Insider Trading, Goldman, Carlyle, Ally, TD in Court News

Seven men, including fund managers and analysts, were charged by the U.S. with forming a “criminal club” of friends and co-workers who reaped almost $62 million from insider trading in Dell Inc. (DELL) shares.

Manhattan U.S. Attorney Preet Bharara alleged that the scheme included one trade that earned a $53 million illegal windfall for Level Global Investors LP co-founder Anthony Chiasson and his fund. The insider-trading ring, which involved five different hedge funds and investment firms, is the largest identified by the U.S. to date to involve a single stock, federal authorities said.

Chiasson, Todd Newman, a portfolio manager formerly at Diamondback Capital Management LLC, Jon Horvath, a hedge fund analyst in New York, and Danny Kuo, a fund manager for Whittier Trust Co. in South Pasadena, California, were taken into federal custody yesterday, said Janice Fedarcyk, head of the Federal Bureau of Investigation’s New York office.

The charges “paint a stunning portrait of organized corruption on a grand scale,” Bharara said yesterday at a news conference. “It describes a circle of friends who essentially formed a criminal club, whose purpose was profit and whose members regularly bartered lucrative inside information. It was a club where everyone scratched everyone else’s back.”

The U.S. said the illegal profits earned as a result of the scheme were almost of the same “magnitude of fraud we proved in the Galleon Group insider trading scheme,” Bharara said.

Robert Khuzami, the head of enforcement at the U.S. Securities and Exchange Commission, which filed a related suit yesterday against the defendants, said the cases describe actions “far more disturbing” than insider trading committed by someone who obtains one illegal tip.

Horvath, 42, is an analyst at Connecticut-based hedge fund Sigma Capital Management LLC, said a person with knowledge of the matter who wasn’t authorized to speak because the information wasn’t public. He was arrested by the FBI yesterday at his home in Manhattan, the U.S. said, and released on a $750,000 bond after a court appearance before U.S. Magistrate Judge James Cott in New York.

“Throughout a more than 10-year career as a respected investment analyst, Jon Horvath has conducted himself with honesty and integrity,” Horvath’s lawyer, Steven Peikin, said after court. “He has done nothing wrong,’” and the charges against him “will be shown to be meritless,” Peikin said.

Greg Morvillo, Chiasson’s lawyer, argued that client trades made by others at Level Global were attributing to his client.

Newman, 47, was released on a $3 million bond after appearing in U.S. District Court in Boston yesterday.

Kuo, 36, who was arrested yesterday in California, was released on $300,000 bond after appearing in federal court in Los Angeles.

Steven Goldberg, a spokesman for New York-based Level Global, didn’t return a call seeking comment on the arrests.

Diamondback, in a letter to investors yesterday, said it has cooperated with U.S. authorities.

Peter Neiman, of Wilmer Hale, a lawyer for Diamondback Capital, declined to comment on the SEC lawsuit. MaryJeanette Dee, a lawyer for Level Global, didn’t return a voice-mail message left at her office seeking comment on the suit.

The criminal case is U.S. v. Newman, 12-00124, U.S. District Court, Southern District of New York (Manhattan). The civil case is Securities and Exchange Commission v. Adondakis, 12-00409, U.S. District Court, Southern District of New York (Manhattan).

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Treasury Code Stolen by New York Fed Programmer, U.S. Says

U.S. Treasury Department software used to track federal collections and payments was stolen by a government contractor’s employee who worked at the Federal Reserve Bank of New York, federal prosecutors said.

Bo Zhang, 32, who worked for an unidentified technology company, was a computer programmer assigned to work on source code at the New York Fed from May until August, the U.S. said in a criminal complaint against him that was unsealed yesterday in federal court in Manhattan. Zhang is a Chinese citizen, said a person with knowledge of the matter who didn’t want to be identified because the information wasn’t public.

The software system relates to the “tracking of the billions of dollars that are electronically transferred every day in the U.S.’s general ledger,” prosecutors said.

Zhang has been in the U.S. on a work visa since 2000, said another person familiar with the matter who also didn’t want to be identified because the information isn’t public. Zhang worked previously at Goldman Sachs Group Inc. (GS) and Bank of America Corp., the person said.

