Rajat Gupta, the former Goldman Sachs Group Inc. (GS) director once accused of feeding inside information to Galleon Group LLC’s Raj Rajaratnam, will face federal charges, a person familiar with the matter said, making him the highest-ranking executive to be named in the probe.
Gupta, 62, will surrender to FBI agents in New York today, the person said. After a four-year securities-fraud investigation of insider trading at hedge funds, Gupta will be charged in a case prosecuted by Manhattan U.S. Attorney Preet Bharara, according to the person, who declined to be identified because the matter isn’t public.
“Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless,” his lawyer, Gary Naftalis, said in an e-mailed statement after the charges were reported yesterday. “He did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo.”
The imminent charges against Gupta were reported earlier by the New York Times. The case comes seven months after federal prosecutors in court first called Gupta and Rajaratnam’s brother Rengan “unindicted co-conspirators.”
Gupta isn’t being charged based on evidence provided by Raj Rajaratnam, said the person familiar with the matter. The charges against him are based on evidence uncovered by the Federal Bureau of Investigation’s probe, the person said.
Rajaratnam, the central figure in what prosecutors have called the largest crackdown on insider trading at hedge funds in U.S. history, was arrested in October 2009. He was convicted of conspiracy and securities fraud by a Manhattan federal jury in May and sentenced to 11 years in prison on Oct. 13. More than 50 people have been charged in the probe.
The U.S. Securities and Exchange Commission in March filed an administrative action contending Gupta passed inside information to Rajaratnam about Goldman Sachs and Procter & Gamble Co. (PG) That action was dropped in August after Gupta, who denied the allegations, sued the SEC for violating his rights by not bringing its case in federal district court.
In the administrative proceeding, the SEC claimed Gupta tipped Rajaratnam, 54, about Berkshire Hathaway Inc. (BRK/A)’s $5 billion investment in New York-based Goldman Sachs. The agency also said Gupta told Rajaratnam about quarterly earnings of Goldman Sachs and Cincinnati-based P&G, the world’s largest consumer products company.
Gupta left the Goldman Sachs board in 2010 and stepped down from P&G’s board in March.
Aside from serving on those two boards, Gupta from 1994 to 2003 ran McKinsey & Co., the global consulting firm. He remained a senior partner there until 2007.
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TCW, DoubleLine Spar Over Trade-Secret Royalties After Trial
TCW Group Inc.’s expert witness said the asset-management firm is owed $81.7 million in “reasonable royalties” by DoubleLine Capital LP after a jury’s finding in September that DoubleLine misappropriated TCW’s trade secrets.
The use of TCW’s trade secrets, including portfolio management systems, would have allowed DoubleLine to avoid risks and delays getting its business operating, Brad Cornell, the witness, told California Superior Court Judge Carl J. West in Los Angeles yesterday.
“TCW’s trade secrets are based on years, if not decades, of actual experience,” Cornell said under questioning by TCW lawyer John Quinn.
TCW, the Los Angeles-based unit of Societe Generale (GLE) SA, sued its former chief investment officer, Jeffrey Gundlach, 51, in January 2010, after more than half of its fixed-income professionals joined DoubleLine, the rival firm Gundlach started within weeks after TCW fired him. Gundlach countersued, saying TCW pushed him out to avoid paying him hundreds of millions of dollars in fees for the funds his group managed.
After a six-week trial, the jury awarded Gundlach and three other former TCW employees $66.7 million for unpaid wages. The jury also found that Gundlach breached his fiduciary duty and misappropriated TCW trade secrets. The jury awarded TCW no damages on the breach claim. The judge will determine what TCW is owed on the trade-secret claim.
DoubleLine’s expert witness is scheduled to testify at the next hearing on Nov. 21. West will rule on the royalties after he has heard all the evidence and both sides have filed additional briefings in support of their positions.
The case is Trust Co. of the West v. Gundlach, BC429385, California Superior Court, Los Angeles County (Los Angeles).
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Rajaratnam Appeals Insider Conviction, 11-Year Sentence
Galleon Group LLC co-founder Raj Rajaratnam filed a notice of appeal of his convictions for running an insider-trading ring, as well as formally notifying the court that he will challenge his prison sentence.
