A U.S. investigation of possible insider-trading by Goldman Sachs Group Inc. (GS) employees expanded to include a managing director whose name emerged at the trial of convicted hedge fund manager Raj Rajaratnam, a person with knowledge of the probe said.
David Loeb, who works on Asia equity sales in New York and focuses on Taiwan, is a subject in the criminal investigation, said the person, who declined to be identified because the matter isn’t public. Loeb is the second Goldman Sachs employee said to be under federal scrutiny. Last month, Henry King, an analyst covering Taiwan, was identified as under investigation by the FBI, a person familiar with the case said.
Goldman Sachs said in a Feb. 28 regulatory filing that “from time to time, the firm and its employees are the subject of or otherwise involved in regulatory investigations relating to insider trading, the potential misuse of material nonpublic information and the effectiveness of the firm’s insider trading controls and information barriers.”
The bank said in the filing that it was “fully cooperating” with any such investigations.
Since 2009, insider-trading and securities fraud charges have been filed against 64 people in the investigation, called “Perfect Hedge.” To date, 59 people have either pleaded guilty or been convicted at trial. They include Galleon Group LLC co- founder Rajaratnam, who is serving an 11-year prison term.
Loeb didn’t return calls or e-mails seeking comment yesterday. Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment.
Jerika Richardson, a spokeswoman for U.S. Attorney Preet Bharara said it is the office’s policy to neither confirm nor deny if Loeb is the subject of any inquiry.
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).
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Kinder Morgan’s El Paso Buyout Deal Allowed by Judge to Proceed
Kinder Morgan Inc. (KMI) was allowed to proceed with a $21.1 billion takeover of El Paso Corp. (EP) by a judge who rejected claims that Goldman Sachs Group Inc.’s conflict of interest in the deal warranted blocking a shareholder vote.
Delaware Chancery Court Judge Leo Strine rejected calls by some El Paso shareholders to block rival pipeline operator Kinder Morgan’s $25.91-a-share offer. El Paso didn’t negotiate a high enough price and Goldman Sachs, which owns 19 percent of Kinder Morgan, wrongfully served as adviser to El Paso on the deal and improperly influenced negotiations, they argued.
“I reluctantly deny the plaintiffs’ motion for a preliminary injunction, concluding that the El Paso stockholders should not be deprived of the chance to decide for themselves about the merger, despite the disturbing nature of some of the behavior leading to its terms,” Strine ruled yesterday.
El Paso shareholders are scheduled to vote on the offer March 6.
The role of New York-based Goldman Sachs on both sides of the deal was the focal point of the Wilmington case. Pension funds from Louisiana, Florida and New York that invested in El Paso argued Goldman Sachs, the fifth-largest U.S. bank by assets, has long-standing ties to Kinder Morgan and helped Richard Kinder, the firm’s chief executive officer, take the pipeline operator private in 2006.
“We’re gratified that the judge denied the injunction and that we can proceed with the vote of the shareholders,” Larry Pierce, a spokesman for Kinder Morgan, said in an e-mail yesterday.
El Paso officials are looking “forward to the close of the transaction with Kinder Morgan,” company spokesman Richard Wheatley said in a phone interview.
“We are pleased that shareholders will get to vote on the merger,” David Wells, a spokesman for New York-based Goldman Sachs, said in an e-mail. “We respect the judge’s opinion but want to be clear that we stood by our client through this process, encouraging them to get independent views from another adviser. We were also transparent with El Paso about our relationship with Kinder Morgan and the related issues.”
The pension funds contended in their suit that Goldman Sachs had a financial incentive to advise El Paso’s managers to accept a lower price than they might have negotiated. Kinder’s cash-and-stock bid amounts to a 37 percent premium to El Paso shareholders, according to the company.
“Goldman’s staggering conflict of interest was obvious from the outset: With a stake in KMI worth over $4 billion, every dollar shaved off the buyout price represented $150 million of savings for Goldman,” the funds argued.
The case is In re El Paso Corp. Shareholder Litigation, Consolidated 6949-CS, Delaware Chancery Court (Wilmington).