U.S. Magistrate Judge James Cott yesterday agreed to release Zhang on a $200,000 bond secured by a condominium located in the Flushing, Queens, section of New York City. Cott ordered that he surrender all of his travel documents and restricted his movements to parts of New York and to New Jersey, where Zhang’s lawyer said his client works. Cott set the next court appearance in the case for Feb. 17.

After court yesterday, Zhang’s lawyer, Joseph Grob, declined to comment on the charges or whether his client is a citizen of China or a naturalized U.S. citizen.

Matt Anderson, a Treasury spokesman, said the department has worked to strengthen security procedures for Federal Reserve contractors working on Financial Management Service projects.

“There was no compromise of any transaction data, personal identifying information or federal funds,” Anderson said in an e-mailed statement.

The case is U.S. v. Zhang, 12-mag-00108, U.S. District Court, Southern District of New York (Manhattan).

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Lawsuits/Pretrial

HUD, DOJ to Meet With States for Support on Foreclosure Deal

U.S. Housing and Urban Development Secretary Shaun Donovan and a Justice Department official are set to meet with state attorneys general next week to rally support for a proposed settlement with banks over foreclosure practices, said a spokesman for Iowa Attorney General Tom Miller.

Materials about the proposed deal are being sent to all states, and Democratic attorneys general have been invited to meet on Monday with Miller, Donovan and Associate Attorney General Thomas Perrelli, said Geoff Greenwood, Miller’s spokesman.

State and federal officials have been negotiating a settlement with the five largest mortgage servicers, including Bank of America Corp. and JPMorgan Chase & Co. (JPM), which would set requirements for conducting foreclosures and provide relief to homeowners. Miller, a Democrat, has been leading negotiations for the states.

Attorneys general from all 50 states announced in 2010 they were investigating bank foreclosure practices after disclosures that the companies were using faulty documents in seizing homes.

The meeting, planned for Chicago, comes after about a dozen state attorneys general met last week to discuss their mortgage probes and how they might work together during settlement talks, people familiar with the matter said last week. At Monday’s meeting, the federal and state officials will answer questions and discuss details of the potential deal in an effort to win support, Greenwood said.

The group included New York Attorney General Eric Schneiderman, California Attorney General Kamala Harris and others who have said any deal shouldn’t protect banks from mortgage-related investigations that haven’t yet been resolved.

Harris and Nevada Attorney General Catherine Cortez Masto announced in December they were collaborating in their mortgage and foreclosure investigations. Schneiderman and Delaware Attorney General Beau Biden are also cooperating. In December, Massachusetts Attorney General Martha Coakley sued Charlotte, North Carolina-based Bank of America, New York-based JPMorgan, Citigroup Inc. (C), Wells Fargo & Co. and Ally Financial Inc. (ALLY), accusing them of conducting unlawful foreclosures and deceiving homeowners.

HUD spokesman Derrick L. Plummer declined to comment.

Goldman Sachs Asks for Arbitration in Basis Yield Suit

Goldman Sachs Group Inc. asked a New York state court judge to order arbitration in a lawsuit against the investment bank by Basis Yield Alpha Fund or dismiss the complaint.

Basis Yield Alpha Fund, a unit of Australian hedge fund Basis Capital Funds Management Ltd., sued Goldman Sachs in New York State Supreme Court in October, accusing the bank of making false and misleading statements and omissions in connection with the sale of securities known as Timberwolf and Point Pleasant.

Basis Yield agreed that any disputes connected to the investments would be subject to binding arbitration when it opened its trading account, New York-based Goldman Sachs said in court documents filed Jan. 17.

The case should be dismissed if arbitration isn’t ordered because it lacks a “substantial nexus” to New York, and because the losses from the investments were caused by the collapse of the mortgage market and not by misrepresentations, Goldman Sachs said in the filings.

“Not only are subjective opinions as to market direction inactionable, but defendants had no crystal ball as to market direction any more than did BYAFM or any other investor,” Goldman Sachs said in the court documents.

