After several drinks at a Greek restaurant on Manhattan’s Third Avenue in the summer of 2006, two computer programmers at Bernard Madoff’s investment firm asked their supervisor whether the boss’s business was a scam, Bloomberg News’ David Glovin and Bob Van Voris report.
Chief Financial Officer Frank DiPascali laughed off the question, telling George Perez and Jerome O’Hara that Madoff was honest. DiPascali would later tell the FBI he wondered why they took so long to ask.
His chronicle of the dinner, and the lengths to which Madoff went to convince employees that his massive fraud was a legitimate business, were revealed for the first time in FBI reports made public last week. Attached to court filings by ex- Madoff employees facing fraud charges, they contain interviews with DiPascali -- Madoff’s chief aide -- who in 2009 pleaded guilty to his role in the biggest Ponzi scheme in U.S. history.
Once, when Perez and O’Hara confronted Madoff and asked why there was no sign of stock trades, Madoff exploded, DiPascali told the FBI.
“You are not going to tell me how to run my business,” Madoff insisted during a meeting in the office of the firm’s operations chief, Daniel Bonventre, according to DiPascali. “Trades occur overseas.”
Madoff, 73, pleaded guilty to fraud in 2009 and is serving a 150-year term for cheating investors out of $20 billion in principal. Five employees -- Perez, O’Hara, Bonventre, Annette Bongiorno and Joann Crupi -- are accused of aiding Madoff in his fraud. Defense attorneys said they’ll use DiPascali’s comments to establish their clients were unaware of Madoff’s scheme.
Bonventre and Bongiorno began working for Madoff in 1968, with Bongiorno rising to the level of supervisor and account manager. Crupi, an employee since 1983, tracked daily bank account activity, prosecutors said. Perez and O’Hara started at the firm in the early 1990s.
The five were arrested in 2009 and 2010. In addition to DiPascali, who began working for Madoff in 1975, former employees David Kugel, Enrica Cotellessa-Pitz and Eric Lipkin have pleaded guilty and are aiding prosecutors.
The case is U.S. v. Bonventre, 10-CR-228, U.S. District Court, Southern District of New York (Manhattan).
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JPMorgan Loses $373 Million Arbitration to American Century
JPMorgan Chase & Co. (JPM) was ordered by arbitrators to pay $373 million to American Century Investments over claims that executives led by Jes Staley enriched the bank at the expense of the fund-management firm.
The award, issued privately in August, focused on JPMorgan’s promise to promote American Century products when the bank acquired the firm’s retirement-plan services unit, or RPS, in 2003.
Because Staley, then JPMorgan’s asset-management chief, mistakenly thought there was a limit on the bank’s liability if it didn’t meet obligations, executives failed to make good on the deal, arbitrators found. Employees were instead rewarded for pushing JPMorgan’s own products, according to the ruling.
“In short, JPM and RPS stacked the cards against ACI,” the arbitrators wrote in the ruling.
The arbitrators awarded American Century $373 million plus 9 percent annual interest until paid in full.
JPMorgan, the largest U.S. bank by assets, set aside funds to cover the award during last year’s third quarter. Parties in the case had agreed to resolve it privately through arbitration and the ruling had been sealed.
Staley, 56, was promoted to lead JPMorgan’s investment bank in 2009.
The case was brought to the American Arbitration Association in 2009 and tried before a two-person panel in February and March of last year. In their ruling, the panelists said they reviewed about 600 exhibits and heard testimony from almost 50 witnesses, including Staley.
“Almost no one including the top executives of JPM and RPS down the chain of command paid any attention to what the revenue agreement said” unless it applied to the bank’s own earnings, the arbitrators wrote.
“We disagree strongly with the arbitrator’s decision and award,” Kristen Chambers, a spokeswoman for New York-based JPMorgan, said yesterday. “Among other things, it misinterprets the contract, ignores facts favorable to us such as the performance of certain American Century funds during the period in dispute, and ignores expert opinions that were favorable to us.”
Chris Doyle, a spokesman for Kansas City, Missouri-based American Century, said the firm is “very pleased” with the decision.
