Citigroup Inc. (C), whose $285 million settlement with U.S. regulators over a collapsed collateralized debt obligation was faulted by a federal judge as too lenient, may have to pay more money to avoid admitting it did anything wrong, said lawyers following the case.
Citigroup, the third-biggest U.S. lender, agreed last month to settle a claim by the Securities and Exchange Commission that it misled investors in a $1 billion CDO linked to subprime residential mortgage securities. Investors lost about $700 million, according to the agency.
The case is the latest in which U.S. District Judge Jed Rakoff, who must approve the agreement for it to take effect, has criticized the SEC’s practice of letting defendants settle enforcement suits without admitting or denying fault. While he may not be able to compel New York-based Citigroup to acknowledge it did what the SEC claims, he may push the SEC and the bank to renegotiate a costlier deal.
“He can’t really force two parties who want to settle to go to trial,” said J. Robert Brown Jr., who teaches corporate governance at the University of Denver Sturm College of Law. “If he rejects it, the only place I see any latitude to change the settlement is the money.”
Rakoff, who in 2009 rejected a $33 million deal between the SEC and Bank of America Corp. (BAC), has said his role is to determine whether the Citigroup settlement is “fair, adequate and reasonable” and in the public interest. He’s limited to approving or disapproving the settlement and can’t rewrite it to impose terms the parties don’t want, said James Kwak, a professor at the University of Connecticut School of Law in Hartford.
Rakoff, 68, hasn’t said when he will rule. SEC spokesman John Nester and Citigroup spokeswoman Danielle Romero-Apsilos declined to comment on the approval process.
The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11-cv-7387, U.S. District Court, Southern District of New York (Manhattan).
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Retail Groups Sue Fed Over New Debit Card Rules for Banks
The Federal Reserve was sued by retailer groups over new regulations governing so-called swipe fees over claims the Fed disregarded the law when deciding how much banks can charge merchants for debit-card transactions.
The groups, in a lawsuit filed yesterday in U.S. District Court in Washington, said retail merchants will be “substantially harmed” by the fees the Fed set under the Durbin Amendment, a provision of the Dodd-Frank legislation passed last year. The rule went into effect on Oct. 1.
“The Board’s final rule permits banks to recover significantly more costs than permitted by the plain language of the Durbin Amendment and deprives plaintiffs of the benefits of the statute’s anti-exclusivity provisions,” the retailers argued in their complaint.
The case was filed by the National Retail Federation, the Food Marketing Institute and NACS, formerly the National Association of Convenience Stores. Oil Miller Co., a residential heating and air company based in Norfolk, Virginia, and Boscov’s Department Store LLC, based in Reading, Pennsylvania, also joined the complaint.
Susan Stawick, a spokeswoman for the Fed, declined to comment on the suit.
“Retailers won’t truly be happy until they pay zero to accept cards,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition, a trade group representing payment networks like Visa and MasterCard and banks including JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. (WFC)
The debit-card market is massive -- more than 38 billion transactions took place in 2009 -- and its participants include grocery and electronics stores, gas stations and large retailers like Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT), all of whom lobbied for limits on the power of banks and payment networks to impose fees.
In June, TCF Financial Corp. (TCB) failed to persuade a U.S. appeals court in St. Louis to block the Fed rule. The court found TCF was unlikely to prevail on a claim that the cap is unconstitutional.
The case is NACS v. Board of Governors of the Federal Reserve System, 11-02075, U.S. District Court, District of Columbia (Washington).
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Jon Corzine Sued by MF Global Customer Over Client Assets
An MF Global Holdings Ltd. customer yesterday filed a proposed class-action lawsuit against the bankrupt firm and its former head, Jon Corzine.
Davide Accomazzo, managing director of Cervino Capital Management LLC, a Topanga, California-based commodity trading adviser, claimed in the suit filed in federal court in Manhattan that his money and other assets belonging to his clients were lost after MF Global commingled them with its own funds.
The suit claims that Corzine and other officers of the futures brokerage operator, including Bradley Abelow, president and chief operating officer, and Henri Steenkamp, the company’s chief financial officer, violated the Commodity Exchange Act and prohibitions against commingling clients’ money.
MF Global filed for bankruptcy on Oct. 31.
This lawsuit is one of several that have been previously filed in federal court in New York against MF Global, Corzine and company officials.
The case is Accomazzo v. Corzine, 11-CV-8467, U.S. District Court, Southern District of New York (Manhattan).
JPMorgan Sued by BayernLB Over Mortgage-Backed Securities
BayernLB alleged in the suit, filed Monday in New York State Supreme Court, that JPMorgan units concealed the truth about the poor quality of the loans underlying the securities and knew that credit ratings misrepresented their risk.
