Bank of America Corp. (BAC)’s proposed $8.5 billion settlement with mortgage-bond investors must be considered in federal court and not in New York state court where it was first filed, a U.S. judge said.
“The settlement agreement at issue here implicates core federal interests in the integrity of nationally chartered banks and the vitality of the national securities markets,” U.S. District Judge William Pauley in Manhattan said in a decision filed yesterday. “A controversy touching on these paramount federal interests should proceed in federal court.”
The proposed agreement would settle claims from investors in Countrywide Financial Corp. mortgage bonds and is a move by Charlotte, North Carolina-based Bank of America to resolve liabilities tied to its 2008 purchase of the home lender. The deal was reached with an institutional investor group that includes BlackRock Inc. (BLK) and Pacific Investment Management Co. and would apply to 530 mortgage-securitization trusts.
Bank of New York Mellon Corp., the trustee for the mortgage-bond trusts, filed the settlement in state court and planned to seek approval at a November hearing. Under the state proceeding, approval would bind investors outside the group that negotiated the agreement.
Kevin Heine, a Bank of New York spokesman, declined to comment on the ruling. The bank had asked Pauley to return the case to state court after it had been moved to federal court. Kathy Patrick, a lawyer for the institutional investor group that negotiated the agreement, didn’t respond to an e-mail seeking comment on it yesterday.
The proposed settlement agreement has been criticized by some investors in the bonds, including American International Group Inc. (AIG), which said in a court filing that Bank of America is “drastically underpaying on its liability.” Other investors have filed objections to the agreement, saying they need more information to evaluate it.
One investor group, Walnut Place LLC and related entities, moved the case to federal court in August. They said in a court filing that they have “serious concerns about the adequacy of the settlement and conflicts of interests of the parties that negotiated it.” Investor claims “are worth many times” more than $8.5 billion, they said.
Owen Cyrulnik, a lawyer for the Walnut Place entities, declined to comment after a Sept. 21 court hearing about why they wanted the case in federal court. In court papers, they said Bank of New York filed the Article 77 proceeding, to “cherry-pick” the benefits of class-action settlements and “cast aside the aspects that it finds inconvenient,” mainly the right of investors to opt out.
David J. Grais, a lawyer for Walnut Place, declined to comment.
The case is Bank of New York Mellon v. Walnut Place LLC, 11-cv-5988, U.S. District Court, Southern District of New York (Manhattan).
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Citigroup to Pay $285 Million Over SEC’s CDO Fraud Claims
Citigroup Inc., the third-biggest U.S. lender, agreed to pay $285 million to settle U.S. regulatory claims it misled investors about a $1 billion financial product linked to risky mortgages that defaulted within months of its sale.
Citigroup structured and sold the collateralized debt obligation in 2007 without telling investors that it helped pick about half the underlying assets and was betting they’d decline in value, the Securities and Exchange Commission said in a statement yesterday. Credit Suisse Group AG (CSGN) agreed to pay $2.5 million for its role in selecting the assets, the SEC said.
Citigroup’s settlement, the third-biggest penalty paid for conduct related to the credit crisis, is the latest SEC action against banks that bundled and sold securities linked to the housing market. Goldman Sachs Group Inc. (GS) paid a record $550 million in 2010 for failing to tell investors that a hedge fund that helped select a CDO’s assets was betting it would decline. JPMorgan Chase & Co. (JPM) paid $153.6 million in a similar matter in June, and SEC officials have said more cases are on the horizon.
“Investors were not informed that Citigroup had decided to bet against them and had helped choose the assets that would determine who won or lost,” Robert Khuzami, the SEC’s enforcement director, said in a statement.
The approximately 15 clients in the deal known as Class V Funding III lost virtually their entire investments. Citigroup received about $34 million in fees and reaped about $126 million in profits from the short position, according to the complaint.