Rajaratnam, 54, was sentenced to 11 years in prison by U.S. District Judge Richard Holwell in Manhattan on Oct. 13, the longest term ever for insider trading. Rajaratnam filed the notice of appeal the same day. It was entered into public court records yesterday.
Holwell has recommended sending Rajaratnam to the federal medical center in Butner, North Carolina, because of his health problems, which include diabetes. He’s scheduled to surrender on Nov. 28.
Rajaratnam is the central figure in what U.S. investigators called the largest hedge fund insider-trading case in U.S. history. The federal probe, which included tapping Rajaratnam’s phone, led to convictions of more than two dozen people. A federal jury in Manhattan convicted Rajaratnam on May 11 of all 14 counts of securities fraud and conspiracy against him.
Samidh Guha, an attorney for Rajaratnam, has said the defense would challenge the use of wiretaps.
Holwell denied a request by Rajaratnam’s lawyers to allow their client to remain free while appealing his conviction. He is out on bail until he reports to prison.
The case is U.S. v. Rajaratnam, 09-01184, U.S. District Court, Southern District of New York (Manhattan).
Breuer Says Didn’t Know Chancellor Wanted to Discuss Kirch
Former Deutsche Bank AG (DBK) Chief Executive Officer Rolf Breuer told a court he wasn’t told beforehand that a 2002 meeting with then-German Chancellor Gerhard Schroeder would include discussing the situation of the late Leo Kirch’s media group.
When he was invited by the chancellor’s office he wasn’t told the subject of the meeting, Breuer said at a Munich appeals court in one of the cases Kirch filed against Breuer and the lender. Breuer said he assumed Schroeder wanted to discuss foreign investors’ ambitions for Germany’s cable market.
“When the discussion touched Kirch’s situation I understood from the context the others were hoping we would take an active role to help him,” Breuer said. “But I was pretty tight-lipped on all of this.”
The Kirch lawsuits, which continued after the media entrepreneur’s July death, claim Deutsche Bank secretly plotted the company’s demise. Kirch argued the meeting with Schroeder was part of a plan that included a February 2002 interview on Bloomberg Television in which Breuer said “everything that you can read and hear” is that “the financial sector isn’t prepared to provide further” loans or equity to Kirch.
Within months, Kirch’s media group filed the country’s biggest bankruptcy since World War II. Kirch sued Frankfurt- based Deutsche Bank and Breuer in lawsuits that seek about 3.3 billion euros ($4.6 billion).
Former Dresdner Bank AG CEO Bernd Fahrholz and Jentzsch are scheduled to testify today. Former Commerzbank AG CEO Klaus- Peter Mueller is scheduled to testify on Oct. 27.
The case is: OLG Muenchen, 5 U 2472/09.
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Rio Tinto Genocide Claims Reinstated by U.S. Appeals Court
Rio Tinto Group, the world’s second-largest mining company, lost a bid to throw out genocide and war crimes claims in a U.S. lawsuit filed by Papua New Guinea landowners accusing the company of human rights abuses and environmental damage.
A federal appeals court in San Francisco yesterday reversed dismissal of those two claims while upholding a lower-court judge’s decision to toss claims for racial discrimination and crimes against humanity. The court said claims of genocide and war crimes fall within the limited category of issues that can be considered under the Alien Tort Statute, a law allowing non- citizens to sue in the U.S. for violations of international law.
In the 2000 lawsuit, landowners claimed Rio Tinto and the Papua New Guinea government formed a joint venture to operate a Bougainville Island copper mine, once the world’s largest, and were responsible for thousands of deaths related to civilian resistance to the mine.
The appeals court sent the case back to federal district court in Los Angeles for further proceedings.
An e-mail message to the media office at London-based Rio Tinto seeking comment on the ruling wasn’t immediately answered.
Steve Berman, an attorney for the landowners, didn’t immediately return a voice-mail message seeking comment on the ruling.
Rio Tinto’s Panguna mine was shut in 1989 after attacks by the Papua New Guinea army, according to court records.