A June 2010 lawsuit by Basis Capital over the securities was dismissed last year by U.S. District Judge Barbara Jones in Manhattan, who ruled the Australian fund couldn’t use U.S. securities laws to pursue its claims against Goldman Sachs.

The case is Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc., 652996/2011,

Carlyle Seeks to Ban Shareholder Lawsuits Before Public Offering

Carlyle Group LP, the Washington-based buyout company that’s preparing to go public, is seeking to bar its future shareholders from filing individual and class-action lawsuits.

The firm revised its governing documents last week to say that investors who purchase company shares must settle any subsequent claims against Carlyle through arbitration in Wilmington, Delaware. That could limit the ability of stockholders to win big awards for securities-law violations such as fraud, Bloomberg News’s Miles Weiss reported that several attorneys said.

The U.S. Supreme Court (1000L) has issued a series of rulings in recent years upholding the right of companies to require the use of arbitration to resolve disputes with consumers. Carlyle is seeking to extend this principle to public shareholders, a move that could run up against a bedrock of U.S. securities law, the ability of investors to seek redress in federal court.

“What we are talking about is legally uncharted territory,” said Donald Langevoort, a law professor at Georgetown University in Washington who previously worked for the U.S. Securities and Exchange Commission. “I would be surprised if the courts allow any company to entirely foreclose shareholder rights to sue under federal securities laws.”

Chris Ullman, a spokesman for Carlyle, declined to comment.

At issue are provisions of U.S. securities laws that bar investors from waiving their rights to seek damages.

The SEC must approve Carlyle’s registration statement before the private-equity firm can sell shares to the public. The agency has historically refused to permit a public offering by a company whose charter mandates arbitration and precludes class actions, John Coffee, a professor at Columbia Law School in New York, said in an e-mail response to questions.

Carlyle may be considered different because it’s a limited partnership rather than a corporation, Coffee said.

“It will be a difficult precedent to contain if the SEC permits this,” he said.

Florence Harmon, a spokeswoman for the SEC, declined to comment.

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Financial Guaranty Suits Against Ally Moved to U.S. Court

Financial Guaranty Insurance Co. lawsuits against Ally Financial Inc. (ALLY) over soured mortgage loans backing securities sold to investors were moved to federal court.

Financial Guaranty filed two lawsuits against Ally Financial in New York state Supreme Court in Manhattan on Dec. 27, accusing Ally’s Residential Funding unit of making “material misrepresentations” about the loans, which Financial Guaranty said were riskier than promised. Ally said there was “no merit” to it being named in the complaints.

The cases were moved to U.S. District Court in Manhattan on Jan. 13, according to court documents filed in New York state Supreme Court yesterday. Three other lawsuits filed by Financial Guaranty against Ally Financial units in November were removed to U.S. District Court earlier this month.

FGIC Corp., the holding company for Financial Guaranty Insurance Co., sought bankruptcy protection from creditors in August 2010 after suffering losses from the drop in the U.S. housing market.

The cases are Financial Guaranty Insurance Co. v. Ally Financial Inc., 653621-2011, and Financial Guaranty Insurance Co. v. Ally Financial, 653623-2011, New York state Supreme Court (Manhattan).

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Trials/Appeals

J&J Hid 3 Risperdal Diabetes Studies From FDA, Texas Jury Told

Johnson & Johnson (JNJ) officials hid three studies showing some patients using Risperdal developed diabetes while claiming the antipsychotic drug didn’t cause the disease, a witness testified.

As early as 1999, Johnson & Johnson’s Janssen unit had researchers’ findings that about half the patients taking Risperdal in a study comparing its risks to those of Eli Lilly & Co.’s Zyprexa antipsychotic drug developed diabetes after a year on the medication, Joseph Glenmullen, a psychiatrist and Harvard Medical School instructor, told a Texas jury yesterday.

That study concluded Risperdal caused “medically serious weight gain” that led study subjects to develop diabetes, Glenmullen testified in the trial of the state of Texas’s lawsuit over Janssen’s marketing of the drug. At the same time, Janssen salespeople were telling doctors that researchers concluded the drug didn’t cause the disease, Glenmullen added.

