. 13. Rajaratnam, 54, was convicted in May on all 14 criminal counts against him. Prosecutors said he gained $63.8 million by trading with inside information in 11 stocks, including Goldman Sachs Group Inc. (GS), Intel Corp. (INTC), Google Inc. (GOOG), ATI Technologies Inc. and Clearwire Corp. (CLWR)
Galleon earned $53.8 million in profit and avoided losses of $9.9 million, a Federal Bureau of Investigation agent testified at Rajaratnam’s trial. His lawyers argued in court papers filed Sept. 9 that the government’s loss calculation, used to support its recommendation that Rajaratnam be sentenced to as much as 24 1/2 years in prison, “massively overstates the seriousness of the offense.”
“In financial crime cases, the loss determination has become the driving factor in sentence calculations,” A. Jeff Ifrah, a lawyer in Washington who co-wrote “Federal Sentencing for Business Crimes,” said yesterday in a phone interview.
Prosecutors have asked for a prison term of at least 19 years and seven months, calling Rajaratnam “the modern face of illegal insider trading.” He is a central figure in Manhattan U.S. Attorney Preet Bharara’s crackdown on insider trading at hedge funds.
Holwell scheduled an Oct. 4 hearing on the loss amount, Stephanie Cirkovich, a spokeswoman for the Southern District of New York, said yesterday in a phone interview.
Rajaratnam claims the government’s flawed loss calculation is responsible for most of its requested prison sentence. Federal sentencing guidelines, which are advisory, increase the recommended term for financial crimes based on the amount of money lost.
John Dowd, Rajaratnam’s lawyer, and Ellen Davis, a spokeswoman for Bharara, declined to comment on the hearing.
A federal jury in Manhattan convicted Rajaratnam on May 11 after a two-month trial in which they heard evidence that Rajaratnam engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies.
The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
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UBS Sues Highland Crusader for $686 Million in New York
UBS AG (UBS) sued Highland Crusader Holding Corp. in New York seeking damages of more than $686 million for alleged fraudulent conveyances and tortious interference.
UBS, in a complaint filed yesterday in state court in Manhattan, said Highland Crusader Holding Corp. is a wholly owned subsidiary of Highland Crusader Offshore Partners LP, which is an affiliate of Highland Capital Management LP.
UBS, Switzerland’s biggest lender, sued Highland Capital Management in New York in June 2010, claiming the investment firm founded by James Dondero and Mark Okada “fraudulently induced” UBS to restructure a collateralized debt obligation transaction in 2008. That suit followed a complaint filed by UBS against Highland Capital Management in February 2009.
“Once Highland Capital and the fund counterparties succeeded in misleading UBS into restructuring the original transaction, Highland Capital and its affiliates, including defendant Crusader Holding Corp., made it impossible for the fund counterparties to meet their obligations to UBS,” lawyers for the Zurich-based bank said in the complaint.
Highland Capital, founded by Dondero and Okada in Dallas in 1993, announced plans in October 2008 to close its flagship Crusader Fund and the Highland Credit Strategies Fund over a three-year period after suffering losses on high-yield, high- risk loans and other types of debt.
“After numerous decisions in Highland Capital Management’s favor, this is yet another baseless attempt to rehash identical claims that have already been filed and heard by the courts,” Stefan Prelog, an outside spokesman for Highland Capital, said in an e-mailed statement. “We are disappointed and surprised that UBS continues to pursue these frivolous actions despite their continued setbacks.”
The case is UBS Securities LLC v. Highland Crusader Holding Corp., 652646/2011, New York State Supreme Court (Manhattan).
SEC Sued Over 1998 Policy of Purging Files Linked to Probes
The U.S. Securities and Exchange Commission was accused in a lawsuit by a government watchdog of illegally destroying documents from probes of Bernard Madoff, Bank of America Corp. (BAC) and Lehman Brothers Holdings Inc.