The SEC also sued Brian Stoker, a former Citigroup employee who the agency said was responsible for structuring the deal, according to a complaint filed yesterday at U.S. District Court in New York. Stoker’s attorney, Fraser Hunter, said his client will “defend this lawsuit vigorously.”
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Citigroup, McGraw-Hill Win Appeals in Retirement Plan Suits
Citigroup Inc. (C) and McGraw-Hill Cos. won appeals-court decisions upholding dismissal of lawsuits brought by employees claiming their retirement plans lost money invested in company stock.
The U.S. Court of Appeals in Manhattan upheld the dismissals in companion ruling yesterday. In 2009, U.S. District Judge Sidney Stein in New York found that Citigroup, the third- biggest U.S. lender, didn’t breach its duty to the workers by offering Citigroup stock as an investment option. In February 2010, U.S. District Judge Richard Sullivan ruled similarly in favor of McGraw-Hill, the finance and media company that is splitting into two.
The Citigroup plan fiduciaries “didn’t abuse their discretion here,” the appeals court wrote in that ruling.
The Citigroup suit was filed on behalf of 150,000 employees covered by two retirement plans. The plaintiffs in the McGraw- Hill case participated in one of two defined-contribution plans offered by the company. Both cases were brought under the federal Employee Retirement Income Security Act of 1974, also known as ERISA. Both companies are based in New York.
“We’re totally disappointed with the decision,” Marc I. Machiz, a lawyer for the Citigroup employees, said in a phone interview. “We’re disappointed both for the Citigroup employees who are not going to get a remedy for their losses and because the decision makes it difficult or impossible to get a remedy from a company that mismanages its plan.”
Machiz, of Cohen Milstein Sellers & Toll PLLC in Philadelphia, said it was likely the Citigroup plaintiffs would ask the full appeals court to rehear the case.
Edwin Mills, a lawyer for the McGraw-Hill employees at Stull, Stull & Brody in New York, didn’t immediately return a call for comment on the decision.
The cases are Gray v. Citigroup Inc., 09-3804, and Gearren v. McGraw-Hill Cos., 10-792, 2nd U.S. Circuit Court of Appeals (Manhattan).
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Iberiabank to Pay $2.5 Million to Settle Overdraft Suits
Iberiabank Corp. (IBKC) agreed to pay $2.5 million to settle consumer lawsuits accusing the Louisiana bank of illegally charging excessive overdraft fees, according to court papers.
Iberiabank officials also will change policies governing the way debit-card transactions are handled in connection with overdraft fees, the Lafayette, Louisiana-based bank said in an Oct. 18 court filing in federal court in Miami. Overdraft suits filed across the U.S. have been consolidated in that court for pre-trial proceedings.
Bank customers who are covered by the settlement will receive their share of the settlement fund “without having to do anything at all,” lawyers for consumers who sued Iberiabank over the overdraft policy, said in the court filing.
The settlement comes nine months after Bank of America Corp., the second-largest U.S. bank by assets, agreed to pay $410 million to resolve similar claims over its overdraft policies. In May, a judge in Miami gave preliminary approval to the accord.
Daryl Byrd, Iberiabank’s president and chief executive officer, didn’t return a call seeking comment on the settlement yesterday. The bank didn’t admit any wrongdoing in the settlement, according to the court filing.
The case is In re Checking Account Overdraft Litigation, 09-02036, U.S. District Court, Southern District of Florida (Miami).
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KV Pharmaceutical Sued Over Pregnancy Drug Pricing Statements
KV Pharmaceutical Co. (KV/A) was sued by an investor who accused it of misleading shareholders about its marketing plans for Makena, a drug intended to prevent premature births.
Frank Julianello’s complaint, filed yesterday in federal court in St. Louis, accuses the Bridgeton, Missouri, drugmaker, Chief Executive Officer Gregory Divis and another executive, Scott Goedeke, of making false statements in February about its intent to make the drug widely available.