Texas contends New Brunswick, New Jersey-based J&J, the world’s largest health-care products company, defrauded the Medicaid program by promoting Risperdal for uses not approved by U.S. regulators, including for children with psychiatric disorders, and misleading doctors and regulators about the drug’s risks.

The state joined a lawsuit filed by a whistle-blower, Allen Jones, a former Pennsylvania health-care fraud investigator. Lawyers for Texas Attorney General Greg Abbott are asking jurors in state court in Austin, Texas, to order J&J and Janssen to pay at least $579 million in damages over the companies’ Risperdal marketing practices.

Michael Clements, a Janssen spokesman, didn’t return a call for comment yesterday on Glenmullen’s testimony about the company’s handling of the studies.

Glenmullen, testifying as an expert for the state, told jurors Janssen officials didn’t turn over Study 113, which found Risperdal posed a higher diabetes risk than Zyprexa, to the U.S. Food and Drug Administration when regulators began probing links between anti-psychotic medications and the disease in 2000.

The drugmaker also didn’t turn over the results of two other later studies that found Risperdal and Zyprexa posed comparable diabetes risks to the FDA.

The case is Texas v. Janssen LP, D-1GV-04-001288, District Court, Travis County, Texas (Austin).

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Verdicts/Settlements

Julius Baer Said to Recover $43.8 Million in Singapore Suit

Julius Baer Group Ltd. (BAER) won a bid in Singapore to recover 34.1 million euros ($43.8 million) from LonGains Investment Pte for a trade involving credit-linked notes, according to two people familiar with the dispute.

Switzerland’s biggest publicly traded private bank won the ruling at Singapore’s High Court last week, said the people, who weren’t authorized to speak publicly about the decision. Minutes from the Jan. 11 closed hearing aren’t publicly available.

LonGains, a Singapore-based commodities investor and trader, had no money in its Euro and U.S. dollar accounts when it placed the trade in August on notes issued by BNP Paribas SA, and linked to Commerzbank AG (CBK), according to Julius Baer’s Sept. 27 lawsuit. That triggered a 34.1 million euro overdraft, the bank said in court papers.

“We’re going to appeal the decision,” LonGains director Magindra Raw Manian said on Jan. 18. He declined to confirm the value of the notes.

Tresor Anne Tan, a Singapore-based spokeswoman at Julius Baer, declined to comment on litigation matters.

It’s a “straightforward claim for money lent and unpaid fees,” Michael Georg Gerny, head of legal products and services at Julius Baer, said in a Dec. 7 court filing.

The case is Bank Julius Baer v LonGains Investment Pte S668/2011 in the Singapore High Court.

TD Bank Loses $67 Million Verdict Over Rothstein Fraud Role

Toronto-Dominion Bank (TD) lost a $67 million jury verdict over claims it helped Scott Rothstein, the convicted Florida attorney, in his $1.2 billion Ponzi scheme by telling victims their money was safe as he depleted accounts.

A jury in federal court in Miami returned the verdict yesterday, in a lawsuit brought by Coquina Investments, based in Corpus Christi, Texas. The panel deliberated about four hours before reaching its verdict and notified U.S. District Judge Marcia Cooke.

“It was clear cut for us,” the jury forewoman, Shonda Smith, said after the verdict. “We were all surprised at how much stuff they allowed to go through, all the deposits and transfers. At any point, someone could have stopped it.”

Coquina’s lawyer David Mandel on Jan. 17 urged the jury to award $32 million in compensatory damages and $140 million in punitive damages.

“They didn’t lift a finger,” Mandel said in closing arguments. “Once fraud was evident, it was their obligation to report it and stop it.”

A spokeswoman, Rebecca Acevedo, said the bank is disappointed with the verdict “and is considering all of its options.”

“We still maintain that we were Rothstein Rosenfeldt Adler’s bank and that it was Scott Rothstein who defrauded investors,” she said by e-mail, referring to the confidence man’s law firm. “We will continue to defend the bank against claims of wrongdoing.”

Yesterday’s verdict was for $32 million in compensatory damages and $35 million in punitive damages, the type designed to punish.