Citizens for Responsibility and Ethics in Washington yesterday asked a federal judge in Washington to order the commission and its chairman, Mary Schapiro, to preserve investigative records and attempt to recover files that were destroyed.
“The public deserves to know all the messy details about how these investigations were conducted, and why they were closed at such an early stage without taking any action against the Bernie Madoffs of the world,” Anne Weismann, the group’s chief counsel, said in a statement.
The SEC’s data policy came under scrutiny after Darcy Flynn, a 13-year SEC employee, claimed in a letter to U.S. Senator Charles Grassley that the agency destroyed documents including materials related to Goldman Sachs’s trades of American International Group Inc. credit-default swaps in 2009, insider-trading probes of Deutsche Bank AG, Lehman Brothers and SAC Capital Advisors LP, and investigations of possible financial fraud at Wells Fargo & Co. and Bank of America in 2007 and 2008.
John Nester, an SEC spokesman, declined to comment on the suit.
The case is Citizens for Responsibility and Ethics in Washington v. U.S. Securities and Exchange Commission, 11-cv- 01732, U.S. District Court, District of Columbia (Washington).
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Goodrich Investors Sue to Block United Technologies Takeover
The New Jersey Carpenters Annuity Fund sued United Technologies and some Goodrich directors and officers Sept. 26 in New York State Supreme Court in Manhattan, saying the proposed payment is “inadequate and undervalues the company.”
United Technologies, based in Hartford, Connecticut, on Sept. 21 said it agreed to buy Charlotte, North Carolina-based Goodrich, adding a maker of aircraft landing gear and jet- turbine casings to take advantage of a record surge in commercial plane orders.
“The proposed transaction provides for no meaningful premium to Goodrich’s public shareholders, as the consummation of the proposed transaction will result in the complete loss of control over the company and its prospects,” the fund said in the complaint.
The bid represents a premium of 47 percent to Goodrich’s closing share price on Sept. 15, the day before merger talks were reported.
John Moran, a spokesman for United Technologies, said he hadn’t seen the lawsuit and declined to comment on the complaint. Lisa Bottle, a spokeswoman for Goodrich, didn’t return a voice-mail message.
The case is New Jersey Carpenters Annuity Fund vs. Corvi, 652637/2011, New York State Supreme Court (Manhattan).
MillerCoors Claims New England Patriots Broke Sponsorship Deal
MillerCoors LLC, the beer maker, claimed in a lawsuit that the New England Patriots football team reneged on an exclusive sponsorship contract to “pursue a more lucrative exclusive agreement” with Anheuser-Busch InBev NV.
A copy of the Sept. 26 complaint in Massachusetts state court was provided by MillerCoors. The filing couldn’t be confirmed independently with the court.
“We negotiated in good faith with the New England Patriots for several months, at their invitation, to become their exclusive and official beer partner after several years of a shared deal,” Pete Marino, a MillerCoors spokesman, said in an e-mailed statement. “Regrettably the team has now reneged on the deal that was reached, and we are left with no choice but to take legal action and ask the courts to uphold the integrity of our binding legal agreement.”
MillerCoors has been an official beer sponsor of the National Football League team for almost 10 years, according to the complaint. The current sponsorship deal expires in February.
“I have not seen any complaint or official filing yet, so I wouldn’t be comfortable offering any comment,” Dan Goldberg, a lawyer for the Patriots, said in an e-mailed statement.
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Mets Ruling Pares Picard Allegations to Foremost Fraud Claim
The New York Mets’ owners may still have to pay hundreds of millions of dollars to the trustee liquidating Bernard Madoff’s investment firm after a judge dismissed nine of the 11 counts in his lawsuit.
The trustee, Irving Picard, sought $300 million in profit and $700 million in principal from Sterling Equities Inc. partners Fred Wilpon, Saul Katz and other defendants in the complaint filed in Manhattan federal court.