Democratic U.S. Senators Amy Klobuchar of Minnesota and Sherrod Brown of Ohio criticized KV the following month for pricing Makena at $1,500 per injection, when it previously was available for $10 to $20 per weekly dosage. KV shares fell 21 percent on March 30 after the U.S. Food and Drug Administration said pharmacists were free to provide less-expensive versions. KV dropped from $13.07 on March 8 to $4.60 on April 5, losing 65 percent of its value.
“This decrease in the price of KV’s stock was a result of the artificial inflation caused by defendants’ misleading statements,” according to Julianello’s complaint.
He seeks class-action, or group, status on behalf of everyone who bought the company’s stock from Feb. 14 to April 4, an an award of unspecified money damages, plus interest.
There was no reply yesterday to voice-mail or e-mail messages left with the company’s investor relations department.
The case is Julianello v. KV Pharmaceutical Co., 11- cv-01816, U.S. District Court, Eastern District of Missouri (St. Louis).
BofA, Wells Fargo, JPMorgan Sued by ATM User Over Fees
Bank of America Corp., Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. were sued for allegedly colluding to fix access fees for automated teller machines.
The antitrust suit, brought in federal court in Washington by an ATM user and made public yesterday, also names Visa Inc. (V) and MasterCard Inc. (MA), the world’s biggest payment networks, as defendants. It is the third lawsuit filed in Washington in the past week alleging price-fixing of ATM fees and surcharges.
“The violation in this case is a horizontal agreement among every bank that is a member of the Visa and/or MasterCard networks that charges ATM access fees on foreign ATM transactions,” the complaint alleges.
The suit was filed by a New Jersey man on behalf of consumers who “have been forced to pay artificially inflated, supra-competitive ATM access fees,” according to the filing.
Two earlier lawsuits, one filed Oct. 18 and the other Oct. 12, accuse Visa and MasterCard of antitrust violations for restricting independent ATM operators from charging varying prices for customers using alternative networks such as STAR, Shazam Inc. or TransFund.
Thomas Kelly, a spokesman for New York-based JPMorgan, declined to comment on the lawsuit. Jerry Dubrowski, a spokesman for Charlotte, North Carolina-based Bank of America, didn’t immediately respond to an e-mail message seeking comment on the suit. Ancel Martinez, a spokesman for San Francisco-based Wells Fargo, didn’t immediately respond to telephone messages seeking comment on the lawsuit.
James Issokson, a spokesman for MasterCard, based in Purchase, New York, said in an e-mailed statement that the lawsuits “challenging certain MasterCard ATM rules are without merit” and that the company will defend itself against them.
Will Valentine, a spokesman for San Francisco-based Visa, declined to comment on the filing.
The case is Genese v. Visa Inc., 11-1838, U.S. District Court, District of Columbia (Washington).
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Madoff Judge Grants Mets Owners’ Request for Confidentiality
The New York Mets owners won new confidentiality restrictions on information the liquidator of Bernard Madoff’s firm gathers ahead of a trial over his right to take back money withdrawn from the con man’s Ponzi scheme.
U.S. District Judge Jed Rakoff in Manhattan set a March 19 trial date for trustee Irving Picard’s case against the Major League Baseball team owners after narrowing by two-thirds the $1 billion demanded by Picard from Fred Wilpon and Saul Katz. In an order published yesterday, Rakoff said he disagreed with Picard, who had said Rakoff couldn’t modify the confidentiality rules the trustee currently uses in bankruptcy court.
“The defendants’ proposal keeps confidential everything that was previously marked confidential and simply adds some modest, standard, further restrictions,” Rakoff said.
The trustee’s fear of added administrative burdens from the changes “appears exaggerated,” he wrote.
Amanda Remus, a Picard spokeswoman, didn’t respond to an e- mail seeking comment.
Picard initially sued the Mets owners in bankruptcy court. They asked Rakoff to handle the case.
The case is Picard v. Katz, 11-cv-03605, U.S. District Court, Southern District of New York (Manhattan).