The case is Coquina Investments v. Rothstein, 0:10- cv-60786, U.S. District Court, Southern District of Florida (Miami).

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Stryker Biotech Agrees to Plead Guilty to Misbranding Charge

A Stryker Corp. (SYK) unit agreed to plead guilty and pay a $15 million fine while the medical-device maker was on trial on charges it marketed an unapproved mixture of products for strengthening human bone growth.

The unit, Stryker Biotech, and three Stryker sales representatives were on trial in federal court in Boston on a 13-count criminal indictment claiming conspiracy and wire fraud. The trial began Jan. 9 with jury selection.

Stryker Biotech agreed to plead to one misdemeanor count of misbranding a medical device, according to a letter dated yesterday from the U.S. Attorney’s Office in Boston and filed with the federal court.

Prosecutors agreed to drop the case against Hopkinton, Massachusetts-based Stryker Biotech and won’t call Stryker Corp. President Stephen P. MacMillan to testify “in connection with current or future trial proceedings” in the case before Judge George O’Toole.

The government dropped charges Jan. 17 against former regional sales manager David Ard of California, according to a motion filed by prosecutors. Attorneys for former national sales representative William Heppner of Illinois and ex-regional manager Jeffrey Whitaker of North Carolina have asked the judge to declare a mistrial. Mark Philip, former chief executive officer of Stryker Biotech from 2004 to 2008, is scheduled to go to trial later this year.

The case is U.S. v. Stryker Biotech LLC, 09-cr-10330, U.S. District Court, District of Massachusetts (Boston).

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Ex-Columbus Hill Capital CFO Admits Embezzling $10.4 Million

The former chief financial officer of Columbus Hill Capital Management LP, an investment management firm based in Short Hills, New Jersey, pleaded guilty to embezzling more than $10.4 million.

David Newmark, 39, admitted in federal court in Newark, New Jersey, that he created a phony account to collect deposits that he stole from the company. Newmark, who pleaded guilty to wire fraud and tax evasion, agreed to forfeit $10.4 million.

“Making personal use of company cash, it was only a matter of time before he was caught with his hand in the piggy bank,” U.S. Attorney Paul Fishman said in a statement.

Newmark, of Towaco, New Jersey, faces as many as 20 years in prison on the fraud charge and five years on the tax evasion count. U.S. District Judge William Walls set sentencing for April 24.

Newmark’s attorney, Michael Himmel, didn’t immediately return a call seeking comment on the plea.

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On the Docket

Allen Stanford Loses Bid to Delay Jan. 23 Fraud Trial

R. Allen Stanford lost a bid to delay his $7 billion fraud trial after a federal judge refused to wait until a digital forensics expert on the defense team recovers from a medical emergency.

Jury selection will begin as scheduled on Jan. 23, according to court records.

An employee of Accumyn Consulting, which is providing Stanford’s defense team with digital forensics and electronic- discovery management services, was diagnosed with an illness that will prevent her from working for at least three weeks, U.S. District Judge David Hittner told lawyers at a hearing yesterday in federal court in Houston.

“There are many, many other employees at Accumyn,” Hittner said, rejecting the defense’s request for a three-week delay. When Stanford’s attorneys tried to debate the matter, Hittner cut them off. “That’s it. I’ve ruled,” he said.

Stanford, 61, has been imprisoned as a flight risk since his June 2009 indictment on charges he defrauded investors through allegedly bogus certificates of deposit at his Antigua- based Stanford International Bank. Stanford denies all wrongdoing.

Stanford entered a plea of “not guilty” yesterday when Hittner re-arraigned him on a 14-count superseding indictment that was handed down while Stanford was in an out-of-state prison.

Hittner previously refused repeated requests by Stanford’s court-appointed attorneys to delay the former financier’s trial to give them more time to prepare. Stanford’s lawyers failed to convince Hittner that time and budget constraints imposed by the court infringed on their client’s constitutional right to an adequate defense.

The criminal case is U.S. v. Stanford, 09-cr-342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09-cv-298, U.S. District Court, Northern District of Texas (Dallas).

To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York, at eamon2@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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