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Tourre Liable, BofA, SIFMA on SROs, Citigroup: Compliance

Fabrice Tourre, the former Goldman Sachs Group Inc. (GS) vice president on trial for his role in a failed $1 billion investment, was found liable on six of seven claims by a jury in Manhattan.

The verdict is a victory for the government in one of the most high-profile trials to come out of the financial crisis of 2007-2008. The U.S. Securities and Exchange Commission accused Tourre, 34, of intentionally misleading participants in a 2007 deal known as Abacus about the role played by Paulson & Co., the hedge fund of billionaire John Paulson.

The jury’s finding of wrongdoing may help Goldman Sachs customers in lawsuits against the bank over losses tied to the transaction. Tourre faces unspecified money penalties and a possible ban from the securities industry.

The SEC claimed Tourre hid the fact that Paulson helped choose the portfolio of subprime mortgage-backed securities underlying Abacus, then made a billion-dollar bet it would fail.

At trial, the SEC presented testimony from 11 witnesses over two weeks. Tourre didn’t call any witnesses, relying instead on his lawyers’ questioning of the witnesses called by the SEC, including Tourre himself.

“We are obviously gratified by the jury’s verdict and appreciate their hard work,” Matthew Martens, the lead SEC lawyer, said.

“As a firm, we remain focused on being more transparent, more accountable, and more responsive to the needs of our clients,” Michael DuVally, a Goldman Sachs spokesman, said in a statement.

“We’re declining comment as the case is still ongoing,” Chris Kittredge, a spokesman for Tourre at Sard Verbinnen & Co. in New York, said in a statement.

The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).

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Compliance Action

BofA Says DOJ, SEC May Seek Sanctions Over Jumbo-Loan Securities

Bank of America Corp. said the Department of Justice and Securities and Exchange Commission have warned that they may bring civil claims over the lender’s handling of securitizations backed by jumbo mortgages.

SEC investigators also have said they are considering recommending the agency file a complaint over Merrill Lynch’s involvement in collateralized debt obligations, the Charlotte, North Carolina-based lender said yesterday in a regulatory filing. The New York Attorney General’s Office may bring claims against Merrill Lynch over residential mortgage-backed instruments, the firm said.

The bank “has been in active discussions with senior staff of each government entity in connection with the respective investigations and to explain why the threatened civil charges are not appropriate,” Bank of America said.

The firm said it also expects a $1.1 billion charge to income tax expense in the third quarter after changes in the U.K. corporate income tax rate.

New York Resort Owners Charged With $96 Million Ponzi Fraud

A money manager and a real estate developer already facing a regulator’s fraud lawsuit were charged with running a $96 million Ponzi scheme and diverting the proceeds to their New York beachfront resort.

Brian R. Callahan, 43, and his brother-in-law Adam J. Manson, 41, were charged in a 24-count indictment unsealed yesterday in federal court in Central Islip, New York. They pleaded not guilty and were released on bond.

The men are accused of telling investors that their money was going into hedge funds and other investment vehicles while actually much of it was going to the unprofitable 117-unit Panoramic View Resort & Residences in Montauk.

“The defendants used one of Long Island’s landmarks, the Panoramic View Resort, to perpetrate a wide-ranging fraud,” U.S. Attorney Loretta Lynch said yesterday in a statement about the scheme, which purportedly took place from 2006 to 2012 and involved more than 40 investors. “To conceal their status as business failures, the defendants employed all the tricks in the typical con man’s bag.”

Callahan, of Old Westbury, and Manson, of New York, were partners in Distinctive Ventures, a real estate investment firm that purchased the resort in January 2007 for about $38 million, according to the indictment. Callahan, a former securities broker who was sanctioned by regulators in 2009, was also managing a group of offshore investment funds, for which he was soliciting money from investors, the U.S. said.

“It’s unfortunate that the government decided to escalate it,” Robert Anello, a lawyer for Manson, said in a phone interview yesterday.

