The insider-trading prosecution of former Goldman Sachs Group Inc. (GS) director Rajat Gupta is built on circumstantial evidence that may be less persuasive than the wiretaps that sealed the fate of his friend Raj Rajaratnam.
Unlike the case against the Galleon Group LLC co-founder and hedge fund tycoon, which included his own words in calls with leakers, prosecutors will seek to convict Gupta based on the timing of his phone calls and the Rajaratnam trades that immediately followed, said Peter Henning, a law professor at Wayne State University in Detroit. Wiretaps likely to be used at Gupta’s trial involve Rajaratnam boasting of a source he doesn’t name. The government said that source is Gupta.
Prosecutors “don’t have the wiretaps, the smoking gun evidence,” Henning said in an interview following Gupta’s surrender to the FBI yesterday in Manhattan. “I wouldn’t call it a weak case, but there are some challenges that weren’t featured in the Rajaratnam case.”
Gupta, 62, who previously led McKinsey & Co., became the highest-ranking executive to be charged in a four-year probe by the Federal Bureau of Investigation that led to a nationwide crackdown on insider trading. Yesterday, prosecutors unsealed a six-count indictment accusing him of leaking inside information to his business partner Rajaratnam.
Rajaratnam, 54, was sentenced on Oct. 13 to 11 years in prison, the longest term for insider trading in U.S. history, following his conviction in May. If convicted, Gupta faces up to 20 years in prison on each of five securities fraud counts and as long as five years on a conspiracy charge.
Gupta, who also served on the board of Procter & Gamble Co. (PG), the world’s largest consumer-products company, pleaded not guilty yesterday in an appearance in Manhattan federal court.
“The government’s allegations are totally baseless,” defense attorney Gary Naftalis said in a statement. “Mr. Gupta is innocent of any of these charges and that he has always acted with honesty and integrity.”
Gupta’s indictment cites at least three instances in which he allegedly leaked tips to Rajaratnam. He’s accused of telling Rajaratnam about Berkshire Hathaway Inc. (BRK/A)’s $5 billion investment in Goldman Sachs in September 2008, about the bank’s unexpected fourth-quarter loss that year, and about P&G’s poor performance in late 2008.
In a related lawsuit by the U.S. Securities and Exchange Commission, the agency said Gupta tipped Rajaratnam about Goldman Sachs’s second-quarter profit in 2008. The regulator puts Rajaratnam’s profit from the entire insider scheme at more than $23 million.
The government said that Gupta benefitted in financial and non-financial ways from the alleged conspiracy. Some such benefit must be proven in a case against a tipper.
The cases are U.S. v. Gupta, 11-cr-00907, and SEC v. Gupta, 11-cv-07566, U.S. District Court for the Southern District of New York (Manhattan).
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BNY Mellon Sued by Funds Over Foreign Exchange Costs
Bank of New York Mellon Corp. (BK), the world’s largest custody bank, was sued by pension funds in California over allegations that it overcharged for foreign-exchange transactions.
The state False Claims Act lawsuit, filed in 2009, was unsealed yesterday in state court in Alameda County, California, the law firm Cotchett Pitre & McCarthy LLP said in an e-mailed statement. The firm represents employee retirement funds in Los Angeles.
The funds in Los Angeles and other California counties claim that BNY Mellon said it would use “best practices” when executing foreign exchange transactions to give its clients the highest price when in fact it used the least advantageous prices and secretly profited from the difference.
Massachusetts’s Secretary of the Commonwealth William Galvin yesterday filed an administrative complaint against the bank over similar allegations following lawsuits brought by the attorneys general of New York, Virginia and Florida and the U.S.
BNY Mellon used “a hidden scheme that rigged the pricing of non-negotiated foreign-exchange transactions while maximizing profits for the bank,” Galvin said in a statement.
Massachusetts Treasurer Steven Grossman said in June that New York-based BNY Mellon overcharged the state’s public pension system by $30.5 million since 2000.
Kevin Heine, a spokesman for BNY Mellon, said the Massachusetts complaint “recycles baseless allegations” and the bank is confident it’s “right on the facts and on the law.” Heine didn’t immediately return a voice-mail message left after regular business hours yesterday seeking comment on the California lawsuit.
The case is In Re Bank of New York Mellon False Claims Act Litigation, RG09480749, Alameda County Superior Court
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Global Hunter’s Teevan Sues Ex-Employer Cantor Fitzgerald
Marty Teevan, head of trading at Global Hunter Securities LLC, sued his former employer, Cantor Fitzgerald LP, in a contract dispute.
Teevan, who left Cantor in September 2010, filed a sealed complaint in Delaware Chancery Court in Wilmington Oct. 25. He accused the New York-based brokerage firm of a breach of contract, according to documents submitted with the complaint.