The case is Alexis Holyweek Sarei v. Rio Tinto Plc (RIO), 02-56256, U.S. Court of Appeals for the Ninth Circuit (San Francisco).
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BNY Board Sued by Shareholder Over Foreign Currency Trades
Bank of New York Mellon Corp. (BK)’s chief executive officer and directors were sued by a shareholder after government officials alleged the bank defrauded clients through foreign-exchange transactions.
The bank’s pricing practices for currency trades, as described in lawsuits by state and federal officials, have damaged its reputation and have caused or will cause it to lose business, the shareholder, Murray Zucker, said in a complaint filed yesterday in New York State Supreme Court.
Chief Executive Officer Gerald Hassell and the directors “risked sacrificing a significant long-term revenue stream and hard earned reputation for short-term price gouging of institutional clients,” Zucker said. He is suing on behalf of the bank for damages caused by the directors’ actions.
BNY Mellon was sued by the U.S. and the New York attorney general’s office this month over foreign-exchange trades made on behalf of clients. The New York-based bank earned $2 billion through a 10-year fraud, according to Attorney General Eric Schneiderman. Florida and Virginia have also sued the bank.
Kevin Heine, a bank spokesman, had no immediate comment on the lawsuit. The bank previously denied that it defrauded clients and said it will fight the lawsuits by New York and the U.S. government.
The case is Zucker v. Hassell, 11112133, New York State Supreme Court (Manhattan).
Delaware ‘Secret’ Court Violates Constitution, Suit Claims
Delaware’s Chancery Court judges were accused in a lawsuit of violating the U.S. Constitution by conducting “secret judicial” proceedings.
The Delaware Coalition for Open Government Inc. filed a lawsuit yesterday in U.S. District Court in Wilmington, challenging a state court program in which businesses settle their disputes privately in front of a Chancery Court judge. The arbitration program is so similar to a regular case that it violates the requirement in the U.S. Constitution that court documents and hearings be public, the lawsuit claims.
“The only difference is that now, these procedures and rulings occur behind closed doors instead of in open courts,” Delaware Coalition attorney David L. Finger said in the complaint.
The program has been used five times and is designed to make it cheaper and faster for businesses to settle their disputes, Kenneth Lagowski, a Chancery Court administrator, said in an interview.
“It was done for chancery to stay on the cutting edge of alternative dispute resolutions,” Lagowski said. “For the litigants it is a cheaper alternative to a full-blown trial.”
Any ruling from the arbitration program can be appealed to the Delaware Supreme Court, where the case would become public, Lagowski said.
The lawsuit names all five Delaware Chancery Court judges.
The case is Delaware Coalition for Open Government Inc. v. Strine, 11-01015, U.S. District Court, District of Delaware (Wilmington).
Ex-Innospec Director Charged by U.K. for Fuel Bribes
A former business unit director at an Innospec Inc. (IOSP) unit was charged with trying to bribe public officials in Indonesia and Iraq to win contracts to supply the fuel additive tetraethyl lead.
David Turner, 56, the former director of the Octane Additives division in Innospec’s U.K. unit, was charged yesterday with conspiracy to corrupt by giving or agreeing to give bribes in the two countries over a seven-year period, according to the Serious Fraud Office, which is prosecuting the case.
Turner was also charged with conspiring to defraud a competitor, the Ethyl Corp. subsidiary of Richmond, Virginia- based NewMarket Corp. (NEU), by bribing officials of the Iraqi government to give unfavorable assessments on one of Ethyl’s products.
Turner was charged at a London magistrates court and the case was transferred to a higher criminal court, where he is scheduled to appear on Nov. 2. He was released on bail.
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Alcoa Asks to Reopen Bahrain Case So It Can Seek Dismissal
Alcoa Inc. (AA), the largest U.S. aluminum producer, asked a judge to reopen a racketeering lawsuit filed against it by Bahrain’s state-owned aluminum producer, saying that it will seek to dismiss the case.
Aluminum Bahrain BSC, known as Alba, sued in February 2008, claiming that Alcoa bribed senior officials in Bahrain and caused Alba to pay inflated prices for alumina, the principal raw material in aluminum. The case was filed in federal court in Pittsburgh, where Alcoa is based.