The case is American Century Investment Management Inc. v. J.P. Morgan Invest Holdings LLC, 58 148 Y 00220 09, American Arbitration Association (Kansas City).
Milan Settles Derivatives With UBS, Deutsche Bank, JPMorgan
JPMorgan Chase & Co., UBS AG, Deutsche Bank AG (DBK) and Depfa Bank Plc agreed to unwind interest-rate swaps with the city of Milan’s government in a 455 million-euro ($600 million) transaction.
Under the settlement, the banks, which are on trial for fraud, closed the swaps yesterday at a “positive” mark-to- market for the city, according to an e-mailed statement from the Italian municipality.
The settlement isn’t for damages and doesn’t indicate any acceptance of responsibility by the banks, according to the statement. Milan agreed to drop claims for damages in the U.K. and Italy, where the banks face criminal charges. Milan agreed to forgo civil claims in return for a “discount’ on the cost of closing the swaps, it said. The criminal trial will continue. Officials for the four banks declined to comment further.
The lenders charged 101 million euros in so-called hidden fees for arranging the derivatives that adjusted payments on the city’s 1.7 billion-euro bond offering in 2005 and from subsequent restructurings, according to city prosecutor Alfredo Robledo. The fees are fraudulent given that they weren’t disclosed, he said as he secured charges against the banks in March 2010.
‘‘It’s hard to tell the net position of the settlement without the actual contracts,” which typically remain private, said Michael Dempster, founder of the University of Cambridge’s Centre for Financial Research.
The funds from the settlement will be held by the four banks as a guarantee on other derivative contracts that the city and the banks will maintain, according to the statement. Two- thirds of the settlement has been invested in Italian government bonds, according to the city.
Stanford’s Twitter Complaint Fails to Win Fraud Retrial
R. Allen Stanford, found guilty of running a $7 billion Ponzi scheme, lost a retrial bid in which his lawyers argued that Twitter comments by courtroom news reporters may have influenced the jury that convicted him.
“The defendant’s motion for a new trial is denied,” U.S. District Judge David Hittner in Houston ruled yesterday without elaboration in a single-sentence decision.
Stanford, 61, was found guilty on 13 of 14 criminal counts after a six-week trial in which prosecutors convinced jurors that he misled investors about what was being done with proceeds of the certificates of deposit they bought from Stanford International Bank Ltd. in Antigua.
Stanford is scheduled to be sentenced June 14. The four wire-fraud charges and five mail-fraud charges he was convicted of each carry a maximum punishment of 20 years in prison.
Defense lawyers, in a March 20 filing, said journalists’ real-time coverage of the trial on Twitter improperly influenced the jurors, who had been warned to avoid other forms of media coverage.
The case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston).
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Oracle Investor Sues Over $200 Million Whistle-Blower Accord
Oracle Corp. (ORCL) directors, including Chief Executive Officer Larry Ellison, were sued by an investor for failing to mitigate damages when the company agreed to a $200 million whistle-blower settlement with the U.S. government.
Directors violated their fiduciary duties by forcing the government into extensive litigation even though they knew the allegations were “grounded in fact,” shareholder Jordan R. Weinrib said in a complaint filed yesterday in Delaware Chancery Court (1400L) in Wilmington.
“Rather than attempt to settle all claims at that time by the institution of appropriate corporate therapeutics and the paying of what would have been a small fine, the board insisted on digging in and litigating the matter extensively,” Weinrib said in the complaint.
The settlement, announced in October, resolved a lawsuit claiming Oracle induced the General Services Administration to buy $1.08 billion in software from 1998 to 2006 by falsely promising the same discounts offered to favored commercial customers. The payout was the largest ever obtained by the GSA under the False Claims Act, which lets citizens sue on behalf of the government and share in any recovery.
Former Oracle employee Paul Frascella filed the case in 2007. The Justice Department pursued the case after joining the whistle-blower lawsuit.
Weinrib is seeking unspecified damages on behalf of the company. Deborah Hellinger, an Oracle spokeswoman, declined to comment on the lawsuit.