The lender said it believed the mortgage securities were safe investments based on representations about the quality of loans and credit ratings when it invested almost $2.1 billion in 57 offerings from 2005 to 2007, according to the complaint.
Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment on the lawsuit.
The case is Bayerische Landesbank New York Branch v. Bear Stearns & Co., 653239/2011, New York State Supreme Court, New York County (Manhattan).
Transatlantic Sued Over Deal to Sell Company to Alleghany
Transatlantic Holdings Inc. stockholders sued the reinsurer in New York over its agreement to be bought by Alleghany Corp. (Y) for $3.4 billion in cash and stock.
Alleghany, an insurer based in New York, announced Nov. 21 that it had agreed to buy New York-based Transatlantic Holdings, capping months of takeover interest in the company, a former American International Group Inc. (AIG) unit that helps insurance companies pool their biggest risks.
Shareholder Marilyn Clark filed the complaint against Transatlantic yesterday in New York State Supreme Court in Manhattan, saying the proposed acquisition came from an unfair process and undervalues the company.
“This deep discount to the company’s book value is not a surprise given the company’s management’s refusal to undertake a full, fair and truthful sales process,” Clark said in the complaint. “The inadequate process has led to the proposed acquisition which fails to maximize the company’s value.”
A spokesman for Transatlantic declined to immediately comment on the lawsuit.
Clark seeks to have the transaction declared unlawful and unenforceable and to have the agreement rescinded.
The case is Clark v. Transatlantic Holdings Inc. (TRH), 653256/2011, New York State Supreme Court (Manhattan).
Harleysville Policyholder Sues Over ‘Self Dealing’ in Buyout
Harleysville Mutual Insurance Co. was sued by a customer contending that the company’s directors doubled their personal payout in a planned sale of the company by diverting a merger premium away from policyholders.
The directors of the customer-owned firm stand to get about $39 million from their personal holdings in a Nasdaq-listed subsidiary that is part of a planned sale to Nationwide Mutual Insurance Co., according to a complaint filed by policyholder OCL Corp., a New Castle, Delaware-based trucking company.
The entire $435 million merger premium is being paid to minority shareholders of the subsidiary, Harleysville Group Inc. (HGIC), while majority owner Harleysville Mutual and its members get no payout, OCL said in the filing yesterday in state court in Philadelphia. Those customers may be entitled to more than $275 million if the premium were divided fairly, OCL said.
The transaction “is fundamentally unfair to Harleysville Mutual’s policyholder-members and constitutes manifest self- dealing,” OCL said. The plaintiff is seeking to block the planned payout to minority shareholders and to represent other policyholders in a class-action, or group, suit.
Robert Kauffman, general counsel of the Harleysville companies, didn’t immediately return a phone message and e-mail seeking comment.
Nationwide, also owned by its policyholders, agreed in September to merge with Harleysville, Pennsylvania-based Harleysville Mutual for no cash consideration. At the same time, Columbus, Ohio-based Nationwide agreed to pay $60 a share to minority shareholders of Harleysville Group, more than twice the price before Bloomberg News reported the takeover talks in September. The total cash payout is about $840 million, Nationwide has said.
Spector Roseman Kodroff & Willis PC, based in Philadelphia, and New York-based Wohl & Fruchter LLP are representing OCL. The suit names Harleysville Mutual and each of its directors as defendants.
The case is OCL Corp. v. Harleysville Mutual, Court of Common Pleas, Philadelphia County (Philadelphia).
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Verdicts, Settlements and Sentences
Merck to Pay $950 Million, Plead Guilty to Resolve Vioxx Probe
Merck & Co. (MRK), the second-largest U.S. drugmaker, will pay $950 million and a unit of the company will plead guilty to a criminal charge to resolve a U.S. probe of its sales of the painkiller Vioxx.
Merck, Sharp & Dohme will plead guilty to a misdemeanor criminal count of misbranding Vioxx, the U.S. Justice Department said yesterday in a statement. The company will pay a $321.6 million criminal fine and $628.3 million to resolve civil claims that it sold the drug for unapproved uses and misled users about its cardiovascular safety.
Approved by the Food and Drug Administration in 1999, Vioxx became Merck’s third largest-selling drug by 2003, generating $2.5 billion in annual sales. The company pulled Vioxx off the market in 2004 after a study found it posed an increased risk of heart attacks and strokes, and set aside $950 million in October 2010 to deal with the consequences of the criminal probe.