A month later, U.S. District Judge Donetta Ambrose halted the case after the U.S. Justice Department said it was investigating whether Alcoa made corrupt payments in Bahrain. The judge also administratively closed the case, “to allow the government to fully conduct an investigation without the interference and distraction of ongoing civil litigation,” court records show.
In a filing yesterday, Alcoa asked Ambrose to reopen the case and also sought permission to file a motion seeking its dismissal because racketeering law “does not apply to the extraterritorial conduct” alleged by Alba. Alcoa said Alba should be required to file a statement laying out its racketeering case.
Alcoa has cooperated during the past three years in the Justice Department probe and a related investigation by the U.S. Securities and Exchange Commission, according to the filing.
An Alba attorney, Mark MacDougall of Akin Gump Strauss Hauer & Feld LLP in Washington, didn’t return a call seeking comment on Alcoa’s request.
The case is Aluminum Bahrain BSC v. Alcoa Inc., 08- cv-00299, U.S. District Court, Western District of Pennsylvania (Pittsburgh).
Oppenheimer Rochester Funds Lose Dismissal Bid, Face Trial
Massachusetts Mutual Life Insurance Co.’s Oppenheimer Rochester Funds lost a motion to dismiss a group of 32 class- action securities fraud lawsuits when a federal judge in Colorado moved the cases forward for trial.
“This is a very significant opinion” and “we are pleased that we can now proceed with the discovery phase of this litigation,” said plaintiffs’ co-lead counsel, Steven Toll, in a statement yesterday.
Shareholders in seven Oppenheimer municipal bond funds sued in federal courts nationwide, consolidated in 2009, alleging they were marketed as stable income-seeking funds “when in fact they employed extremely risky investment strategies,” U.S. Senior District Judge John L. Kane in Denver wrote in an order Oct. 24.
“Plaintiffs’ losses are plausible,” based on alleged misleading statements and omission,’’ the judge concluded in refusing to dismiss the cases.
The consolidated case is In Re Oppenheimer Rochester Funds Group Securities Litigation, 09-md-02063, U.S. District Court, District of Colorado (Denver).
Houston’s County Will Ask State to Investigate Suing MERS
The Texas county that includes Houston will ask the state attorney general to investigate suing Mortgage Electronic Registration Systems Inc. over unpaid filing fees on behalf of all the counties in Texas, an official said.
“If this is something that affects county government all over the state, why isn’t the state attorney general pursuing it?” Harris County Judge Ed Emmett said in an interview yesterday. Emmett is a member of the Harris County Commissioners Court and the highest elected official of the county.
MERS tracks servicing rights and ownership interests in mortgage loans on its electronic registry, allowing banks to buy and sell loans without recording transfers with individual counties. Harris County lawyers said they were considering a lawsuit similar to one filed last month against MERS by Dallas County.
The Dallas suit claimed MERS cheated the county out of tens of millions of dollars in mortgage-filing fees. Dallas County District Attorney Craig Watkins, who also sued Bank of America Corp. (BAC), said his county may be owed as much as $100 million.
Emmett said Harris County is considering multiple options, including joining the Dallas suit or waiting until it’s resolved, as well as contacting Texas Attorney General Greg Abbott. County officials are concerned about unnecessarily paying money for outside lawyers, he said.
There is “no basis” for such lawsuits in Texas, said Janis Smith, a spokeswoman for Reston, Virginia-based Merscorp Inc., the parent of MERS.
“MERS complies with the recording statutes and mortgage regulations in Texas, as well as in all the other states,” Smith said in an e-mail. “The legality of MERS’ business model has already been affirmed in numerous cases decided by Texas courts and by other state and federal courts.”
Cases against MERS include Dallas County v. Merscorp Inc., 11-cv-02733, U.S. District Court, Northern District of Texas (Dallas); and Christian County Clerk v. Mortgage Electronic Registration Systems Inc., 5:11-cv-00072, U.S. District Court, Western District of Kentucky (Louisville).