The case is Weinrib v. Ellison, CA7350, Delaware Chancery Court (Wilmington).
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Siemens Sued Over Cancellation of Alarm Funding IPO
The suit, filed March 21 in New York state Supreme Court in Manhattan, accuses Siemens First Capital of “intentionally destroying” three related companies that were planning an initial public offering.
Siemens told Whitecap (US) Fund I LP, the majority owner of Alarm Funding LLC, the parent of the three companies, in March 2011 that the companies had defaulted on an $85 million loan because the public offering hadn’t been completed by March 1, according to the lawsuit.
The companies had never missed a payment on the loan and had repaid $47 million, the complaint shows. Whitecap and two related entities filed the suit, which seeks damages of more than $20 million, on behalf of the companies.
“Siemens was not content with what it was entitled to under the contract, i.e. repayment in full over time,” according to the lawsuit. “Instead, Siemens wished to extract as much money as possible from the alarm funding companies as quickly as it could.”
The case is Whitecap (US) Fund I LP v. Siemens First Capital Commercial Finance LLC, 650888/2012, New York state Supreme Court (Manhattan).
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CVS Ordered to Stop Controlled Drug Sales at Two Pharmacies
CVS Caremark Corp. (CVS) must stop filling prescriptions for controlled substances at two of its pharmacies in Sanford, Florida, while an appeals court weighs a U.S. order barring the sales.
The U.S. Court of Appeals in Washington yesterday rejected a request by CVS to put the order by the Drug Enforcement Administration on hold. A lower court judge on March 13 upheld the DEA suspension, which resulted from an investigation into oxycodone sales by the pharmacies.
“Appellant has not satisfied the stringent requirements for a stay pending appeal,” the three-judge panel ruled.
A different three-judge panel on March 16 turned down a similar bid by Cardinal Health Inc. (CAH), the second-largest U.S. drug distributor by revenue, to forestall the suspension of its Lakeland, Florida, facility from distributing controlled substances.
U.S. District Judge Reggie Walton said the DEA produced enough information to show that pharmacists at the CVS stores filled prescriptions for the painkiller oxycodone that they knew or should have known would lead to the drug being diverted for illegal uses.
Carolyn Castel, a CVS spokeswoman, didn’t immediately return an e-mail seeking comment on the ruling.
The cases are Cardinal Health v. U.S. Department of Justice, 12-05061, and Holiday CVS LLC v. Holder, 12-05072, U.S. Court of Appeals, District of Columbia Circuit (Washington).
AT&T Accused of Improperly Billing U.S. Program for Deaf
A unit of AT&T Inc. (T) is accused of improperly billing the U.S. for millions of dollars in reimbursements of text-based communications under a federal program for the hearing-impaired.
The U.S. Justice Department intervened March 22 in a whistle-blower lawsuit in federal court in Pittsburgh that alleged the phone company violated the False Claims Act. AT&T failed to ensure that users of the Federal Communications Commission program were eligible, the U.S. alleges.
“Federal funding for Telecommunications Relay Services is intended to help the hearing- and speech-impaired in the United States,” Stuart Delery, acting assistant attorney general for the Justice Department’s civil division, said yesterday in a statement. “We will pursue those who seek to gain by knowingly allowing others to abuse this program.”
According to the complaint, AT&T allowed thousands of calls to be made on the system by users in Nigeria and other countries seeking to defraud U.S. merchants.
Marty Richter, a spokesman for Dallas-based AT&T, said in a statement that the company followed the FCC’s rules for providing Internet Protocol Relay services and for seeking reimbursement for those services.
“As the FCC is aware, it is always possible for an individual to misuse IP Relay services, just as someone can misuse the postal system or an e-mail account, but FCC rules require that we complete all calls by customers who identify themselves as disabled,” Richter said.
The case is Lyttle v. AT&T Communications of Pennsylvania, 10-01376, U.S. District Court, Western District of Pennsylvania (Pittsburgh).