A lawyer for Callahan, Robert Knuts, didn’t immediately respond to a call and e-mails seeking comment on the charges.

The criminal case is U.S. v. Callahan; the civil case is Securities and Exchange Commission v. Callahan, 12-cv-01065, both in U.S. District Court, Eastern District of New York (Central Islip).

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Liechtenstein Bank to Pay $23.8 Million in U.S. Tax Deal

Liechtensteinische Landesbank AG (LLB), the oldest bank in the Alpine principality, won’t be prosecuted by the U.S. government after agreeing to pay $23.8 million and admitting it helped American clients evade taxes.

The bank, based in Vaduz, admitted using secret accounts from 2001 to 2011 to help clients hide as much as $341 million from the Internal Revenue Service. It gave the U.S. Justice Department files on more than 200 secret accounts after Liechtenstein amended its law last year to allow such transfers.

“LLB-Vaduz knew that certain U.S. taxpayers were maintaining undeclared accounts at LLB-Vaduz in order to evade their U.S. tax obligations,” the bank said in a non-prosecution agreement released July 30 by the Justice Department. “LLB-Vaduz knew of the high probability that other U.S. taxpayers who held undeclared accounts” did so “for the same unlawful purpose.”

The U.S. chose not to prosecute, citing the bank’s “extraordinary” cooperation. The admissions and handover of account data make LLB-Vaduz the third bank, after Switzerland’s UBS AG and Wegelin & Co., to acknowledge wrongdoing in a five-year U.S. crackdown on offshore tax evasion.

UBS, Switzerland’s largest bank, avoided prosecution by paying $780 million in 2009, admitting it aided U.S. tax evasion and handing over data on 4,500 accounts. Last year, the U.S. indicted Wegelin, the oldest Swiss private bank. Wegelin pleaded guilty in January, handing over $74 million.

“The bank is very pleased that the inquiry concerning LLB-Vaduz has now been resolved under the terms negotiated,” said Benjamin Brafman, a lawyer in New York who represents LLB-Vaduz.

The case is U.S. v. $15.9 Million in U.S. Currency, 13-CV-5296, U.S. District Court, Southern District of New York (Manhattan).

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Compliance Policy

Wall Street Firms Back Removing Legal Protections for Exchanges

The government should strip U.S. stock exchanges of the legal status that protects them from most lawsuits, a trade group for brokers said.

In a letter to the Securities and Exchange Commission, the Securities Industry and Financial Markets Association said the self-regulatory model of organizations such as the New York Stock Exchange (NYX) and Nasdaq Stock Market is outdated. Though the SEC fined Nasdaq for mishandling Facebook Inc.’s initial public offering last year, the legal protections shielded the market operator from liabilities.

The letter is the latest salvo in the fight between brokers and exchanges, who in recent years have become competitors for stock transaction volume. The proliferation of trading venues such as dark pools at broker-dealers and the decline of the public exchanges’ market share has created tensions on Wall Street.

Self-regulatory status for exchanges means that “one group of businesses is empowered to oversee and regulate the business and activities of its competitors,” Theodore R. Lazo, associate general counsel at Sifma, wrote in the letter to the SEC. “Conflicts of interest in this model abound and only worsen as they are left unresolved.”

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In the Courts

Tenet, Health Management Accused of Paying Clinic Kickbacks

Tenet Healthcare Corp. (THC), the third-biggest publicly traded U.S. hospital chain, and Health Management Associates Inc. (HMA) were accused in a lawsuit of paying kickbacks to a Georgia clinic in exchange for referrals.

The hospital chains were sued under the Federal False Claims Act in a whistle-blower case brought by Ralph Williams, a former chief financial officer of Health Management Associates, on behalf of the U.S. and Georgia. The lawsuit, filed in federal court in Athens, Georgia, was ordered unsealed July 31.

The clinic recruited pregnant, undocumented Hispanic women who would be eligible for Medicaid benefits when they gave birth and referred them to Health Management and Tenet hospitals in exchange for kickbacks, according to the complaint.