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Morgan Stanley Mortgage Capital Sued for Breach of Contract
A Morgan Stanley (MS) unit was sued for breach of contract by a securitization trust seeking to force the bank to buy back about $300 million in mortgage loans.
Morgan Stanley Mortgage Capital failed to comply with the terms of agreements governing the sale of about 5,400 mortgage loans with a total unpaid principal balance of about $300 million, trustee U.S. Bank NA said in a complaint filed yesterday on the trust’s behalf in New York State Supreme Court in Manhattan.
The loans began to default or become delinquent “at a significant rate” shortly after they were sold to the trust, which has suffered losses of $140.7 million as of Feb. 25, according to court papers. The trust seeks $142 million in damages.
“The plaintiff has been informed of numerous breaches of representations and warranties made by MSMC that related to the quality of the mortgage loans,” U.S. Bank said. “MSMC has failed to cure these breaches or repurchase the loans.”
Mary Claire Delaney, a spokeswoman for New York-based Morgan Stanley, declined to comment on the lawsuit.
The case is Morgan Stanley Mortgage Loan Trust 2006-4SL and Mortgage Pass-Through Certificates, Series 2006-4SL v. Morgan Stanley Mortgage Capital, 650579/2012, New York State Supreme Court (Manhattan.)
Doctors Among 36 Charged in $275 Million Insurance Scheme
Thirty-six people, including 10 doctors and three lawyers, were charged in a no-fault auto insurance scheme that made more than $275 million.
The ring, which consisted mostly of Russian-born U.S. residents, used “medical fraud mills,” phony clinics that billed insurers for unnecessary treatments, according to the indictment.
Lawyers connected to the scheme filed fraudulent personal injury claims and suits to make additional money, the government said in the indictment. Charges against participants in the alleged scheme include racketeering conspiracy, health-care fraud conspiracy, conspiracy to commit mail fraud and conspiracy to launder money.
New York law requires vehicles registered in the state to carry no-fault insurance providing as much as $50,000 per person to cover injuries sustained in auto accidents, according to the government.
The case is U.S. v. Zemlyansky, 12-CR-171, U.S. District Court, Southern District of New York (Manhattan).
Drilling Rig Manager Charged With Lying About Blowout Tests
Hudson, 49, lied to an investigator with the U.S. Department of Interior’s inspector general office when he denied directing others to falsify blowout prevention testing records, U.S. Attorney Jim Letten in New Orleans said yesterday in a statement.
Prosecutors said Hudson was employed by Helmerich & Payne as a drilling rig manager aboard Rig 206 in May 2010, during a period of heightened vigilance on oil rigs following the deadly blowout that killed 11 crew members aboard the Deepwater Horizon operated by BP Plc (BP/) -- an unrelated incident that triggered the nation’s worst offshore oil spill.
In May 2011, the company said in a regulatory filing that it suspended operations on an offshore rig after an employee reported possible “testing irregularities.” The Tulsa, Oklahoma-based company told stockholders that operations on the rig were “promptly suspended,” federal authorities were alerted, and “certain employees” were fired for violating company policies and procedures.
The company said it was cooperating with a grand jury investigation of the matter.
Hudson’s attorney, Steven Lemoine of New Orleans, declined to comment on the charges.
Steven R. Mackey, vice president and general counsel of Helmerich & Payne Inc., didn’t immediately respond to an e-mail seeking comment on the charges against Hudson.
Swiss Bank Employee Offered Stolen Hyposwiss Client Account Data
Swiss authorities arrested a man suspected of stealing data from Hyposwiss Privatbank AG and offering it for sale, public prosecutors said yesterday.
Prosecutors opened an investigation on Jan. 19 after they were alerted by a law firm that was offered the data, Jeannette Balmer, a prosecution spokeswoman said, in an e-mail. A former “external” Hyposwiss employee was arrested on Feb. 16 and remains in custody, she said, without providing the name.