AT&T Seeks Data on Sprint’s Wireless Deals in Antitrust Case
AT&T asked Sprint for documents relating to transactions entered into since January 2004, including deals with Nextel Communications Inc., Virgin Mobile and Clearwire Corp., according to a filing in Washington federal court yesterday by Sprint, which filed its own lawsuit to halt the T-Mobile deal.
Sprint said the request shows why U.S. District Judge Ellen Segal Huvelle should give it access to data Dallas-based AT&T turned over to the Justice Department.
“Requests for these types of documents go far beyond ordinary, non-party merger case discovery, which focuses on the current competitive landscape, not on the details of every transaction entered into by a competitor in the last eight years,” Overland Park, Kansas-based Sprint said in the filing.
Sprint and Ridgeland, Mississippi-based Cellular South Inc. urged Huvelle to let their outside lawyers and experts use AT&T’s private data to prepare for trial in their own lawsuits. To deprive them of that opportunity creates a “fundamental unfairness,” the wireless carriers said in an earlier filing.
John Taylor, a spokesman for Sprint, declined to comment beyond the filing. Michael Balmoris, an AT&T spokesman, declined to comment.
The Justice Department sued AT&T and Bonn-based Deutsche Telekom AG (DTE)’s T-Mobile unit on Aug. 31, saying a combination of the two companies would “substantially” reduce competition. Seven states and Puerto Rico joined the effort to block the deal, which would make AT&T the biggest U.S. wireless carrier.
The case is U.S. v. AT&T Inc., 11-cv-01560, U.S. District Court, District of Columbia (Washington).
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Countrywide Suit Belongs in N.Y. State Court, FHFA Says
Countrywide Financial Corp. defendants improperly moved a suit by the Federal Housing Finance Agency to federal court in Manhattan from state court in an attempt to transfer it to a multidistrict litigation case in California, the agency said yesterday.
Countrywide was among 17 banks sued by the FHFA in September. The FHFA alleges it lost “billions of dollars” after Countrywide offered $26.6 billion worth of residential mortgage backed securities to Fannie Mae and Freddie Mac from 2005 to 2008.
FHFA says Countrywide filed a removal notice to move the case to federal court in Manhattan on Sept. 30. At least 11 of 16 other suits brought by the agency are currently before federal judges in New York. Countrywide also filed a notice on Oct. 3 to transfer the case to the Central District of California, where a multidistrict litigation that relates to it is pending.
“In their bid to achieve removal, the Countrywide defendants stretch the doctrines upon which they rely beyond the breaking point,” FHFA said in court papers filed yesterday. “The Countrywide defendants’ preferred forum is not the legal forum,” FHFA said. “Plaintiff FHFA thus respectfully requests that this action be remanded to New York state Supreme Court.”
Lawrence Grayson, a spokesman for Bank of America, which acquired Countrywide in 2008, declined to comment on the U.S. request.
The case is FHFA v. Countrywide Financial Corp., 11cv6916, U.S. District Court, Southern District of New York (Manhattan).
Deutsche Bank Loses Bid to Revise $2.4 Billion Lehman Claims
Deutsche Bank, which told a judge that about $100 million is at stake in the classification, can take up the issue again later, U.S. Bankruptcy Judge James Peck said at a court hearing yesterday in Manhattan.
Germany’s largest lender bought the claims from a Lehman affiliate, Lehman Brothers Bankhaus AG, in July 2010. Consisting of a $1.4 billion IOU from the Lehman parent and a $1 billion IOU from Lehman’s commercial-paper unit, they were classified at the time as general unsecured claims. Lehman ranked them in August as affiliate claims, which were worth less, in the third version of its $65 billion liquidation plan, Deutsche Bank said.
“My understanding is that Deutsche Bank bought the claims under an acquisition agreement,” Peck told lawyers from the Frankfurt-based bank. “You acquired affiliate claims and you can’t improve your position simply because Deutsche Bank isn’t an affiliate of Lehman.”