Ernst & Young Suit Over Lehman Fees Sent to N.Y. State Court
A lawsuit accusing Ernst & Young LLP of facilitating a “major accounting fraud” by helping Lehman Brothers Holdings Inc. (LEHMQ) deceive the public about its financial condition was sent back to New York state court.
U.S. District Judge Lewis Kaplan in Manhattan yesterday said the lawsuit, filed in state supreme court in December 2010 by then-New York Attorney General Andrew Cuomo and later moved to federal court, should be tried in state court. Cuomo’s successor, Eric Schneiderman, has continued to pursue the case.
Kaplan said he reviewed the matter even after the state dropped its objection to having the case tried in federal court and “now concludes that the removal was improper because the case does not come within federal jurisdiction.” The claims in the complaint are predominantly based on state and not federal law, he said.
“We are disappointed by the court’s ruling, and we are reviewing it,” Charlie Perkins, an Ernst & Young spokesman, said in an e-mail. “We will continue to vigorously defend ourselves in this matter.”
The case is In re Lehman Brothers Securities and ERISA Litigation, 09-MD-2017, U.S. District Court, Southern District of New York (Manhattan).
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Morgan Stanley Pay Suit Dismissal Upheld by Appeals Court
The dismissal of a Morgan Stanley (MS) shareholder lawsuit brought in 2010 over $45 billion paid to the firm’s employees in three years was upheld by a New York appeals court.
Shareholders including the Security Police and Fire Professionals of America Retirement Fund sued Morgan Stanley, former chairman John Mack and other executives in February 2010, accusing the company of making improper compensation and bonus payments.
New York State Supreme Court Justice Shirley Werner Kornreich threw out the suit in December 2010, citing a requirement that shareholders first make a demand on a board before suing on behalf of a company or show that such a move would be futile.
An appeals court in Manhattan upheld the dismissal yesterday, saying the complaint lacks specific allegations needed to determine whether work done by company employees was “of such limited value to the corporation that no reasonable person in the directors’ position’’ would have approved their pay.
“The complaint does not adequately plead waste,” Justice Peter Tom, of the state Appellate Division First Department, wrote. “It lacks the ‘specific allegations of unconscionable transactions and details regarding who was paid and for what reasons they were paid.’”
Mack ceded his chairman role at New York-based Morgan Stanley in January to Chief Executive Officer James Gorman, who took over as CEO for Mack at the end of 2009.
The case is Security Police and Fire Professionals of America Retirement Fund v. Mack, 600359-2010, New York State Supreme Court (Manhattan).
Madoff Trustee Appeals $59 Billion Ruling in UniCredit Suit
The liquidator of Bernard Madoff’s firm appealed a court ruling that tossed most of his $59 billion in claims against UniCredit SpA (UCG), Sonja Kohn and other defendants, following earlier appeals seeking to recover about $30 billion in damages from banks.
Madoff trustee Irving Picard’s notice of appeal and document record were transmitted yesterday to U.S. District Court in Manhattan by a U.S. appeals court, according to filings. U.S. District Judge Jed Rakoff on Feb. 21 dismissed Picard’s claims under the racketeering statute, which allows for triple damages, saying he hadn’t proved his allegations.
Picard now has $90 billion in claims before the appeals court, out of about $100 billion he had demanded in more than 1,000 suits to gather money for customers with Madoff Ponzi scheme losses. Rakoff and another district judge, Colleen McMahon, dismissed the $90 billion in claims in Picard’s suits against banks including JPMorgan Chase & Co., HSBC Holdings Plc, UBS AG (UBSN) and UniCredit.
In his written opinion on the UniCredit racketeering case, Rakoff said Picard made a “casual assertion” that the defendants “fed, perpetuated and profited from” Madoff’s Ponzi scheme, and failed to show a direct relationship between the alleged criminal acts and resulting injuries to the con man’s customers.
Rakoff also dismissed common-law claims including unjust enrichment and conversion. He directed that the remaining claims be returned to bankruptcy court.
Madoff, 73, is serving a 150-year sentence in a federal prison in North Carolina for running a Ponzi scheme that defrauded investors of an estimated $20 billion in principal. Picard and his law firm, Baker & Hostetler LLP, have charged about $273 million for their work on the Madoff estate so far.