U.S. District Judge Jed Rakoff said yesterday he wouldn’t decide right now if Picard could try to seize almost $300 million in profits received over the course of the Sterling investment with Madoff, or about $83 million, representing the last two years of Sterling’s profits before Madoff’s 2008 arrest.
Sterling said in an e-mail that the opinion limits Picard to an attempt to recover only two years of “payments.” The decision wasn’t specific about what the recovery of principal would be.
It’s “not a big win for Picard but not a total loss,” said Harvey Miller, a bankruptcy lawyer at Weil Gotshal & Manges LLP. “He still has significant viable claims. By the same token Wilpon and Katz have achieved a reduced exposure at least at this stage.”
Picard is reviewing Rakoff’s decision and declined to comment “prior to a thorough evaluation,” said Amanda Remus, a Picard spokeswoman.
Rakoff left open the question of what time period might apply to the recovery of profits.
“The court does not resolve on this motion whether the Trustee can avoid as profits only what defendants received in excess of their investment during the two year look back period specified by section 548 or instead the excess they received over the course of their investment with Madoff,” said a note in Rakoff’s decision.
The judge let stand Picard’s claim that Katz and Wilpon turned a blind eye to Madoff’s Ponzi scheme.
Picard sued the Mets owners in bankruptcy court in December, demanding the return of what he called “fictitious” profit and $700 million in principal taken out of the Madoff firm by Sterling and its partners. He alleged they had “concerns” that Madoff was conducting a fraud, even shopping for fraud insurance, and failed in their duty to probe the fraud.
Asking Rakoff to dismiss the suit, the Mets owners said they “never suspected Madoff was running a Ponzi scheme or any other fraudulent enterprise, never shopped for fraud insurance, never thought they needed fraud insurance, and never purchased fraud insurance” for their Madoff investments. No federal law forces a brokerage customer to investigate his money manager, they said.
The bankruptcy court case is Picard v. Katz, 1:10-ap-05287, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The district court case is Picard v. Katz, 11-cv- 03605, U.S. District Court, Southern District of New York (Manhattan).
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S&P, Moody’s, Fitch Win Dismissal of Ohio Pension Fund Suit
Standard & Poor’s, Moody’s Corp. (MCO) and Fitch Inc. won dismissal of a lawsuit alleging their ratings of mortgage-backed securities were faulty and caused five Ohio public employee pension funds to buy money-losing investments.
Former Ohio Attorney General Richard Cordray filed the suit in 2009, accusing the three companies of making “spectacularly misleading evaluations” of the securities because of what they were paid by the issuers.
U.S. District Judge James L. Graham in Columbus threw out the case Sept. 26, agreeing with the firms that the ratings were predictive opinions. Without specific allegations of intent to defraud, the companies couldn’t be held liable, he said.
“The Ohio funds make a bare allegation that the ratings agencies knew or should have known that their ratings were false or misleading,” Graham wrote. “But a complaint must provide further factual enhancement to avoid dismissal.”
Ohio Attorney General Mike DeWine, who replaced Cordray, is disappointed in the ruling and discussing further moves in the case with the pension funds, his spokesman, Mark Moretti, said.
Cordray has been nominated to head the new federal Consumer Financial Protection Bureau.
Michael Adler, a spokesman for Moody’s said the company “is pleased that the court has dismissed all of the claims in this matter.”
The case is Ohio Police & Fire Pension Fund v. Standard & Poor’s Financial Services LLC, 09-cv-01054, U.S. District Court, Southern District of Ohio (Columbus).
Judge Won’t Dismiss Lehman Brokerage’s Claim Against RBS
A bankruptcy judge refused to dismiss a $346 million claim by Lehman Brothers Holdings Inc. (LEHMQ)’s brokerage against Royal Bank of Scotland Group Plc (RBS), saying he would “retain jurisdiction to hear and determine all matters” arising from his order.