The Tenet hospitals said in an e-mailed statement that the agreements were appropriate and provided substantial benefit to women in underserved Hispanic communities.

“The services provided under these agreements included translation, determination of Medicaid eligibility, and other services designed to improve the delivery of obstetric care and increase the likelihood of a safe birth and a healthy baby,” according to the statement.

“The company denies the allegations contained in the complaint, which the federal government declined to intervene in, and intends to vigorously defend itself,” Naples, Florida-based Health Management said in an e-mailed statement.

The case is U.S. v. Health Management Associates Inc., 09-00130, U.S. District Court, Middle District of Georgia (Athens.)

Citigroup Judge Approves $590 Million Settlement Over CDOs

Citigroup Inc. (C) won court approval to pay $590 million to resolve a lawsuit by shareholders alleging the third-largest U.S. bank hid risks tied to toxic assets.

U.S. District Judge Sidney Stein in Manhattan yesterday also awarded the plaintiffs’ lead lawyers fees of $70.8 million, or 12 percent of the fund, as well as $2.8 million in expenses.

“This is a sizable award that rewards counsel for years of excellent work,” Stein said in his ruling.

Stein last August gave preliminary approval to the settlement of a 2007 suit filed by investors in collateralized debt obligations, which are pools of assets such as mortgage bonds packaged into new securities. The investors accused New York-based Citigroup of repackaging unmarketable financial instruments and selling them to itself to hide its exposure to the securities.

The judge said that the bank’s public statements “painted a misleading portrait of Citigroup as relatively safe from the market’s concerns about potential losses resulting from falling CDO values.”

The class-action, or group, suit was brought on behalf of investors who bought Citigroup common stock from Feb. 26, 2007, through April 18, 2008. The shares fell more than 50 percent in the period, according to data compiled by Bloomberg.

“We are pleased to put this matter behind us,” Shannon Bell, a Citigroup spokeswoman, said in an e-mail.

Ira Press, a lawyer for Kirby McInerney LLP, the firm serving as lead counsel for the plaintiffs, didn’t immediately return a voice-mail message seeking comment on Stein’s ruling.

The case is In re Citigroup Inc. Securities Litigation, 07-cv-9901, U.S. District Court, Southern District of New York (Manhattan).

Porsche Wins Ruling in Bid to Torpedo Pendragon U.K. Suit

Porsche SE won a ruling in its bid to block a U.K. court from hearing a $195 million suit filed over the 2008 use of options in the failed bid to take over Volkswagen AG. (VOW)

The Stuttgart Regional Court said it can continue to hear a case Porsche filed against Cayman Islands investment fund Pendragon (Master) Fund Ltd. because the suit was filed 10 days before the fund filed its own action in London. The ruling can be appealed, Bernhard Schabel, a spokesman for the tribunal, said by telephone yesterday.

The decision is a win in Porsche’s battle against lawsuits that are seeking more than 5.4 billion euros ($7.1 billion) combined. A London court in March stayed Pendragon’s U.K. action, saying it will wait until the German courts have determined which case was filed first. A suit in the U.K. would allow plaintiffs to ask for more disclosure than in Germany. The information could subsequently be used against Porsche in the German courts.

By filing a so-called torpedo suit in Stuttgart, Porsche, the holding company that sold the Porsche car brand to VW last year, invoked European Union rules saying the venue where a party files an action first prevails, and bars another country’s court from assuming jurisdiction over the same issue.

Lara Melrose, a lawyer representing Pendragon in the U.K., declined to immediately comment on yesterday’s ruling.

Porsche welcomes the ruling and believes the claims are unfounded, Albrecht Bamler, a spokesman for the company, said in an e-mailed statement.

The case is LG Stuttgart, 18 O 220/12.

To contact the reporter on this story:

Ellen Rosen in New York at erosen14@bloomberg.net.

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

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