Bank of America, Refco, ProShare, AIG in Court News

A federal judge said he needs more information on the basis for Bank of America Corp.’s $33 million settlement of a lawsuit filed by the U.S. Securities and Exchange Commission before he can approve it.

Bank of America on Aug. 3 agreed to resolve claims it misled investors about bonus payments in connection with its January acquisition of Merrill Lynch & Co. The SEC had filed a complaint shortly before the accord was announced.

The agreement didn’t specify how the $33 million figure was arrived at or whether it would come from the $20 billion Bank of America received in bailout money from the federal government, U.S. District Judge Jed Rakoff said in an Aug. 5 order that scheduled an Aug. 10 hearing on the matter.

“Despite the public importance of this case, the proposed consent judgment would leave uncertain the truth of the very serious allegations made in the complaint,” Rakoff wrote.

The SEC claimed in its complaint that Bank of America falsely represented to shareholders of both banks “that Merrill had agreed not to pay year-end bonuses when, in fact, Bank of America had agreed that Merrill could pay such bonuses up to as much as $5.8 billion,” Rakoff wrote. Merrill paid $3.8 billion in bonuses, according to the order.

Bank of America, based in Charlotte, North Carolina, didn’t admit to any wrongdoing in the settlement.

“We look forward to appearing before the judge and answering what questions he may have about the settlement,” Scott Silvestri, a spokesman for Bank of America, said in a phone interview yesterday. “We can’t envision any scenario under which TARP money would be used to fund the settlement,” he said, referring to the federal Troubled Assets Relief Program.

“We look forward to appearing before the court and addressing any questions Judge Rakoff may have,” John Nester, a spokesman for the SEC, said in an e-mailed statement.

The case is Securities and Exchange Commission v. Bank of America Corp., 09-cv-6829, U.S. District Court, Southern District of New York (Manhattan).

Ex-Credit Suisse Broker Butler Implicated by Partner

Former Credit Suisse Group AG broker Eric Butler, who is charged with fraudulently selling millions of dollars in subprime securities to corporate clients, was implicated in the fraud by his former partner, Julian Tzolov.

“We did it together,” Tzolov, 36, told jurors in Butler’s criminal trial in Brooklyn, New York federal court yesterday. “We were sitting right next to each other. We were meeting with clients together.”

Tzolov, who pleaded guilty to securities fraud and other charges July 22, testified as jurors viewed snapshots of the two men together at a birthday party, at Butler’s wedding and at a 2006 New Year party in South Beach, Miami. He said that he and Butler worked together to defraud investors including GlaxoSmithKline Plc, Roche Holding AG and Potash Corp. of Saskatchewan.

Butler, 37, is being tried on charges he falsely told clients the products were backed by federally guaranteed student loans and were a safe alternative to bank deposits or money market funds. Tzolov testified yesterday that he and Butler put the money into the riskier securities to get higher commissions.

Butler faces a possible prison sentence of about 34 years, according to prosecutors in the office of Brooklyn U.S. Attorney Benton Campbell.

Tzolov was a fugitive for three months after disappearing while free on $3 million bond. He was arrested July 15, just outside Marbella, Spain, accompanied by a bodyguard and carrying false documents, Spanish authorities said.

The case is U.S. v. Tzolov, 08-CR-370, U.S. District Court, Eastern District of New York (Brooklyn).

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SEC Rebuts Dismissal of Suit Against Refco Law Firm

The U.S. Securities and Exchange Commission disagreed with a court’s rejection of investor claims to recoup losses from Joseph Collins, former lawyer for bankrupt Refco Inc., a step that may bolster shareholders’ efforts to sue those involved in fraud.

The agency faulted the judge for dismissing a lawsuit in March based on Supreme Court decisions that barred shareholders from suing parties indirectly involved in a fraud. Individuals who contribute to scams should be treated as playing a direct role, and be liable to investors’ suits, the SEC said in a brief filed yesterday at 2nd U.S. Circuit Court of Appeals in New York.

U.S. District Judge Gerard Lynch denied an investors’ suit, saying a 1998 Supreme Court ruling required that a false statement be publicly attributed to an individual before the person is deemed to play a “primary” role and be subject to private lawsuits.

The SEC is “going to find it very hard to convince the Second Circuit to override what is understood to be the law,” said John Coffee, a Columbia Law School securities law professor, saying he agreed with the agency’s opinion. “This is a strongly established precedent.”

Lynch’s ruling would let a person “shield himself from liability” by promoting the fraud using another person or anonymously, the SEC said in its filing. “Such a ruling would unduly restrict private actions.” The SEC said it didn’t argue for acceptance or reversal of the court’s decision.

