Morgan Stanley, SEB, TBC, Lehman, Stanford in Court News

An ex-FrontPoint Partners LLC fund manager, Joseph F. “Chip” Skowron, who began serving a five- year sentence for insider trading in January, must pay Morgan Stanley (MS) $10.2 million, a judge ruled.

The amount consists of $3.8 million in legal fees the bank spent on Skowron’s case and an internal investigation, plus 20 percent of his salary from 2007 to 2010, or $6.4 million, U.S. District Judge Denise Cote in Manhattan ruled March 21.

Morgan Stanley acquired FrontPoint in 2006 and spun off the unit last year.

Cote denied the New York-based bank’s request for repayment of the $33 million it paid to settle claims by the U.S. Securities and Exchange Commission. The amount represents the disgorgement of the losses the FrontPoint unit avoided as a result of Skowron’s insider trading, Cote said in the ruling.

Skowron, who began serving his prison sentence in January at the Federal Correctional Institution Schuylkill in Pennsylvania, argued that Morgan Stanley shouldn’t collect any funds under the Mandatory Victims Restitution Act.

Skowron, who has a medical degree from Yale School of Medicine, pleaded guilty to getting illegal tips from a former adviser for Human Genome Sciences Inc. (HGSI) that trials of the company’s hepatitis C drug were being halted.

FrontPoint sold its stock before the announcement was made public, avoiding $30 million in losses, the government said.

Morgan Stanley is pleased with Cote’s decision and plans to seek the $33 million from Skowron in a separate civil action, Matt Burkhard, a spokesman for the bank, said yesterday in a phone interview.

“While we are reviewing the court’s decision, and considering our options, Dr. Skowron has made it clear he will accept all responsibility for his actions under the law,” his attorney, Josh Epstein, said in an e-mailed statement.

“However, we do not believe that Morgan Stanley is even entitled to the amount of restitution it has secured with this decision. We can assure you that Morgan Stanley’s attempt to claw back $33 million in ill-gotten gains, as Judge Cote herself referred to those monies in rejecting Morgan Stanley’s claim, is meritless. It is startling that Morgan Stanley would ignore the court’s clear decision to make a grab for money to which it has no legal right.”

The criminal case is U.S. v. Skowron, 1:11-cr-00699, and the SEC case is SEC v. Benhamou, 10-cv-8266, U.S. District Court, Southern District of New York (Manhattan).

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Hedge Fund Loses Case Against Sweden’s SEB Over Option Losses

A hedge fund that saw the value of its assets fall more than 90 percent in a month at the peak of the global credit crisis lost a lawsuit against Skandinaviska Enskilda Banken AB (SEBA) over the liquidation of a trading account.

Euroption Strategic Fund Ltd. sued Sweden’s fourth-largest bank in London, claiming it suffered damages and lost profits of as much as 173 million euros ($229 million) when the lender closed out its portfolio of derivatives in October 2008 after the fund didn’t meet margin calls.

Judge Elizabeth Gloster ruled SEB was right to make a margin call and liquidate positions when extreme market swings left Euroption facing losses of about 50 million euros, or 70 percent of the value of its assets. The bank’s conduct as clearing broker “could not be characterized as either negligent or irrational,” Gloster said in a judgment released this week.

The collapse of Lehman Brothers Holdings Inc. (LEHMQ) in September 2008 sent stocks tumbling, producing a period of “unprecedented volatility,” Gloster said. Euroption’s strategy was to sell out-of-the-money equity-index options that paid a premium if markets remained stable. When shares fell and customers exercised the options, the fund was left exposed.

The fund, based in the British Virgin Islands, had assets of about 70 million euros before the credit crisis and is now worth about 6 million euros. Euroption claimed in the suit that SEB and its then head of futures clearing, Steve Martin, didn’t understand options trading and that closing out the positions was “slow, disorganized and often misdirected.”

Euroption is considering an appeal, according to its lawyer Sean Upson.

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Ex-Bear Stearns Employees to Get $10 Million in Settlement

Thousands of former Bear Stearns Cos. (BSC) employees will share a $10 million settlement of lawsuits claiming they lost money on the bank’s stock in their retirement accounts.