The stolen data relate to a dispute between Russian billionaires Oleg Deripaska and Vladimir Potanin, according to a report in Handelszeitung newspaper yesterday. Swiss prosecutors have dismissed allegations by Deripaska that Potanin and Hans Bodmer, a lawyer who resigned from Hyposwiss’s board in November, used offshore accounts to move money from MMC Norilsk Nickel OJSC. (GMKN)
The requested price for the data was 2 million francs ($2.23 million), the Swiss newspaper said.
“We can confirm that a former employee of Hyposwiss has been arrested,” said a St. Galler Kantonalbank spokesman, Simon Netzle, adding that the bank remained in contact with prosecutors. Hyposwiss is owned by St. Galler.
Neither the bank nor the prosecutors commented on whether the arrest relates to the dispute between the Russians.
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CIFG, Syncora Can’t Bring New Claims Against Loan Originator
CIFG Assurance North America Inc. and Syncora Guarantee Inc. can’t bring new claims against a loan originator over the quality of $1.8 billion of home-equity loans they guaranteed, a judge ruled.
New York State Supreme Court Justice Bernard J. Fried on Feb. 24 denied a motion by the insurers to amend their complaint against GreenPoint Mortgage Funding Inc., saying that the new claims are based on documents that were already filed in the case. Fried in March 2010 threw out the original 2009 lawsuit, which accused the loan originator of violating its mortgage- underwriting guidelines.
“Plaintiffs may not replead to strategically change their approach to this action by reference to allegations and theories of recovery which were available to them from the onset of this litigation,” Fried wrote in his ruling, according to court documents filed yesterday.
Capital One Financial Corp. (COF) shut Novato, California-based GreenPoint in August 2007, less than a year after acquiring its parent company, Long Island’s North Fork Bancorp.
The case is U.S. Bank NA v. GreenPoint Mortgage Funding Inc., 600352/09, New York State Supreme Court, New York County (Manhattan).
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Stanford Jurors Weigh U.S. Claim He Used Bank as Personal ATM
R. Allen Stanford “flushed” investor money away on failing businesses, yachts and cricket tournaments, prosecutors told jurors who began deliberations on whether the Texas financier led a massive Ponzi scheme.
If Stanford’s customers knew what he was really doing with their money, they wouldn’t have bought certificates of deposit issued by his Antigua bank, Justice Department lawyer William Stellmach said in Houston federal court yesterday at the close of the financier’s five-week fraud trial.
“The truth is that he flushed it away,” Stellmach said. “He told depositors he was using their money in one way and the truth was completely different.”
Stanford, 61, is accused of leading a $7 billion scheme funded through the sale of CDs issued by Stanford International Bank Ltd. Some of the CDs were sold in the U.S. by the Houston- based securities firm, Stanford Group Co. He faces 14 criminal counts, including mail fraud and wire fraud, that each carry maximum sentences of 20 years in prison.
His attorneys rested their case Feb. 27 without Stanford taking the stand. In his closing argument, defense lawyer Ali Fazel said “there was no deceit and this man is not guilty.”
The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston).
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Mattel Asks Appeals Court to Reverse $310 Million MGA Award
Mattel Inc. (MAT) asked a federal appeals court to reverse the $310 million in damages and fees that toymaker MGA Entertainment Inc. won last year in a trial over ownership of the rights to MGA’s Bratz dolls.
Mattel said in a brief filed Feb. 27 with the U.S. Court of Appeals in San Francisco that “after two trials and eight years of litigation,” it isn’t contesting the jury’s finding that MGA didn’t infringe Mattel’s copyright when it developed the dolls from an idea and drawings by a former Mattel designer.
The El Segundo, California-based maker of the Barbie doll said it wants the appeals court to throw out the $172.5 million MGA won on its counterclaims that Mattel stole its trade secrets. Those claims were time-barred and shouldn’t have been brought to trial, Mattel said. Nor was there evidence that the alleged trade secrets were actually secrets, it said.
“MGA failed to prove on a trade-secret-by-trade-secret basis that the 26 products on which the jury found liability and damages were trade secrets, adducing at best only vague and general proof that MGA protected the secrecy of some of the products it displayed at toy fairs for publicity purposes,” Mattel said.