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Altria Light-Cigarette Marketing Trial Ends in Jury Deadlock
The plaintiffs said Philip Morris falsely claimed that the brand was lower in tar and nicotine, in violation of state merchandising law. The smokers, who didn’t claim any personal injuries, said Philip Morris improperly touted Marlboro Lights as safer than other brands.
The plaintiffs were seeking $700 million in the St. Louis trial. Philip Morris denied there was any deception and disputed damages. The 12 jurors, who began deliberations Oct. 17, said yesterday they were one vote shy of the nine members needed for a verdict. The vote was 8-4 for the plaintiffs, jurors said after the trial ended.
“Today’s mistrial shows that the plaintiffs failed to convince a jury of their claims,” Murray Garnick, an Altria vice president and associate general counsel, said yesterday in a statement. “We continue to believe that these claims are baseless.”
The lawsuit will be tried again at a date to be determined, smokers’ lawyer Stephen Swedlow said in an interview.
“We were only one vote short,” Swedlow said. “We’ll make strategies to pick up that one vote the next time.”
The lawsuit was filed in 2000 on behalf of all buyers of Marlboro Lights in Missouri. The group includes as many as 400,000 current and former Marlboro Lights smokers. The trial began with opening statements last month.
The smokers claimed that Philip Morris “willfully deceived consumers regarding the nature and effect of Marlboro Lights,” according to the complaint.
Philip Morris convinced the plaintiffs that it was better for their health to smoke Marlboro Lights than other cigarettes, Swedlow, the smokers’ attorney, told the jury Oct. 17 in closing arguments.
“There was no deception on our part,” Beth Wilkinson, a Philip Morris lawyer, said in her closing arguments.
The case is Larsen v. Philip Morris Cos., 002-00406-02, Circuit Court, City of St. Louis, Missouri.
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Solvay $32 Million Antitrust Fines Annulled by EU Top Court
Solvay SA (SOLB) won a bid to annul antitrust fines totaling 23 million euros ($32 million) at the European Union’s top court in a ruling that will boost the company’s fourth-quarter profit by 15 million euros.
The European Commission, the 27-nation EU’s antitrust regulator “failed to respect Solvay’s right of access to the procedural file and its right to be heard,” the EU Court of Justice ruled in Luxembourg yesterday.
The commission in December 2000 re-imposed fines on the Brussels-based company, the world’s largest soda-ash maker, a few months after an EU court threw out penalties originally levied in 1990. In its appeal, Solvay argued it didn’t have access to all the documents on which the commission’s claims were based. The agency admitted it had misplaced some documents, according to the court.
The missing sub-files may have contained evidence “which would have enabled” Solvay “to offer an interpretation of the facts different from the interpretation adopted by the commission, which could have been of use for its defense,” the court said.
“This is very positive news,” said Erik De Leye, a spokesman for Solvay in Brussels, by phone. “The ruling marks the end of the story.”
Amelia Torres, a spokeswoman for the commission, said the regulator would study the judgments carefully and that EU procedures “have changed fundamentally in many aspects” since the first fine was imposed more than 20 years ago.
The cases are C-109/10 P, C-110/10 P, Solvay v. European Commission.
Martin Frankel’s 17-Year Sentence Upheld by Appeals Court
Martin Frankel’s 17-year prison sentence for looting $209 million from seven U.S. insurance companies was upheld by the federal appeals court in Manhattan.
The court yesterday rejected Frankel’s claims that U.S. District Judge Ellen Burns in New Haven, Connecticut, made several errors in sentencing him to 200 months in prison, three years of supervised release and $204.2 million in restitution.
Frankel, 56, pleaded guilty in May 2002 to 24 counts of fraud and racketeering, admitting he bought the insurers between 1991 and 1999 and drained their assets, spending the money on diamonds, women and expensive cars.
Frankel fled his $3 million Greenwich, Connecticut, mansion in May 1999 with the authorities closing in. Four months later, he was arrested in a hotel in Germany and extradited to the U.S.
The case is U.S. v. Frankel, 06-1752-CR, U.S. Court of Appeals for the Second Circuit (Manhattan).
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