The company, based in Whitehouse Station, New Jersey, already has agreed to pay $4.85 billion to settle thousands of patient lawsuits claiming injuries, along with $1.9 billion for legal costs in defending and resolving the cases.
“We believe that Merck acted responsibly and in good faith in connection with the conduct at issue in these civil settlement agreements, including activities concerning the safety profile of Vioxx,” Bruce N. Kuhlik, the company’s general counsel, said in a statement.
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Bank of America Settles Countrywide Fraud Claims By Calpers
Bank of America Corp. settled securities fraud claims by a group of investors including the California Public Employees Retirement System that opted out of a $624 million class-action settlement in 2010.
A confidential settlement has been reached with all the defendants except KPMG LLP, Countrywide’s former auditor, lawyers for the plaintiffs said in a filing Monday in federal court in Los Angeles.
Countrywide, acquired by Bank of America in 2008, was accused of misleading shareholders about its finances and lending practices. The plaintiffs, which also include funds managed by BlackRock Inc. (BLK), T. Rowe Price Group Inc. (TROW) and TIAA- CREF are the largest group of those who rejected the 2010 settlement, saying the terms were inadequate.
Shirley Norton, a spokeswoman for Bank of America, had no immediate comment on the settlement. Blair Nicholas, a lawyer representing the investors, didn’t immediately return a call to his office.
The case is Government of Guam v. Countrywide, 11-6239, U.S. District Court, Central District of California (Los Angeles.)
Allied Health Care’s Schwartz Gets 16 Years in Ponzi Scheme
Allied Health Care Services Inc. founder Charles K. Schwartz was sentenced to 16 years and three months in prison for using a Ponzi scheme to defraud 74 financial institutions of $80 million.
Schwartz, 58, of Sparta, New Jersey, pleaded guilty in April to bilking lenders who invested $135 million in Orange, New Jersey-based Allied, falsely saying he was leasing medical equipment. Prosecutors said the lenders lost $80 million, including Sun Bancorp Inc., which was defrauded of $13 million.
Prosecutors said Schwartz used another company to carry out a phony-invoice scheme over eight years. Schwartz admitted he used the money he stole to pay himself and relatives and buy real estate, including property in New Jersey and a horse farm in upstate New York. Schwartz asked U.S. District Judge Susan Wigenton to impose a 10-year term.
“I’d like to apologize to the court for the actions which brought me here,” Schwartz said yesterday in federal court in Newark at his sentencing. “Words can never express how sorry I am for what I’ve done.”
“This case was a guilty plea from Day One,” John Whipple, Schwartz’s attorney, said. “He made a lengthy statement upon his arrest. He fully confessed, 100 percent to the entire scheme. He laid out exactly how it worked, for how long. There’s always been full acceptance of responsibility.”
Assistant U.S. Attorney Jacob Elberg said he was troubled by what he said were suggestions from Whipple “that the victims are not worthy of their status as victims.”
He noted that one of the employees at a defrauded financial institution took his own life after the fraud.
The case is U.S. v. Schwartz, 11-cr-239, U.S. District Court, District of New Jersey (Newark).
Ex-Obama Fundraiser Rezko Sentenced to 10 1/2 Years
Antoin “Tony” Rezko, the former campaign fundraiser for President Barack Obama and ex-Illinois Governor Rod Blagojevich, was sentenced to 10 1/2 years in prison for his role in a kickback scheme.
Rezko, 56, an investor in restaurant chains and a developer of low-income real estate, was found guilty by a jury of plotting with a Chicago-area businessman serving on two state boards to take millions of dollars from firms doing business with Illinois.
Rezko was sentenced yesterday before U.S. District Judge Amy St. Eve in Chicago.
His four-month trial began in March 2008 at the height of the presidential primary season that saw Obama -- then a U.S. senator from Illinois -- win the Democratic party’s nomination for president over then-U.S. Senator Hillary Rodham Clinton of New York.
The Syrian-born Rezko had raised money for Obama’s U.S. and Illinois state senate campaigns and collected more than $1.4 million for then-Governor Rod Blagojevich, who was indicted on corruption charges six months later.
While Obama was mentioned several times during Rezko’s trial, he was never accused of any wrongdoing. Money Rezko raised for Obama’s presidential campaign was donated to charity, according to Bill Burton, a campaign spokesman.
The case is U.S. v. Levine, 05cr691, in the U.S. District Court for the Northern District of Illinois (Chicago).
Ex-AllianceBernstein Worker Pleads Guilty in Computer Case
A former AllianceBernstein Holding LP (AB) employee accused of stealing software from the fund manager pleaded guilty to computer trespass in New York state court in Manhattan.