Two ex-Bear Stearns employees asked March 20 a federal court judge in Manhattan to approve the settlement on behalf of an estimated 8,400 former colleagues.

The settlement will resolve class-action suits filed beginning in 2008 against Bear Stearns and other defendants by former employees of the bank. The employees, participants and beneficiaries of Bear Stearns’s employee stock ownership plan who held shares of the bank’s common stock, claimed risky investments in subprime mortgages caused them to lose money.

JPMorgan Chase & Co. bought Bear Stearns in March 2008 when the firm was on the brink of failing.

The parties engaged in mediation in October 2009 and pursued negotiations in telephone conferences through the end of last year, the investors said in court papers seeking approval for the agreement. They said the settlement may equal 10 percent to 28 percent of the losses to the stock ownership plan.

The case is In re Bear Stearns Cos. Securities, Derivative and ERISA Litigation, 09-MDL-1963, U.S. District Court, Southern District of New York (Manhattan).

Wal-Mart to Pay $2 Million for Overcharges, California Says

Wal-Mart Stores Inc. (WMT) will pay $2.1 million for overcharging consumers in violation of a 2008 agreement to stop scanning errors that resulted in customers paying more for products than their shelf price.

California Attorney General Kamala Harris yesterday filed a modified judgment in San Diego Superior Court that resolves Wal- Mart’s failure to comply with the 2008 agreement, Harris said in an e-mailed statement. The judgment was also filed with San Diego District Attorney Bonnie M. Dumanis and San Diego City Attorney Jan I. Goldsmith, according to the statement.

As a result of the 2008 agreement, consumers who were overcharged at cash registers received $3 off the lowest advertised price of the item, and if the price was less than $3, Wal-Mart was required to give the item free of charge, according to the statement. Yesterday’s judgment means the program, originally intended to end in November, will be extended to November 2013, Harris said.

Wal-Mart will also describe the policy in large signs in English and Spanish at each of about 3,000 check-out stands at 180 stores in California, according to the statement.

“We always strive for 100 percent pricing accuracy and will continue to make improvements to ensure we meet this goal,” Steve Restivo, a spokesman for Bentonville, Arkansas- based Wal-Mart, said in an e-mailed statement. “California families can trust Wal-Mart to deliver on our mission to help them save money and live better.”

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New Suits

Midas Sued by Shareholder Over $173 Million TBC Acquisition

Midas Inc. (MDS) was sued by a shareholder claiming the takeover price of about $173 million offered by tire supplier TBC Corp. (TBCC) is “inadequate.”

The deal undervalues the company given its improving sales trends and its strategy to co-brand Midas and SpeeDee shops, shareholder Glenn Freedman said in the complaint filed yesterday in Delaware Chancery Court. Freedman is seeking to represent all Midas shareholders in his bid for a court order barring the transaction.

“The proposed transaction is wrongful, unfair and harmful to Midas public shareholders,” Freedman said in the complaint.

Midas, which has more than 2,250 franchised, licensed and company owned namesake shops in 14 countries, announced March 13 that it agreed to a cash offer of $11.50 a share. The transaction also includes the assumption of $137 million in debt and pension liabilities.

JPMorgan Chase & Co. (JPM), which served as Midas’s financial adviser, was unable to provide “independent, disinterested financial advice” to the company because of its affiliation with TBC parent Sumitomo Corp. (8053), Freedman said in his complaint.

JPMorgan has disclosed that it owns 1 percent or more of Sumitomo Mitsui Financial Group Inc. (8316) securities and has performed and received compensation from that company for both investment banking and non-investment banking services, Freedman said in the complaint. JPMorgan wasn’t named as a defendant in the case.

Bob Troyer, a spokesman for Midas, didn’t immediately return a phone call seeking comment on the complaint. Jennifer Zuccarelli, a JPMorgan spokeswoman, also didn’t return a phone call and e-mail seeking comment on the claims.

The case is Glenn Freedman v. Midas Inc., CA7346, Delaware Chancery Court (Wilmington).