Refco concealed trading losses for almost a decade by secretly transferring them to a holding company owned by Chief Executive Officer Phillip Bennett. Prosecutors said Collins knew of the scheme and drafted legal documents that helped Bennett deceive investors. Refco shareholders including RH Capital Associates LLC and Pacific Investment Management Co. had sought to add Collins and his law firm to their suit against Bennett.

“Attribution of a false or misleading statement to a person is only one means by which that person can create the statement and thus be a primary violator,” the SEC said. An individual who creates a misstatement to hide the fraud also is a “primary violator,” according to the brief.

John Villa, an attorney at Williams & Connolly LLP in Washington representing the defendants, declined to comment.

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Hypo Real Estate Investor Trustee Told to Substantiate Lawsuit

A trustee for fund companies suing Hypo Real Estate Holding AG over about 320 million euros ($460 million) in damages must provide more facts to sustain the case, a German judge said.

The trustee, who sued on behalf of about 56 funds including Allianz SE’s asset-management unit Allianz Global Investors, hasn’t proven he is the right person to make claims, Presiding Judge Matthias Ruderisch said at a Munich court hearing yesterday. The trustee has until October to substantiate his case, the judge said.

“The action, in which funds from Germany, Luxembourg, USA, Canada and Saudi Arabia are participating, is lacking clarity,” Ruderisch said. “The suit must show who would have had the alleged damage here -- the funds or the holding companies.”

Hypo almost collapsed in September after its Irish unit Depfa Bank Plc failed to get short-term funding when credit markets dried up after Lehman Brothers Holdings Inc.’s bankruptcy. Munich-based Hypo has since received a total of 102 billion euros in debt guarantees and credit lines.

The case is: LG Muenchen, 22 O 783/09.

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New Suits

ProShare Sued by Investor After Inverse ETF Losses

ProShare Advisors LLC, the largest manager of funds that magnify increases or declines in indexes, was sued for violations of securities law after regulators questioned whether the vehicles are appropriate for long-term shareholders.

ProShares UltraShort Real Estate Fund provided false and misleading statements in its registration statement and prospectus, according to a lawsuit filed in U.S. District Court in Manhattan by investor Steven Novick of Connecticut. He is seeking class-action, or group, status on behalf of all shareholders.

The Financial Industry Regulatory Authority said in June that leveraged exchange-traded funds might not be suitable for individual investors because returns can deviate from long-term indexes when held for longer than a day. Brokerage units of firms including UBS AG and Ameriprise Financial Inc. have halted the sale of such ETFs, which use swaps or derivatives to amplify daily index returns.

“ProShares’ registration statements have always been accurate and complete, contained all material information, and complied with all legal requirements,” the Bethesda, Maryland- based firm said yesterday in an e-mailed statement. “We plan to defend against this suit vigorously.”

The company manages about $28 billion in exchange-traded funds.

The case is Steven Novick v. ProShare Advisors LLC, 09-cv-6935, U.S. District Court, Southern District of New York (Manhattan).

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Teva Sues Merrill Lynch Over Auction-Rate Purchases

Teva Pharmaceutical Industries Ltd., the world’s biggest maker of generic drugs, sued Bank of America Corp.’s Merrill Lynch unit over the purchase of $273 million in auction-rate securities from the bank.

Merrill, based in New York, underwrote and sold the securities as part of its business of structuring collateralized-debt obligations, or CDOs, Teva said in its complaint filed yesterday in federal court in New York. Bank of America, based in Charlotte, North Carolina, acquired Merrill in January.

“Teva has suffered staggering losses as a result of its purchase of CDO auction-rate notes and other auction-rate securities structured and underwritten by Merrill,” Petah Tikva, Israel-based Teva said in its complaint.

Citigroup Inc., UBS AG, Goldman Sachs Group Inc., Merrill and at least four other underwriters last year agreed to repurchase more than $50 billion in debt to settle regulatory claims they improperly touted the investments as safe, cash-like investments. Banks managing the auctions abandoned the $330 billion market in February 2008, stranding thousands of investors who could no longer sell the securities.

The settlements didn’t typically cover large companies that bought auction-rate securities for their treasuries.

Shirley Norton, a Bank of America spokeswoman, didn’t return a call for comment on Teva’s suit.

The case is Teva Pharmaceutical Industries Ltd. v. Merrill Lynch & Co., 09-cv-6936, U.S. District Court, Southern District of New York (Manhattan).

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Bankrate Investor Sues to Block Apax Partners Sale

A Bankrate Inc. investor sued to block the $571 million sale of the provider of personal-finance information to Apax Partners LLP, saying it undervalues the company’s stock.

Apax’s $28.50-a-share offer for Bankrate is “grossly inadequate” and Bankrate executives stand to unfairly reap millions from the deal, Bankrate shareholder Patricia Novick said in the lawsuit. London-based Apax is a private-equity firm that oversees more than $35 billion in investments.