The bank is “still discussing internally” if it would continue to support Lehman’s plan if the claims aren’t revised, Alan Kolod, a lawyer for Deutsche Bank, told Peck.
Lehman had a right to reclassify the claims under a deal struck with bankrupt Bankhaus last year on settling intercompany obligations, lawyer Harvey Miller said.
“Nothing limited Lehman’s ability to make different classifications,” he said. “Nothing says Bankhaus will get the highest recovery of all unsecured claims.”
A sophisticated buyer, “Deutsche Bank took a business risk” by buying the Bankhaus claims before Lehman settled on a final plan, Miller said. The bank made the purchase without consulting Lehman about their possible value in a revised plan, he said.
The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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Rambus Jury Reviews More Testimony at Hynix-Micron Trial
The jury deliberating whether Hynix Semiconductor Inc. (000660) and Micron Technology Inc. (MU) conspired to push Rambus Inc. (RMBS) out of the memory-chip market reviewed trial testimony by Farhad Tabrizi, a former Hynix executive.
California Superior Court Judge James McBride in San Francisco said yesterday that the 12-member jury, which has been deliberating since Sept. 22, requested information about Tabrizi’s testimony that he was “pressured to become more upbeat about” Rambus-designed dynamic random access memory chips, or RDRAM, at a May 2000 chip industry forum. Rambus lawyers questioned Tabrizi, a former Hynix vice president of worldwide marketing, “extensively” about whether his enthusiasm was “genuine,” McBride said.
McBride said in his chambers that he reviewed testimony excerpts with lawyers from both sides to be read back to the jury.
“We know that Mr. Tabrizi was not the most terse witness,” and that he “tended to fold in a lot of topics in any answer,” which produced objections from lawyers during trial, McBride said. “The jury in its collective wisdom will ask further questions” if the testimony isn’t satisfactory, the judge said.
Rambus, based in Sunnyvale, California, contends that Boise, Idaho-based Micron and Ichon, South Korea-based Hynix colluded to cut the prices of their own SDRAM, or synchronous dynamic random access memory, chips and deserted their commitment to produce RDRAM, relegating it to a niche role.
Rambus contends it would have earned $3.95 billion in royalties without the alleged conspiracy. Under California law, a jury finding of damages in that amount would be automatically tripled to $11.9 billion.
Lawyers for Hynix and Micron argued that Rambus has only itself to blame, not collusion by rivals, for the flaws and production delays that led to the failure of its product to become an industry standard.
The case is Rambus Inc. v. Micron Technology Inc., 04-0431105, California Superior Court (San Francisco).
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Milan Swap Fees May Not Cover Risk, Depfa Executive Says
Banks that sold swaps to Milan may lose money on the transactions because the fees charged don’t cover all the risk assumed, Marco Santarcangelo, a Depfa Bank Plc banker on trial for fraud, told a Milan court.
The city of Milan isn’t required to post collateral against a potential loss on its swaps while banks such as Depfa must do so with their counterparties, Santarcangelo said yesterday. Margins on the swaps may be insufficient to cover the banks’ cost of funding, he said.
JPMorgan Chase & Co., UBS AG (UBSN), Deutsche Bank AG and Dublin- based Depfa are on trial on charges of mis-selling swaps to Milan, derivatives that adjusted payments on a 1.7 billion-euro ($2.4 billion) bond offering in 2005. Prosecutor Alfredo Robledo said the banks misled Milan by telling the city it could save about 55 million euros with the bond sale and a series of swaps. Robledo says the banks earned 101 million euros in hidden fees. The banks deny the charges.
Depfa, a unit of Hypo Real Estate Holding AG, charged total gross margins of about 18 million euros on the 2005 swaps and subsequent restructurings, Santarcangelo told the court. The firm’s derivative traders assured Santarcangelo that the fees were in line with market practice, he said. At the end of the 30-year deal, banks may still record a loss, he said.