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Lawsuits/Pretrial

ADM, Corn Refiners Seek Dismissal From Sugar Producers’ Lawsuit

Archer-Daniels-Midland Co. (ADM) and four other corn refiners asked a judge to dismiss them from a lawsuit by sugar producers over allegedly false advertising that high-fructose corn syrup is natural.

Lawyers for the corn refiners said at a hearing yesterday before U.S. District Judge Consuelo B. Marshall in Los Angeles that the companies can’t be made liable for the statements of a trade group of which they are members, the Corn Refiners Association.

A group of sugar growers and refiners last year sued the corn refiners and their trade association, claiming that an advertising campaign that promotes high-fructose corn syrup as “natural” and “nutritionally the same as table sugar” is false and misleading.

The sugar producers, in an amended complaint filed in November, said the corn refiners initiated the advertising campaign in 2008 in response to the “growing vilification” of high-fructose corn syrup, which is used as a sweetener in soft drinks and has been linked to an increase in obesity in the U.S., and a “resulting drop in sales.”

The corn refiners have sought approval from the U.S. Food and Drug Administration to substitute “corn sugar” for “high- fructose corn syrup” on ingredient labels, according to the complaint.

The case is Western Sugar v. Archer-Daniels-Midland, 11-3473, U.S. District Court, Central District of California (Los Angeles).

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Tenet Healthcare Suit Over Community Health Buyout Dismissed

A federal judge dismissed Tenet Healthcare Corp. (THC)’s lawsuit against Community Health (CYH) Systems Inc. seeking to recover costs incurred rebuffing a takeover bid.

U.S. District Judge Barbara M.G. Lynn in Dallas ruled yesterday that Congress didn’t intend for target companies to recover damages such as those Tenet sought. The case was dismissed with prejudice, meaning Tenet can’t refile.

Community Health, the second-largest U.S. hospital company, dropped its $7.3 billion bid in May after the board of Dallas- based Tenet rejected the all-cash takeover offer as “grossly inadequate.” A month earlier, Tenet sued Community Health, accusing it of defrauding Medicare, the federal health insurance program. Community Health called the suit “baseless.”

Tenet later modified its lawsuit to seek damages for unspecified but “significant” costs it said it incurred in analyzing Community Health’s offer. Tenet argued that Community Health gave it cause to hire consultants and begin an investigation because Community Health made misleading statements about “synergies” that a combination would produce.

Lawyers for Franklin, Tennessee-based Community Health argued that there was no legal basis for Tenet to recover costs and damages. They said that companies in takeover battles pay their own expenses.

“We’re disappointed in the ruling, but it’s important to remember it wasn’t a ruling on the substance of our claims against Community Health,” Rob Walters, a lawyer for Tenet, said. “It was a ruling on the technical issue of whether Tenet could have standing to recover the costs it incurred.”

Peter Duffy Doyle, a lawyer for Community Health, referred a request for comment to Tomi Galin, a company spokeswoman, who didn’t immediately return a phone call.

The case is Tenet Healthcare Corp. v. Community Health Systems Inc., 3:11-00732, U.S. District Court, Northern District of Texas (Dallas).

NAB Wins $6.5 Million Security Payment in Australia Lawsuit

National Australia Bank Ltd. (NAB) shareholders must pay the bank A$6.2 million ($6.5 million) as security for its legal costs in a class action lawsuit, a judge ruled in a decision the stockholders’ lawyer said may deter investors from seeking legal redress.

The shareholders sued in the Supreme Court of Victoria in Melbourne in November 2010 seeking to recoup A$450 million they claim was lost as the bank’s stock declined because of its exposure to U.S. subprime debt in 2008. The security payment may be the biggest in Australian history, according to an e-mailed statement yesterday from the bank.

National Australia Bank said it expects to spend more than A$20 million on legal costs until trial and had asked the judge to order the shareholders to pay A$11 million. The plaintiffs challenged it, calling the sum “extraordinary in size and unprecedented in Australian legal history,” according to the ruling by Justice Jennifer Davies, who cut the requested amount by almost half.