Royal Bank asked U.S. Bankruptcy Judge James Peck in Manhattan to dismiss the claim. Alternatively, it asked him to put on hold the brokerage’s move to gather information to pursue its demand while Royal Bank waits for a district judge to decide whether to shift the case out of bankruptcy court. Peck rejected all of the bank’s requests, according to an order filed in court yesterday.
ABN Amro, now owned by Royal Bank, owes the money, plus interest, to Lehman Brothers Inc. for early termination of a 1998 swap agreement, the brokerage said in a June filing in U.S. Bankruptcy Court in Manhattan. Royal Bank argued it has a right to set off the funds against amounts it’s owed by the brokerage and its affiliates.
Pholida Phengsomphone, a spokeswoman in Connecticut for Edinburgh-based Royal Bank, declined to comment on the judge’s order.
Lehman Brothers Inc., the remnants of the brokerage not bought by Barclays Plc (BARC), is being separately liquidated from its parent, Lehman Brothers Holdings Inc. It is seeking money from banks it did business with to pay its remaining customers.
The Lehman parent filed the largest bankruptcy in U.S. history on Sept. 15, 2008. The brokerage went into liquidation four days later.
The brokerage bankruptcy case is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Sabre Asks Court to Toss American Airlines Antitrust Claim
Sabre Holdings Corp., the largest U.S. provider of flight data to travel agents, asked a U.S. judge to throw out American Airlines’ claim that it runs a monopoly, citing a ruling in a US Airways Group Inc. (LCC) lawsuit.
Sabre, in a letter Sept. 25, asked Fort Worth, Texas, federal Judge Terry Means to follow a Manhattan judge who, it said, found Sabre couldn’t exercise monopoly power over a market limited to travel agents using its service.
U.S. District Judge Miriam Goldman Cedarbaum on Sept. 12 threw out two of four antitrust claims in the US Airways case.
Cedarbaum “ruled that a Sabre-only market was not plausible on its face,” because a company can’t monopolize its own customers, Sabre attorney Don Scott wrote in the letter.
The lawsuits are at the heart of a dispute between U.S. carriers and so-called global distribution systems like Sabre that collect flight and fare data from carriers and distribute it to travel agents.
The airlines want greater control over dissemination of their data, including providing it directly to agencies that consumers use to plan and buy travel.
American, a unit of Fort Worth-based AMR Corp. (AMR), initially sued Travelport LLC, the second biggest U.S-based global distribution systems company, on antitrust claims. It added Southlake, Texas-based Sabre to the suit in June. Sabre and Travelport, based in Atlanta, control more than 90 percent of U.S. data distribution to travel agents.
“We do not believe that the decision by a New York judge is, in any way, dispositive of any of our claims,” Ryan Mikolasik, a spokesman for American, said in an e-mail. “We remain confident that we will prevail on the facts and merits of our claims.”
The Fort Worth case is American Airlines Inc. v. Travelport Ltd., 11-cv-00244, U.S. District Court, Northern District of Texas (Fort Worth).
The Manhattan case is U.S. Airways Inc. v. Sabre Holdings Corp., 11-cv-02725, U.S. District Court, Southern District of New York (Manhattan).
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Health-Care Law Has Precedent, Retired Justice Stevens Says
Retired Justice John Paul Stevens said a 2005 U.S. Supreme Court ruling involving medical marijuana provides legal support for President Barack Obama’s health-care law.
Stevens, now 91 and more than a year into retirement, said in an interview in Washington this week that he is skeptical about contentions that Congress lacked authority to pass the health-care measure, which requires Americans to either buy insurance or pay a penalty.
Stevens wrote the court’s opinion in the 2005 case, a 6-3 ruling that let the federal government ban marijuana even when the drug doesn’t cross state lines and is used only for medicinal purposes. As with health care, that case centered on Congress’s power to regulate interstate commerce.