Peter Jan, 35, who was an application support specialist at the investment-management company, was accused in April of stealing software used to send and receive messages related to clients’ securities transactions. He was charged with computer trespass, grand larceny and unlawful duplication of computer- related materials.
He pleaded guilty to one count of felony computer trespass as part of a deal with Manhattan District Attorney Cyrus Vance Jr.’s office. Jan will be able to withdraw his plea to the felony count and plead instead to a misdemeanor charge of unauthorized use of a computer if he completes 100 hours of community service and isn’t arrested, his lawyer Jeremy Saland said yesterday. As a result, Jan will face no jail time and no probation, according to the lawyer.
“Mr. Jan was not involved in any theft of data that compromised any aspect of AllianceBernstein’s clients,” Saland said in an interview after Jan’s plea. “This was really an unfortunate incident that was exacerbated because of AllianceBernstein being a major player in the financial community.”
Prosecutors said Jan gave notice to New York-based AllianceBernstein on March 8, 2010, and was supposed to leave the company 11 days later. On four occasions, prosecutors said, he downloaded software used by the company for FIX messages, a financial information exchange standard. Jan was fired on March 15, 2010.
The case is People vs. Jan, 01784/2011, New York State Supreme Court, New York County (Manhattan).
Columbia Student Coles to Enter N.Y. Drug Treatment Program
A Columbia University student arrested last year on drug charges will enroll in a treatment program allowing him to avoid a criminal record.
Christopher Coles, 21, of Philadelphia, was granted entry into the program yesterday by Judge Ellen Coin in New York, who supervises it. If he completes the program successfully, the criminal case will be dropped.
The diversion program, set up in 2009 as part of a reform of the state’s so-called Rockefeller drug laws, allows judges to divert some nonviolent offenders to treatment programs instead of incarceration.
Coles’s choosing to enroll follows a ruling last month by Justice Michael Sonberg of state Supreme Court that denied enrollment to two codefendants, Jose Stephan Perez of Atlanta and Michael Wymbs of New York.
Five students -- Coles; Perez; Wymbs; Adam Klein, 21, of Closter, New Jersey; and Harrison David, 21, of Wrentham, Massachusetts -- were arrested last December after a five-month operation by the New York City Police Department.
Prosecutors said undercover officers spent $11,000 buying drugs including cocaine, marijuana, ecstasy and LSD-laced candy, with most sales taking place in common areas and bedrooms of three fraternities.
David pleaded guilty on July 19 to selling cocaine to an undercover officer in exchange for six months in jail and five years of probation. He began serving his prison term on Aug. 30.
Perez and Klein face sentences of as long as 2 1/2 years if convicted of criminal sale of a controlled substance in the fifth degree, the most serious charge against each of them. Both turned down plea bargains in June that included five years’ probation.
The case is People v. David, 00038N/2011, New York state Supreme Court, New York County (Manhattan.)
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Hewlett-Packard Covington Report Remains Secret, Judges Say
Hewlett-Packard Co. (HPQ) won a court ruling that prevents an internal report on the departure of former Chief Executive Officer Mark Hurd from being made public, as an investor requested.
The Delaware Supreme Court on Monday affirmed a decision by Delaware Chancery Court Judge Donald Parsons Jr. that the “interim” report by lawyers at Covington & Burling to the board shouldn’t be among books and records sought by stockholder Ernesto Espinoza.
“Espinoza has not shown that the Covington report is essential to his stated purpose, which is to investigate possible corporate wrongdoing,” Justice Jack Jacobs wrote in behalf of the court.
Felipe Arroyo, a lawyer for Espinoza, told the justices in arguments on Oct. 12 in Dover that release of all documents would provide “a full opportunity to air out” all background details of Hurd’s departure from HP.
Hurd, who is now president of software maker Oracle Corp. (ORCL), resigned from Palo Alto, California-based HP in August 2010 after a company investigation determined he violated its standards of business conduct. HP said it didn’t find that Hurd had violated the company’s sexual-harassment policy.
Mylene Mangalindan, a Hewlett-Packard spokeswoman, didn’t immediately return phone and e-mail messages seeking comment on the ruling.
The Chancery case is Espinoza v. Hewlett-Packard Co., CA6000, Delaware Chancery Court (Wilmington). The appeal is Hurd v. Spinoza, 208, 2011, Delaware Supreme Court (Dover).
PMI Group Loses Bid to Undo Seizure by Arizona Regulator
PMI Group Inc. (PMI), the mortgage insurer whose main unit was seized by Arizona regulators last month, lost a court bid to undo the takeover, according to a copy of a court filing.