“Apax’s offer is far from an adequate premium” for Bankrate’s shares, Novick’s lawyers said in the suit, filed Aug. 5 in federal court in Florida.

The offer was about 18 percent higher than Bankrate’s average share price during the 10 trading sessions before Apax’s July 22 bid., based in North Palm Beach, Florida, publishes consumer information such as “safety and soundness” ratings for U.S. banks, using measures such as earnings and asset quality to gauge financial strength. It also runs Web sites including and

Apax officials said last month they’d fund the Bankrate buyout with cash, forgoing the use of debt that had been the cornerstone of private-equity deals until credit markets collapsed in 2007. The transaction would be among the 10 biggest private-equity acquisitions in 2009, according to data compiled by Bloomberg.

Todd Fogarty, an Apax spokesman, declined to comment on the suit. Kayleen Keneally, a spokeswoman for Bankrate, wasn’t available to comment.

The case is Patricia Novick v. Bankrate Inc., 09-cv-81138, U.S. District Court, Southern District of Florida (West Palm Beach).

Icahn, XO Holdings Sued by Investor Over Buyout Offer

Billionaire investor Carl Icahn and XO Holdings Inc. were sued in New York state court by company shareholder R2 Investments, which called Icahn’s 55-cent-a-share offer for the communications company “insulting.”

R2 Investments, the holder of more than 15 million shares of XO, accused the company’s board of dismissing proposals from five bidders that would have garnered more value for minority shareholders than Icahn’s deal. Icahn’s proposal tramples the rights of minority shareholders, R2 Investments said in an Aug. 4 letter filed with the U.S. Securities and Exchange Commission.

“Under Mr. Icahn’s tutelage, we believe that this board is on the cusp of stripping almost all value from the minority shareholders,” R2 Investments said. “It has taken this board almost four years to find a way to give Mr. Icahn this company, but after a long, arduous process, the board has almost completed its apparent goal.”

In a July 9 letter, Icahn asked XO Chief Executive Officer Carl Grivner to “initiate the appropriate process” to review and consider the buyout offer, according to an XO filing with the SEC.

Icahn Associates Corp. owns 52.7 percent of XO Holdings’ shares, according to Bloomberg data. Icahn, chairman of XO Holdings, offered 55 cents a share for the common stock he doesn’t already own, a 100 percent premium, according to the SEC filing.

R2 Investments sent the letter to XO’s independent directors, noting the lawsuit was filed.

In the suit, filed on behalf of the company, directors are accused of breach of fiduciary duty and wasting corporate assets. The plaintiffs asked for unspecified damages.

KBR Sued By Kuwaiti Firm for $1 Million in Damages

KBR Inc.’s international unit was sued by a Kuwaiti subcontractor for more than $1 million in damaged equipment, broken leases and unpaid construction work provided in Iraq between 2003 and 2007, according to court papers.

American General Trading & Contracting WLL, based in Kuwait, said in a Houston state court lawsuit that the U.S.’s primary military contractor in Iraq “lost” a power generator and two flatbed trailers, returned eight other flatbed trailers and five water-tanker trucks in “badly damaged” condition, and didn’t fully pay for the construction of 60 helipads at U.S. military camps in Iraq.

“On several occasions, KBR has failed to pay for the equipment, services and materials provided by AGT under various subcontracts,” Charles Henke, the Houston attorney representing the Kuwaiti subcontractor, said in papers filed Aug. 4. Although KBR’s dispute resolution team has “repeatedly represented” it will pay for the damaged equipment, broken leases and unpaid invoices, Henke said, “it now appears that KBR does not intend to honor the parties’ agreement.”

Houston-based KBR is the largest U.S. military contractor.

“KBR has not yet been served with the lawsuit and therefore has not fully reviewed the complaint,” spokeswoman Heather Browne said in an e-mailed statement. “As such, we cannot comment on the specifics of the complaint. KBR is committed to conducting our business with ethics and integrity and will defend itself against these allegations.”

The case is American General Trading and Contracting WLL v. Brown & Root Services, 2009-49327, 234 Judicial District Court of Harris County, Texas (Houston).

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Hank Greenberg, Ex-AIG Chief, Pays $15 Million to End SEC Probe

Maurice “Hank” Greenberg, who led American International Group Inc. for 38 years until his ouster amid state and federal accounting probes in 2005, will pay $15 million to settle U.S. claims he manipulated the insurer’s earnings.

Greenberg, 84, and former AIG Chief Financial Officer Howard Smith “directed several different accounting transactions to materially affect AIG’s reported financial results,” the Securities and Exchange Commission said in a lawsuit filed yesterday in federal court in Manhattan. Smith will pay $1.5 million to resolve the suit.