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Queen’s Law Firm Knew of News Corp. (NWSA) Hacking Lie to Lawmakers
Farrer & Co., the law firm whose clients include Queen Elizabeth II, knew News Corp.’s U.K. unit lied to Parliament in 2009 about the extent of phone hacking at its British tabloid and didn’t take action.
News Corp. had evidence hacking was widespread when it told Parliament two years ago that a “rogue” reporter at the News of the World was to blame, Farrer & Co. lawyer Julian Pike told lawmakers yesterday. He also revealed a previously undisclosed May 2008 meeting at which he said James Murdoch was told about phone-hacking at the paper, in addition to the June 2008 meeting about which other company executives had testified.
The situation was “not ideal,” Pike said when asked by lawmakers whether the queen’s law firm should let other clients lie to Parliament. “I don’t think it caused me any professional embarrassment. I do behave with integrity.”
The firm, which negotiated the company’s first settlement with a hacking victim in 2008, was dropped by News Corp. two days ago after it said it needed to consolidate its legal representation in dozens of lawsuits.
The evidence centered around an e-mail produced by police during settlement talks with hacking victim Gordon Taylor, the head of the Professional Footballers’ Association, which showed transcripts of hacked voice mails had been passed around the News of the World newsroom. The e-mail showed wrongdoing went beyond the tabloid’s royal reporter Clive Goodman and private investigator Glenn Mulcaire, who were both jailed in 2007.
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Quinn Emanuel to Open Moscow Office to Aid London Lawsuits
Quinn Emanuel Urquhart & Sullivan LLP, a Los Angeles-based law firm, plans to open a Moscow office this year as more Russians seek to bring cases in London courts.
“Russians don’t have a lot of faith and confidence in their own legal system in Moscow and so they often agree to resolve disputes in London,” John Quinn, the firm’s managing partner, said yesterday in a phone interview. “We want to have a base in Moscow and to be close to clients there.”
Quinn Emanuel, which has 20 lawyers in London, plans to have 10 attorneys in Moscow within six months, he said. The firm hired Ivan Marisin and Vasily Kuznetsov from Dechert LLP in Moscow to start the new office, with Marisin as managing partner. Their clients have included Bank of New York Mellon Corp. (BK) and Societe Generale SA.
“They are both experienced, extremely well-respected litigators with a track record of success both in Russia and internationally,” Quinn said in a statement.
Quinn Emanuel specializes in intellectual-property and class-action litigation. The firm has nine offices and most recently opened a site in Mannheim, Germany, in March 2010.
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On the Docket
Rajaratnam Friend Goel’s Sentencing Postponed Until January
Goel had been set to be sentenced in Manhattan federal court last month. In response to a letter from prosecutors seeking a delay, U.S. District Judge Richard Holwell set the January date. The decision was posted on the docket yesterday.
Goel pleaded guilty to conspiracy and securities fraud in February 2010, and testified in March against the Galleon Group LLC co-founder in a bid for leniency. Goel said he had known Rajaratnam for 25 years and said he told him about Intel’s earnings in 2007 and a $1 billion transaction in 2008.
The top penalty for insider trading is 20 years in prison, prosecutors said at the time of Goel’s plea. Rajaratnam, 54, the central figure in what U.S. investigators called the largest hedge fund insider trading case in U.S. history, was sentenced to 11 years in prison on Oct. 13.
Goel said he and Rajaratnam became friends at the Wharton School at the University of Pennsylvania, from which they graduated in 1983, and grew close over ensuing years. The families vacationed together, said Goel, a native of Mumbai.
Goel, who worked in Intel’s treasury unit, was arrested along with Rajaratnam in 2009, charged with passing tips about a firm that Santa Clara, California-based Intel made an investment in as well information about Intel’s $1 billion investment in a new wireless network company formed by Clearwire Corp. and Sprint Nextel Corp.
The case is U.S. v. Goel, 10-cr-90, U.S. District Court, Southern District of New York (Manhattan).
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