Lawyers for Teevan asked the court to seal the complaint because it includes Cantor’s partnership agreement, which includes a confidentiality obligation, according to court records.
Teevan, who was hired by Ticonderoga Securities LLC in March, joined Global Hunter in September with three other Ticonderoga bankers. Ticonderoga had shut down its fixed-income business in August, six months after starting the unit, as trading volumes shrank.
Cantor doesn’t comment on litigation, spokesman Robert Hubbell said in a telephone interview.
The case is Teevan v. Cantor Fitzgerald LP, CA6976, Delaware Chancery Court (Wilmington.)
RightNow Shareholder Sues Over $1.5 Billion Oracle Purchase
A RightNow Technologies Inc. shareholder sued over the software maker’s plan to sell itself to Oracle Corp. (ORCL) for $1.5 billion, calling the deal “fundamentally unfair.”
The proposed transaction stems from a flawed process that lacked an open auction and includes deal protections that favor Oracle, shareholder Sanjay Israni said in the complaint filed Oct. 25 in Delaware Chancery Court.
“Neither RightNow’s management, nor its board, has fully explained why the company, or its current management, needs to abandon their deliberately conceived internal growth strategies for a short-term profit,” Israni said in the complaint.
Under the proposed deal announced this week, RightNow shareholders will get $43 a share, or 20 percent more than Bozeman, Montana-based RightNow’s closing price on Oct. 21.
The acquisition will help Oracle, based in Redwood City, California, add software that helps companies serve customers using call centers, the Internet and social networks.
Israni seeks to represent all RightNow shareholders in his request for a court order barring the transaction.
Jaia Zimmerman, a RightNow spokeswoman, declined by e-mail to comment on the suit, saying the company hadn’t reviewed the complaint.
The case is Israni v. RightNow Technologies Inc. (RNOW), CA6977, Delaware Chancery Court (Wilmington)
Drug Companies Hid Thalidomide Birth Defects, 13 People Allege
Grunenthal GmbH, a German drugmaker, and companies now part of GlaxoSmithKline Plc (GSK) and Sanofi were accused in a lawsuit of hiding results of studies that would have revealed the extent of birth defects caused by Thalidomide.
Thirteen people born in the U.S. with birth defects from 1957 to 1962 sued the drugmakers and distributors Oct. 25 in a Pennsylvania state court in Philadelphia, claiming the businesses conspired to withhold the information to maximize sales and protect themselves from liability. The drug was prescribed then to combat morning sickness in early term pregnancies.
While the defects, including missing and malformed limbs, were known in Europe, they couldn’t have happened in the U.S., the companies allegedly told Congress, because the drug was available only on a limited clinical-trial basis.
“It was a carefully constructed lie sold to the public to protect defendants from having to accept responsibility for what they had done,” according to the 160-page complaint.
Claiming that concealment prevented them from knowing until recently the true cause of their deformities, the plaintiffs are seeking compensatory and punitive damages from the companies.
Sanofi-Aventis US LLC, part of Paris-based Sanofi, and Grunenthal, based in Aaschen, Germany, are accused of fraudulently claiming the relationship between Thalidomide and birth defects wasn’t known until November 1961 while the risks were knowable as early as 1955. Now part of Sanofi, Richardson- Merrell Inc., was a North American distributor of Thalidomide, according to the complaint.
Jack Cox, a U.S. spokesman for Sanofi, had no immediate comment on the lawsuit. Frank Schoenrock, a spokesman for Grunenthal, didn’t immediately respond to an e-mail seeking comment after regular business hours.
In 2008, the company said it would pay 50 million euros ($69.3 million) to people injured by the drug.
Smith, Kline & French, now part of Brentford, U.K.-based GlaxoSmithKline, allegedly knew of the defects as early as 1958.
Mary Anne Rhyne, a U.S. spokeswoman for the company in Research Triangle Park, North Carolina, didn’t immediately reply to a voice-mail message seeking comment.
The case is Yeatts v. SmithKline Beecham Corp., 003316, Philadelphia County, Pennsylvania, Court of Common Pleas, Trial Division (Philadelphia).
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Rakoff Asks Madoff Trustee to Explain Reason for ‘Clawbacks’
U.S. District Judge Jed Rakoff told the trustee liquidating Bernard Madoff’s firm to explain why investor James Greiff shouldn’t keep money he says he took from the Ponzi scheme “in good faith.”
The trustee, Irving Picard, has sued about 5,000 investors who, he conceded, didn’t know of the fraud, according to Helen Chaitman, a lawyer for Greiff. Picard has said he did so because it’s “equitable” to take back fictitious profits to pay investors who lost money.