The case is Picard v. Kohn, 11-CV-1181, U.S. District Court, Southern District of New York (Manhattan).
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Baum Foreclosure Firm Settles With New York for $4 Million
Steven J. Baum PC, the largest foreclosure law firm in New York until it shut down last year, reached a $4 million settlement with the state over abuses in its legal work.
Part of the money paid by the firm, Pillar Processing LLC, Steven Baum himself and managing partner Brian Kumiega will be used to help homeowners facing foreclosure or victims of predatory lending, New York State Attorney General Eric Schneiderman said yesterday in a statement. Baum formed Pillar in 2007 to process foreclosure documents.
“The Baum firm cut corners in order to maximize the number of its foreclosure filings and its profits,” Schneiderman said in the statement. Baum and Kumiega have also agreed not to represent lenders or servicers in new foreclosure cases for two years, Schneiderman said.
The firm said in a statement that it didn’t admit wrongdoing as part of the settlement.
In October, the firm, based in Amherst, New York, just north of Buffalo, reached a $2 million agreement related to its foreclosure practices with Manhattan U.S. Attorney Preet Bharara. After that settlement was announced, Fannie Mae and Freddie Mac, the mortgage-finance companies under U.S. conservatorship, dropped Baum from their lists of law firms eligible to handle foreclosures. The firm then said it would close.
“After an exhaustive 10-month investigation, the attorney general’s office did not identify a single instance where a foreclosure proceeding was brought by the Baum firm where the homeowner wasn’t actually in default,” Elkan Abramowitz, a lawyer for the settling parties, said in a phone interview.
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Christie Nominee for Supreme Court Turned Down by Senate Panel
One of Chris Christie’s nominees to the New Jersey (STONJ1) Supreme Court became the first in modern times to be rejected by state lawmakers following a Democrat-controlled confirmation hearing the Republican governor called a “partisan circus.”
Phillip Kwon’s nomination to one of two court vacancies was rebuffed in a 7-6 vote, largely along party lines, after Democrats questioned a $160,000 settlement of U.S. government allegations that family members sought to avoid financial reporting requirements tied to their business.
Democrats, who control the Legislature, have vowed to fight harder against the governor, who they say has bullied them to get his way. Midway through his first term, the two sides are at odds over tax-cut plans. A court on March 8 overruled Christie’s abolition of a housing agency, and 27 groups filed a legal appeal yesterday of his policy to waive environmental regulations in some cases.
“To see what Phil went through today is frankly not only a disappointment for me personally but also a disappointment for the state, the process and the judicial system,” Christie said following the vote. “They didn’t act like officeholders or statesmen. They acted like politicians, and that’s what the people hate.”
Christie told reporters he didn’t have a backup for Kwon, who would have been the court’s first Asian-American justice. The governor said he didn’t anticipate changing his criteria for judicial candidates.
Kwon’s rejection was the first time a nominee for the high court was turned down by the Senate Judiciary Committee since the modern Constitution of 1947, according to Winnie Comfort, a spokeswoman for the New Jersey courts.
Most of the hearing centered on the Justice Department settlement with Kwon’s mother and wife, who own a liquor store in Mount Vernon, New York.
U.S. prosecutors filed complaints related to two bank accounts in June 2011 and seized $290,236, asserting the business illegally “structured” 222 cash deposits to avoid breaching a $10,000 threshold that triggers currency transaction filing requirements.
The business, KCP Wines & Liquor Corp., settled with the U.S. Attorney’s Office in Brooklyn, New York, forfeiting $159,630 without admitting wrongdoing.
In the hearing, Kwon said he advised his mother that structuring the deposits might raise “red flags” with the banks involved. He said his subsequent involvement was confined to helping her obtain a lawyer.
“My mother was not evading taxes,” Kwon said. “She made a mistake.”
Democrats on the committee said Kwon should have advised his mother of the reporting requirements and told her to make larger deposits. Christie has defended his choice of Kwon, saying in January that the lawsuit didn’t involve him “in the least.”
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