The company asked the court to reverse what it called the unprecedented $105.6 million in attorneys’ fees and $31.6 million in costs U.S. District Judge David O. Carter in Santa Ana, California, awarded to MGA for having to defend against Mattel’s copyright-infringement suit.
“I’m pleased that Mattel and its board of directors, after wasting $400 million of shareholders’ money in a lawsuit they should have never brought, have now abandoned that and the ownership of the Bratz brand belongs to MGA,” Isaac Larian, chief executive officer and founder of Van Nuys, California- based MGA, said in an e-mailed statement.
“As for the damages for their crimes against MGA, as well as 40 other toy companies, and the legal fees, I am confident we will prevail on appeal,” Larian said.
The case is Mattel v. MGA, 11-56357, U.S. Appeals Court for the Ninth Circuit (San Francisco.)
Martin Marietta’s Nye Says Vulcan Takeover Would Mean Growth
Martin Marietta Materials Inc. (MLM) Chief Executive Officer Ward Nye told a judge his planned $4.7 billion hostile takeover of rival gravel producer Vulcan Materials Co. (VMC) would lead to long- term growth.
Nye’s testimony came a day after Vulcan CEO Don James told Delaware Chancery Court trial Judge Leo Strine Jr. that the companies had been in friendly talks about a “merger of equals” just two years ago. Martin Marietta made the unsolicited offer in December, after negotiations stalled.
“I’ve always viewed it as a very attractive and synergistic combination,” Nye told the judge in the second day of trial in Wilmington. He said the merger, seriously contemplated in talks in 2010, would produce “hundreds of millions of dollars” in savings. “The operating efficiencies would have been huge,” based on earlier studies, he said.
Vulcan has rejected the offer as inadequate and claims Martin Marietta violated a confidentiality agreement not to reveal the negotiations. Martin Marietta sued contending the agreement lacked any clause prohibiting takeover solicitations.
The combination of Martin Marietta, based in Raleigh, North Carolina, and Vulcan, of Birmingham, Alabama, would create the world’s largest producer of sand, gravel and crushed stone.
The case is Martin Marietta Materials v. Vulcan Materials, CA7102, Delaware Chancery Court (Wilmington).
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EPA’s Greenhouse Gas Rules Are Illegal, Opponents Tell Court
A three-judge panel of the U.S. Court of Appeals yesterday considered challenges to the agency’s rules determining which polluters are covered and when states and industries must comply with regulations curtailing the use of greenhouse gases.
“The agency crossed the line from statutory interpretation to statutory revision,” Peter Keisler, a lawyer for the National Association of Manufacturers, told the judges. He said the EPA violated the law when the agency raised emissions thresholds far above what Congress called for.
Companies such as Massey Energy Co. (MEE), business groups including the U.S. Chamber of Commerce and states led by Texas and Virginia are seeking to stop the agency through more than 60 lawsuits. Some argue that the agency relied on biased data from outside scientists, including some affiliated with the so-called climategate scandal.
The arguments were split into three parts. The panel heard arguments Feb. 29 on the agency’s finding that greenhouse gases are pollutants that endanger human health. They also heard arguments against a 2010 rule on motor vehicle emissions that opponents said improperly sets greenhouse-gas standards for stationary sources, such as steel mills and power plants.
Yesterday, the court considered challenges to the EPA’s “tailoring rule,” which limits the businesses covered by carbon regulation and phases in controls.
The agency aims to phase in industrial polluters covered by the carbon rules through 2016. The EPA argued in court filings that the tailoring rule is acceptable under the Clean Air Act and necessary to avoid states being overrun with permit requests.
The case is Coalition for Responsible Regulation Inc. v. Environmental Protection Agency, 09-1322, U.S. Court of Appeals, District of Columbia (Washington).
Apple Says Giving Proview IPad Brand Would Harm Consumers
Apple Inc. (AAPL), battling for ownership of the iPad trademark for its tablet computer in China, said allowing Proview International Holdings Ltd. (334) to make products with that brand would hurt consumers.