“These arguments implicate the questions about how to integrate the securities and bankruptcy laws,” Rakoff wrote in an order filed in Manhattan federal court yesterday. Under securities law, some withdrawals from a brokerage firm may be protected from so-called clawbacks, the judge has said.
The judge said in the order that he took the case out of bankruptcy court to decide such issues. How he rules could affect other investors like Greiff. Rakoff said this month that he might take over 30 Picard suits related to one filed against a different investor, Gerald Blumenthal.
Separately, a profit sharing plan, a revocable trust and a money-management firm all filed arguments yesterday on why their cases should be handled by a district judge.
Ruling last month on Picard’s $1 billion lawsuit against the owners of the New York Mets, Rakoff cut the trustee’s potential claims by two-thirds, saying he was only entitled to try to claw back withdrawals made in the two years before Madoff’s 2008 bankruptcy. Picard has asked him if he can appeal the ruling.
Amanda Remus, a Picard spokeswoman, didn’t respond to an e- mail seeking comment.
The case is Picard v. Greiff, 11-cv-03775, U.S. District Court, Southern District of New York (Manhattan).
New York Working With Delaware on Criminal Foreclosure Probe
New York Attorney General Eric Schneiderman is working with his Delaware counterpart, Beau Biden, to investigate what he called possible “criminal acts” by financial institutions tied to the foreclosure crisis.
“This was a man-made crisis -- it was created by regulatory neglect and greed,” Schneiderman said last night in a TV interview.
“Beau Biden, who is the attorney general of Delaware, and I thought we really needed to dig in a little bit deeper,” Schneiderman told MSNBC’s Rachel Maddow. “We’re also looking at the conduct of individual institutions and individuals to see if there were misrepresentations made, to see if there was any fraud committed, to see if criminal acts were also a part of this.”
Schneiderman has been investigating mortgage practices of banks as state and federal officials negotiate a settlement with lenders over foreclosure and mortgage-servicing conduct.
All 50 state attorneys general last year announced they were investigating bank foreclosure after disclosures that faulty documents were being used to seize homes. Negotiations with banks including Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) haven’t produced a settlement more than a year since the investigation began.
Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, and Kristin Lemkau, a spokeswoman for New York-based JPMorgan, declined to comment on Schneiderman’s remarks. Joe Rogalsky, a spokesman for Biden, declined to comment immediately.
Schneiderman and Biden have said any settlement with the banks shouldn’t provide liability releases to the companies for matters that haven’t been fully investigated, including the packaging of loans into securities.
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Altria, Reynolds American Begin Trial of 600 Smoking Claims
A West Virginia jury began hearing a case intended to resolve more than 600 smoking-related personal-injury cases against the biggest U.S. cigarette makers, including Altria Group Inc. (MO)’s Philip Morris unit and R.J. Reynolds Tobacco Co.
The jurors in state court in Wheeling heard the start of opening statements in a two-phase trial. In the first phase, which began yesterday, the jury is being asked to determine general liability questions and the availability of punitive damages.
“This case is about the corporations’ responsibility,” Kenneth McClain, a lawyer for the smokers, said in court. “They were actively keeping from the public the information that they had.”
The case, which was originally consolidated for trial purposes in 2000, was moved to Wheeling from Charleston, West Virginia, after Circuit Judge Arthur Recht was unable to find enough jurors qualified to hear the case there.
The jurors will be asked to determine questions related to the companies’ liability, including whether they marketed a defective product. If jurors find for the plaintiffs, they will also determine whether any of the defendants engaged in conduct that can support an award of punitive damages.
The companies have claimed the two-phase plan is unworkable and violates their right to a fair trial. West Virginia’s Supreme Court, ruling on a question certified for appeal by Recht, found in 2005 that the bifurcated trial plan doesn’t violate the Due Process Clause of the U.S. Constitution’s 14th Amendment, clearing the way for the claims to go forward.
Recht told jurors they will be asked to determine whether cigarettes are defective products, whether the companies failed to warn about the dangers of smoking, broke express warranties and fraudulently concealed information from smokers.
Jurors will also be asked to decide whether the cigarette makers “acted in a willful, wanton and reckless manner,” permitting the award of punitive damages.
The case is In Re Tobacco Litigation (Individual Personal Injury Cases), 00-C-5000, West Virginia Circuit Court, Ohio County (Wheeling).
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Deutsche Bank’s Kirch Meeting Not Unusual, Jentzsch Says
A 2002 meeting of Kirch Group creditor banks called by Deutsche Bank AG (DBK) wasn’t unusual and didn’t yield any results, said Stefan Jentzsch, then chief risk officer at HVB Group.