“It sets a precedent in Victoria” and “reduces access to justice,” Jacob Varghese of Maurice Blackburn Lawyers, who represents the shareholders, said in a telephone interview yesterday. The final amount is still “very high”, he said.

Plaintiffs would usually be unable to put up that much money in security, he said. In this case the lawsuit is being funded by International Litigation Funding Partners Pte, who will pay the amount, Varghese said.

The trial is scheduled to begin in December, according to the bank.

National Australia Bank failed to disclose at the beginning of 2008 that it had serious exposure and serious risk of losses, from its subprime mortgage exposure, Andrew Watson, Maurice Blackburn principal, said when the lawsuit was filed.

The case is Between Pathway Investments Ltd. and National Australia Bank Ltd. SCL2010-6249. Supreme Court of Victoria (Melbourne).

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Ex-Lehman Director Jack Pleads Not Guilty to Forgery Charge

Former Lehman Brothers Holdings Inc. managing director Bradley H. Jack pleaded not guilty to a second drug-prescription forgery charge in Connecticut state court.

Jack, 53, said nothing during his arraignment yesterday in Norwalk Superior Court, where Judge Bruce Hudock said he entered a plea of not guilty. Jack, who is free on bail, is due back in court April 24.

The former banker was arrested this month and charged with second-degree forgery for a November incident in which he allegedly altered the date on a prescription for Vyvanse, which is used to treat attention deficit hyperactivity disorder, at a CVS Caremark Corp. pharmacy in Westport, Connecticut.

Jack, of Westport, was also arrested in June after he allegedly tried to pass forged prescriptions for Ritalin and the painkiller Oxycontin, according to Fairfield police. Jack had received treatment for cancer, had had a valid prescription in the past and had no prior criminal record, his attorney, Robert Golger, said in court in August.

After his June arrest, Jack was allowed to enter so-called accelerated rehabilitation, or AR, a program available to people charged with less-serious crimes that might result in prison time. Golger said after yesterday’s proceeding that he didn’t know how the latest arrest would affect the earlier case.

In the latest incident, Jack admitted to police that he altered the prescription, according to the arrest affidavit. He told police his psychiatrist is blind and his assistant, who fills out the prescriptions, put the wrong effective date on the Vyvanse prescription. In October, the doctor switched Jack from Ritalin to 50-milligram pills of Vyvanse.

Jack joined New York-based Lehman in 1984 and ran investment banking from 1996 to 2002, when he became co-chief operating officer with Joseph Gregory. In 2004, he was named to the office of the chairman with the responsibility of overseeing all of the firm’s investment-banking relationships.

He decided to retire from Lehman to pursue work in the nonprofit sector and spend time with his family, Richard Fuld, the bank’s chief executive officer at the time, said in June 2005. The company went bankrupt in September 2008.

The case is Connecticut v. Jack, S20N-CR12-0131552-S, Connecticut Superior Court (Norwalk). The earlier case is Connecticut v. Jack, F02B-CR11-0258280-S, Connecticut Superior Court (Bridgeport).

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New York Law School Wins Dismissal of Suit by Ex-Students

New York Law School won dismissal of a lawsuit filed by former students who accused the school of inflating statistics on graduates’ jobs and pay.

New York State Supreme Court Judge Melvin L. Schweitzer Jr. dismissed the suit in a ruling yesterday, saying that the school’s marketing materials weren’t misleading and that the students had “ample information” from other sources about job prospects.

The former students sued the 1,500-student school in August, accusing it of knowingly inflating employment and salary statistics to recruit and retain students. A similar complaint was filed against Thomas M. Cooley Law School in Lansing, Michigan, the same day.

Schweitzer also said the plaintiffs’ demand of damages that would equal the difference between what they paid for law school and how much their degree is worth is not a remedy under the law since the “great recession” of 2008 and its aftermath have “wreaked havoc” on the legal job market.

“As law graduates who made their decisions to go to law school before the full effects of the maelstrom hit, they now have turned their disappointment and angst on their law school for not adequately anticipating the possibility of the supervening storm and presenting the most complete job-related data that could possibly have been compiled,” Schweitzer wrote.