Lawyers for both companies presented arguments for almost six hours at the Higher People’s Court of Guangdong in southern China yesterday before being asked by the three judges if they wished to settle the case. They said they would consult with their clients and the hearing was adjourned without a new court date or a time frame for a ruling.
Apple appealed a November ruling by a lower court that the trademark belongs to the Shenzhen unit of Proview, a failed display maker, and not the Taiwanese unit that signed a 2009 deal. Losing the appeal would open Apple to lawsuits seeking damages and enable a nationwide ban on iPad sales in the company’s biggest market outside the U.S.
“Consumers in China have come to associate this trademark with Apple’s tablet computer,” Shi Yusheng, one of the lawyers representing Apple, said during the hearing. “Allowing Proview to use the brand to make their own products would cause confusion and harm consumer interests.”
The dispute centers on whether Proview’s Taiwan unit, which Apple paid 35,000 British pounds ($55,000) to use the iPad name in mainland China, had the right to sell it or whether that rested with the Shenzhen unit and its creditors, including Bank of China Ltd. (601988) and China Minsheng Banking Corp. (1988)
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Cigarette Makers Can’t Be Forced to Use Graphic Warnings
The U.S. Food and Drug Administration was blocked by a federal judge from requiring tobacco companies to put graphic health warnings on cigarette packaging.
U.S. District Judge Richard Leon in Washington said the government’s rule violates the tobacco companies’ rights to free speech.
“These mandatory graphic images violate the First Amendment by unconstitutionally compelling speech,” Leon wrote in yesterday’s decision.
Under direction from Congress, which wanted tobacco companies to use color graphics depicting the negative health consequences of smoking, the FDA selected nine images, including ones of a corpse and cancerous lungs. The FDA wanted to require tobacco companies beginning Sept. 22 to put one of the labels on each pack of cigarettes, pairing the images with text such as “Smoking can kill you.”
The graphics were supposed to cover the top half of the front and back of cigarette packages and 20 percent of print advertisements. The FDA estimated the visual warnings would help lower the smoking rate by about 0.212 percentage points, Leon wrote in his opinion.
Units of Lorillard Inc. (LO) and Reynolds American Inc. (RAI), along with Commonwealth Brands Inc. and Liggett Group LLC, sued the FDA in August, claiming the mandates for cigarette packages, cartons and advertising would violate the First Amendment. The companies said in court papers that it would cost them a combined total of about $20 million to meet the 2012 deadline.
“The opinion is a straightforward and clear affirmation that compelled speech by the government is not only rarely constitutional but plainly unconstitutional in this case,” Floyd Abrams, a lawyer for Lorillard, said in a phone interview.
Michelle Bolek, an FDA spokeswoman, said in an e-mail that the agency doesn’t comment on litigation as a matter of policy.
The case is R.J. Reynolds Tobacco Co. v. U.S. Food and Drug Administration, 11-cv-01482, U.S. District Court, District of Columbia (Washington).
Cantor Fails to Win Damages From Four Who Joined China Bank
Cantor Fitzgerald LP failed to win damages from four managing directors in Hong Kong who left the New York-based brokerage to join China-backed investment bank Reorient Financial Markets Ltd.
“There is not a shred of evidence suggesting that, whether individually or collectively, they had any intention to injure Cantor Hong Kong,” High Court Judge A.T. Reyes said in a judgment handed down yesterday.
Cantor’s Europe and Hong Kong units had sought HK$8.7 million ($1.1 million) in damages from former Hong Kong head Jason Boyer and three others, accusing them of breaching their employment contracts and causing a 29 percent drop in its average monthly revenue in the Chinese city.
Victoria Ho, a Hong Kong-based spokeswoman for Cantor at Ogilvy, couldn’t immediately provide a comment from the brokerage in response to yesterday’s court decision.