The banks met to discuss how to handle 800 million euros ($1.1 billion) in funds Kirch was presumed to need through the end of that year, Jentzsch said during testimony at a Munich appeals court yesterday. The meeting took place on Feb. 14, 2002, and also discussed whether to restructure Leo Kirch’s firm to tackle the liquidity crisis, the banker said, undermining a claim there was a conspiracy to bring down Kirch Group.
“If you ask what to do with a group’s liquidity crisis, you also ask what to do with a group’s holdings,” Jentzsch said. “If you massively sell units, the liquidity situation changes.”
The meeting was scheduled 10 days after former Deutsche Bank Chief Executive Officer Rolf Breuer said on Bloomberg TV “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, the media group filed for bankruptcy. Kirch sued Deutsche Bank and Breuer seeking about 3.3 billion euros in suits claiming the bank plotted his company’s demise.
Deutsche Bank and Breuer have long denied the allegations in the lawsuits, which continued after Kirch’s July death, and said Bayerische Landesbank asked Deutsche Bank to call the meeting.
The suits claim Deutsche Bank invited the so-called pool banks including HVB, Commerzbank AG (CBK), BayernLB and DZ Bank AG, to the meeting to talk them into breaking up the media firm. The move blocked refinancing efforts, according to the lawsuits. Kirch had his own meeting with pool banks scheduled the same day.
The case is OLG Muenchen, 5 U 2472/09.
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AB InBev Wins Back ‘Bud’ Name in Austria After Court Decision
Anheuser-Busch InBev NV (ABI) won back the rights to use the name “Bud” on beer in Austria after a local court lifted an injunction that had given Budejovicky Budvar NP the sole entitlement to the name in the country.
A Viennese commercial court in a decision signed Oct. 19 decided to lift the injunction that prevented Anheuser-Busch from selling beer under the name American Bud in Austria since 1999. Austria’s Supreme Court already ruled against Budvar in August.
“Not only do these positive rulings set a favorable precedent, they also open up the Austrian market to AB InBev’s use of the Bud trademark in Austria,” Leuven, Belgium-based AB InBev said in an e-mailed statement.
The case is part of a century-old dispute between Budvar and AB InBev, the world’s largest brewer. The clash over the Austrian rights made it twice to the EU court. The protections at issue, so-called geographical indications, have been the subject of trademark cases around the world involving French champagnes, Italian cheeses and other products.
The Austrian rulings follow a 2009 decision by the European Union’s highest court that clarified the conditions under which Budvar’s right in the country could be maintained.
Petr Samec, a spokesman for Budvar, didn’t respond to an e- mail seeking comment.
Budvar claims it owns the rights to “Bud” because its beer comes from Ceske Budejovice, or Budweis in German. The brewer argued that Bud has been a national geographical indication since 1975 in the Czech Republic and this protection was extended by a bilateral agreement to Austria in 1976.
Ex-Terra President Gets 15 Years Prison for Teleco Bribes
Terra Telecommunications Corp.’s former president, Joel Esquenazi, was sentenced to 15 years in prison for his role in a scheme to bribe officials at state-owned telecommunications company Haiti Teleco.
The sentence issued Oct. 25 is the longest in a case involving the Foreign Corrupt Practices Act, the U.S. Justice Department said in a statement. The former executive vice president of Miami-based Terra, Carlos Rodriguez, 55, of Davie, Florida, was sentenced to seven years in prison, according to the statement. Esquenazi and Rodriguez were also ordered to forfeit $3.09 million, the Justice Department said.
Esquenazi, 52, of Miami, and Rodriguez laundered money and authorized bribes from November 2001 through March 2005 to successive directors of international relations at Haiti Teleco, the sole provider of land-line telephone service in Haiti, according to the statement.
The bribes were used to obtain advantages from Haitian officials for Terra, including preferred telecommunications rates, reductions in minutes for which payments were owed, and the continuance of Terra’s telecommunications connection with Haiti, according to the statement.
Michael Rosen, a lawyer representing Esquenazi, didn’t return a call after regular business hours Oct. 25 seeking comments about the sentencing.
Rodriguez’s lawyer, Arturo Hernandez, said in a phone interview he is “gratified” that Rodriquez wasn’t immediately sent to prison, giving him a chance to file a motion for a bond while his conviction is appealed.
Hernandez said the government’s case suffered from “scant” evidence. The appeal will be based in part on an argument that Haiti’s former Prime Minister Jean-Max Bellerive issued a statement defining Haiti Teleco as a private company, and as such, not subject to the prohibitions of the Foreign Corrupt Practices Act, Hernandez said.
The case is U.S. v. Esquenazi, 09-21010, U.S. District Court, Southern District of Florida (Miami).
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