The former students plan to appeal, said David Anziska, an attorney representing the plaintiffs. The judge’s two main points, that consumers shouldn’t have relied on the school’s employment reports and that damages are too speculative, are “fundamentally questions of fact, not law,” he said in an e- mail.

New York Law School, founded in 1891, is one of the oldest independent law schools in the U.S. with about 1,500 students, according to its website. Michael Volpe, an attorney who represented the school in the case, said he is “confident and comfortable” the decision will be upheld on appeal.

The case is Gomez-Jimenez v. New York Law School, 652226/2011, New York State Supreme Court (Manhattan).

Exxon Says ‘Significant Progress’ Made to End Alaska Gas Dispute

Exxon Mobil Corp. (XOM) has made “significant progress” toward resolving an Alaska natural-gas dispute, and more work remains to reach a settlement, David Eglinton, a company spokesman, said in an e-mail.

Exxon, BP Plc (BP/) and other oil companies are embroiled in a six-year-old lawsuit over their leases to the Point Thomson oil and gas field on Alaska’s North Slope, estimated to hold 300 million barrels of oil and 8 trillion cubic feet of natural gas.

The state revoked the leases, which date back to 1965, in 2006 for failure to submit an acceptable development plan. The companies sued and won a court ruling last year reversing that decision.

Alaska Governor Sean Parnell said March 20 that the parties had been meeting over the last three months and the companies had been given a deadline of the end of this month.

“The state is cautiously optimistic that the Point Thomson dispute will be resolved by the governor’s deadline,” Elizabeth Bluemink, a spokeswoman for the Alaska Department of Natural Resources, said in a phone interview.

She declined to comment about what would be included in the settlement. Parnell said earlier this month that his goal was “production out of Point Thomson.” The oil companies, primarily Exxon, have invested more than $1 billion in the field over the last three years, he said.

Dawn Patience, a BP spokeswoman, said in an e-mail yesterday that company teams “are actively working to resolve” the Point Thomson issue.

“We’re still in a joint discussion phase regarding an effort that would evaluate a North Slope liquefied natural gas pipeline,” Natalie Lowman, a ConocoPhillips (COP) spokeswoman, said in an phone interview.

The lower-court case is Exxon Mobil Corp. v. State of Alaska, 3AN-06-13751, Alaska Superior Court, Anchorage. The appeal is State of Alaska v. Exxon Mobil, S-13730, Alaska Supreme Court.

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Trials/Appeals

Allen Stanford Cites Media ‘Tweets’ as Basis for New Trial

R. Allen Stanford is entitled to a new trial because publicity prior to the six-week proceeding and Twitter posts by reporters in the courtroom likely tainted the jury, his lawyers told a U.S. judge.

The Texas financier, who was accused of leading a $7 billion international investment fraud, was found guilty of 13 criminal counts by a federal court jury in Houston on March 6. Facing as long as 20 years in prison for each of four wire fraud and five mail fraud charges, Stanford is scheduled to be sentenced on June 14.

His lawyers, in a 71-page filing with U.S. District Judge David Hittner, who presided over the case, said the pretrial and midtrial publicity probably prevented the jury from being impartial.

“This court failed to sequester the jury and permitted the news media to occupy the courtroom during trial and permitted the media to ‘tweet’ throughout the trial,” they said in a filing March 20, referring to Twitter Inc.’s platform for disseminating 140-character messages via the Internet.

Stanford, 61, led Houston-based Stanford Financial Group and securities firm Stanford Group Co., as well as the Antigua- based Stanford International Bank Ltd., which issued certificates of deposit sold by the brokerage.

At trial, prosecutors argued that Stanford misled investors about how he and his organization were investing the CD depositors’ money. Defense lawyers countered that the organization maintained sufficient assets to honor its commitments until it was closed after being sued by the Securities and Exchange Commission in February 2009.

Laura Sweeney, a spokeswoman for the U.S. Justice Department, declined to comment, citing a gag order by the judge.

The case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston).

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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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