Boyer, Bradford Ainslie and Brett McGonegal of Cantor’s Asian cash equities desk and Uwe Parpart, its former Asia chief economist and strategist, left for a firm now known as Reorient Financial on the same day last year. The startup is backed by an asset manager under China’s State-owned Assets Supervision and Administration Commission and aims to become a global investment bank, according to the defendants.
All four told the court in a trial in January that they left Cantor independently.
He ordered the defendants to pay Cantor at least $1.3 million, mostly representing payments in lieu of notice. Cantor was ordered to pay most of the defendants legal fees.
The case is Cantor Fitzgerald Europe, Cantor Fitzgerald (Hong Kong) Capital Markets Ltd. and Jason Boyer, Bradford Ainslie, Brett McGonegal, Uwe Henke von Parpart, HCA1160/2011 in Hong Kong’s Court of First Instance.
Lehman Client-Money Appeal Is Rejected by U.K. Supreme Court
The U.K. Supreme Court ruled clients of Lehman Brothers Holding Inc. (LEHMQ)’s British unit whose money wasn’t properly separated from the bank’s own funds can access billions of dollars held in customer accounts.
Courts should interpret future claims in a way “which affords a high degree of protection for all clients,” Supreme Court Judge John Dyson said in yesterday’s decision. “All client money is subject to a trust that arises upon receipt of the money.”
Customers of insolvent firms, including Lehman Brothers and MF Global Holdings Ltd. (MFGLQ), without properly separated cash had faced uncertainty about whether they would be given access to a protected pool of client money or treated as unsecured creditors and suffer greater losses on their claims. The ruling is a victory in a three-year battle for CRC Credit Fund Ltd. and two Lehman affiliates that were told their claims would be treated as unsecured.
“It’s a boost for investor protection and an important stepping stone in terms of getting the administrators closer to being in a position, at long last, to get client money back to those entitled,” Robert Turner, a lawyer for CRC, said in an e- mailed statement.
The Supreme Court said clients should be able to claim from the protected pool even if they weren’t given the correct status before the brokerages failed, and that client money mixed with a firm’s own funds should be added to the pool. Under U.K. rules, client funds are pooled together in the event of insolvency before being distributed.
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Reed Smith Hires Entertainment Lawyer Dossick From Katten Muchin
Dossick, who has represented motion picture and television studios, distribution companies and content owners in disputes, currently represents Sony Pictures Entertainment Inc. (CPEI) and the Weinstein Co., distributor of the Academy Award-winning film “The Artist,” Reed Smith said in a statement.
Dossick is joining Reed Smith as a partner in its commercial litigation group, practicing out of the firm’s Century City office in Los Angeles.
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On the Docket
Ex-General Re Executives Face Fraud Retrial in January 2013
Four former executives at General Reinsurance Corp. and one at American International Group Inc. (AIG) face a Jan. 22 retrial on charges of defrauding AIG investors of as much as $597 million.
U.S. District Judge Vanessa Bryant will preside over the trial in Hartford, Connecticut, according to an order made public Feb. 29. On Aug. 1, the U.S. Court of Appeals in New York ordered a new trial, reversing the executives’ convictions in 2008.
Federal jurors in Hartford convicted former General Re (134618Q) Chief Executive Officer Ronald Ferguson, ex-Chief Financial Officer Elizabeth Monrad, ex-Senior Vice President Christopher Garand and ex-Assistant General Counsel Robert Graham. Former AIG Vice President Christian Milton also was found guilty.
Prosecutors said the fraud involved a sham transaction in 2000 and 2001 to inflate AIG’s loss reserves by $500 million. It preceded the financial crisis of New York-based AIG, which got a bailout of $182.3 billion from U.S. taxpayers. The appeals court said the trial judge at the time, Christopher Droney, erroneously let prosecutors show jurors three charts with AIG stock-price data. Droney has since joined the appeals court.
Droney also erred by improperly instructing the jury on causation, according to the appeals court opinion.
Bryant’s order set a schedule for prosecutors and defense lawyers, including a pretrial conference on Dec. 3 and jury selection on Jan. 3.
The case is U.S. v. Ferguson, 08-6211, U.S. Court of Appeals for the Second Circuit (New York).
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