The Arizona Department of Insurance sufficiently established the insurer was so unsound that it “is or will become unable to meet the anticipated demands of its policyholders,” Arizona Superior Court Judge Richard Gama in Phoenix wrote in a five-page ruling, a copy of which was provided to Bloomberg News. The filing couldn’t be immediately confirmed in court records.
Gama rejected an argument from PMI that the regulator failed to show exigency or irreparable harm from the seizure. The company said it has enough cash and liquid investments to pay claims until at least December 2013. The cost to protect against a default by PMI jumped after the ruling.
“Although it might have $2 billion in liquid assets available for payment of claims until December 2013, PMI is currently insolvent, with a negative policyholder surplus as of Sept. 30, 2011, of approximately $1 billion, significantly below the statutory minimum of $1.5 million,” Gama wrote.
Arizona Director of Insurance Christina Urias took control of the PMI unit last month on an interim basis and directed claims to be paid at 50 cents on the dollar after losses on mortgage defaults drained capital. The Walnut Creek, California- based company was already prohibited from selling new coverage.
Bill Horning, a spokesman for PMI, didn’t return a telephone call.
The case is State of Arizona v. PMI Mortgage Insurance Co., 11-018944, Arizona Superior Court, Maricopa County, (Phoenix).
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Microsoft’s Gates Faces More Questions in Novell Lawsuit
Novell said in its 2004 complaint that Microsoft unfairly restricted competition by using its monopoly on personal computer operating systems to suppress a rival word-processing program. Jeffrey Johnson, Novell’s lawyer, continued his questioning of Gates, 56, yesterday in federal court in Salt Lake City.
Johnson began his cross-examination Monday by asking Gates about the U.S. government’s landmark antitrust case against Microsoft that was settled more than eight years ago. In that case, Redmond, Washington-based Microsoft was declared an illegal monopolist.
Gates acknowledged “there was a lawsuit” and “findings” concluding Microsoft engaged in anticompetitive conduct.
Gates told Microsoft lawyer Steven Holley yesterday that he “absolutely” denied the central allegation of Novell’s suit, that in 1994, in developing the Windows 95 operating system, Microsoft blocked an element of the software to thwart Novell’s WordPerfect and Quattro Pro programs.
While the elements restricted from the operating system may have been useful to companies developing e-mail programs, they were “pretty irrelevant” to word-processing, Gates testified.
Novell, which was bought by Seattle-based Attachmate Corp. in April, has argued that WordPerfect’s share of the word- processing market fell to less than 10 percent in 1996 from almost 50 percent in 1990.
Its value dropped from $1.2 billion in May 1994 to $170 million in 1996, when it was sold to Ottawa-based Corel Corp., said Novell. The company settled separate antitrust claims against Microsoft for $536 million in 2004.
In May, the U.S. Court of Appeals in Richmond, Virginia, revived the case, which had been dismissed by a lower court. The appeals court ruled that Novell, which briefly owned WordPerfect in the mid-1990s, didn’t cede its rights when it transferred claims related to its personal-computer operating system products to Caldera Inc. in 1996.
The appeals court ruling sent the case back to U.S. District Judge J. Frederick Motz in Baltimore, who had originally rejected it. Motz is conducting the trial in Salt Lake City, where the original lawsuit was filed.
The case is Novell Inc. v. Microsoft Corp., 04-01045, U.S. District Court, District of Utah (Salt Lake City).
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Comings and Goings
SEC Deputy Enforcement Head Said to Leave for Justice
Lorin Reisner, the U.S. Securities and Exchange Commission’s deputy head of enforcement, is leaving the agency to take a job as a top federal prosecutor in New York, two people with knowledge of the matter said.
Reisner will become the chief of the criminal division for the U.S. Attorney’s Office for the Southern District of New York, the people said, speaking on condition of anonymity because the decision isn’t yet public. He is expected to start the job early next year pending routine background checks, the people said.
Reisner, who joined the SEC in 2009, has taken the lead on some of the agency’s highest-profile cases to come from the financial crisis, including the $550 million settlement with Goldman Sachs Group Inc. (GS) over claims it misled investors in a financial product linked to subprime mortgages. Before joining the SEC, Reisner had been a litigation partner at law firm Debevoise & Plimpton for 13 years.
U.S. Attorney Preet Bharara sent an e-mail to staff yesterday announcing Reisner’s appointment, one person said. Reisner will take over the post from Jonathan Kolodner, who will become special counsel to Bharara after serving as interim chief of the criminal division, the person said.
A phone call to Reisner wasn’t immediately returned. Carly Sullivan, a spokeswoman for the U.S. Attorney’s office, declined to comment.
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