“To the extent that the commerce clause is an issue in the case, it just seems to me very similar” to the medical marijuana dispute, said Stevens, who served on the court for 34 years. Stevens is holding interviews with reporters to promote his book, “Five Chiefs,” which describes his impressions of the last five chief justices and is scheduled to be released next week.
The Obama administration this week signaled it will file a Supreme Court appeal on health care, saying it will forgo further appeals-court review in a lawsuit pressed by 26 states opposing the law. Stevens said he hadn’t read any briefs in the case.
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Tax-Shelter Dispute Will Get Hearing From U.S. Supreme Court
The U.S. Supreme Court agreed to hear an appeal in a federal tax-shelter case that may reshape the regulatory powers of the Internal Revenue Service.
The case will let the justices clear up lower court disagreement over the amount of time the IRS has to challenge a shelter that was popular in the late 1990s and early 2000s. The technique, known as “Son-of-BOSS,” was used to cut as much as $6 billion from tax bills, according to IRS estimates.
The IRS says it should have six years to act against Son- of-BOSS shelters, rather than the three-year period that applies in other contexts. The tax agency says the extra three years are crucial because of the complex, hard-to-detect nature of the shelters.
“The IRS’s ability to assess additional income tax often depends on the availability of the six-year assessment period,” the Obama administration argued in court papers.
The high court’s ruling may have broader implications as well, determining how much flexibility the IRS has to adapt to new tax-avoidance strategies. One issue in the case is the effect of an IRS regulation that retroactively declared the six- year period to be the applicable rule for Son-of-BOSS cases.
The disputed shelters were designed to artificially inflate the cost basis of an asset so that taxpayers claimed little or no capital gains when they sold it. Taxpayers often used partnerships and short sales, trades that typically are bets that the price of an asset will fall.
The question for the high court is whether basis inflation is covered under a statutory provision that gives the IRS six years to act against taxpayers who omit “gross income” from a return.
The case, which the justices will hear in the nine-month term that formally starts next week, is United States v. Home Concrete & Supply, 11-139.
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Obama Lawyers Signal Supreme Court Appeal on Health Care
The Obama administration signaled it will seek U.S. Supreme Court consideration of the landmark health-care overhaul in a move that may lead to a ruling in the middle of the 2012 presidential race.
The Justice Department said Sept. 26 it will forgo further review at the federal appeals court that declared the law unconstitutional in August. The administration has until mid- November to file an appeal with the Supreme Court.
A Supreme Court ruling striking down parts of the law would transform the campaign, forcing the candidates to refashion their messages, said William Carrick, a Democratic campaign consultant. A decision would probably come in late June, at the end of the court’s nine-month term.
“They would really send the political debate in a whole new direction,” Carrick said.
President Barack Obama is trying to resolve the legal issues on his watch, said Alex Castellanos, a Republican consultant. “This is not politics,” he said. “This is governing.”
The government had until Sept. 26 to seek a new hearing before a larger panel of judges at the Atlanta-based appeals court. Tracy Schmaler, a Justice Department spokeswoman, said the U.S. won’t take that step and declined to say whether the government would file a Supreme Court appeal.
The “clearest inference” is that the administration will seek high court review, said Carter Phillips, a Washington lawyer who has argued 71 Supreme Court cases and isn’t involved in the health-care litigation. And with federal appeals courts divided -- another court upheld the law and a third said courts don’t yet have authority to get involved -- Supreme Court consideration this term is “about as close to 100 percent as you can get,” said Phillips, a partner at Sidley Austin LLP.
The health law would expand coverage to an estimated 32 million Americans who lack insurance, largely through an expansion of the federal-state Medicaid program and so-called exchanges, in which consumers will be able to buy insurance. The law requires insurers to accept people with pre-existing conditions.
The challenges to the law, including a lawsuit being pressed by 26 states, say Congress exceeded its constitutional power by requiring people to either acquire insurance or pay a penalty.
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