“Corporate leaders cannot avoid the truth and consequences of their companies’ performance by using improper accounting gimmicks and signing off on distorted financial reports,” SEC Enforcement Director Robert Khuzami said in a statement. The accounting deals “presented a false financial picture and allowed AIG to claim success in meeting its performance goals.”

The insurer’s former chairman and chief executive officer has been locked in legal battles since AIG’s board pushed him out in 2005 during a probe by then-New York Attorney General Eliot Spitzer into reinsurance, the business of selling insurance to insurers. The company later restated $3.4 billion in earnings and in 2006 agreed to pay more than $1.6 billion to settle state and SEC claims it misled investors. Greenberg has called much of the restatement unnecessary.

In a statement yesterday, Greenberg said the agency’s complaint reflects that assertion, doesn’t blame him “for the vast majority of accounting issues” involved in the adjustment and doesn’t accuse him of fraud. If it had, “he was confident that he could defeat in court any such claim.”

The case focuses on “three primary areas of fraud,” according to the SEC’s complaint. They include transactions with General Re, a unit of Warren Buffett’s Berkshire Hathaway Inc., dealings with Capco Reinsurance Co., and “transactions to misstate net investment income or capital gains.”

In agreeing to resolve the claims, Greenberg and Smith didn’t admit or deny wrongdoing, the SEC said.

“This settlement brings finality for Hank,” said Jacob Frenkel, a former federal prosecutor now practicing law at Shulman Rogers in Potomac, Maryland. “A settlement means no admission, no denial, and one day of news. When they fight the charges, every event in the case is another storyline.”

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Fortis Investors Lose Bid to Block Sale of Former Dutch Units

A Fortis shareholder group lost a bid to stop the Dutch government selling units it bought from the financial-services company last year, an Amsterdam court ruled.

FortisEffect sued parties including the Dutch government, demanding to halt the sale of Fortis Corporate Insurance NV to Amlin Plc and to prevent a possible sale of insurance unit ASR Nederland NV, according to an e-mailed ruling by the Amsterdam district court dated Aug. 5.

The court rejected the claims, saying the state already sold Fortis Corporate Insurance and that halting further sales could hurt government interests. FortisEffect won’t appeal the ruling, Adriaan de Gier, a lawyer who says he represents about 1,200 Fortis shareholders, said in an e-mailed statement yesterday.

The Netherlands bought Fortis units in October, after the parent company ran out of short-term funding as customers withdrew deposits and credit markets froze. Amlin, the biggest insurer in the Lloyds of London market, on July 22 completed the takeover of Fortis Corporate Insurance for 350 million euros ($504 million) to expand in Europe.

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Litigation Departments

Madoff Trustee’s $14.7 Million Fee Request Approved

The trustee liquidating Bernard Madoff’s investment company won court approval of a $14.7 million bill for four months’ work by his law firm, overcoming challenges from victims.

The payment to trustee Irving Picard and his firm, Baker & Hostetler LLP, was approved yesterday by U.S. Bankruptcy Judge Burton Lifland in New York. Some victims argued Picard isn’t paying Madoff clients fast enough and is wasting money that should go to them.

The amount covers Picard’s work from Dec. 15 to April 30. The trustee and the law firm argued the fees were justified by their recovery of $1.08 billion for victims as of June 30 and their filing of complex lawsuits against the con man’s biggest investors seeking about $14 billion more in damages.

Picard was hired to unwind New York-based Bernard L. Madoff Investment Securities LLC after Madoff, 71, was arrested for running a $65 billion Ponzi scheme. Madoff pleaded guilty in March and was sentenced on June 29 to 150 years in prison.

The fees will be paid by the Securities Investor Protection Corp., the government-chartered agency that is overseeing the liquidation and hired Picard. Some victims argue Washington- based SIPC is low on cash and needs the money to make required payments of as much as $500,000 each to victims.

“The trustee has been an abysmal failure,” Helen Chaitman, a lawyer and a Madoff victim who sued Picard over his calculation of claims, said in an objection filed this week. “This depletion of SIPC’s funds is unjustifiable.”

Chaitman also claimed that most of the money recovered by Picard so far was cash in Madoff’s bank accounts and didn’t require extensive effort to secure.

At least seven other law firms filed requests for fees and expenses totaling $1.32 million. The firms gave legal advice or assisted Picard’s team in Madoff-related matters in Luxembourg, Ireland, the British Virgin Islands and the U.K., according to court filings.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Bank of America Names Edward O’Keefe General Counsel

Bank of America Corp. named Edward O’Keefe as general counsel as the bank undergoes a management shuffle and continues to address legal issues stemming from its acquisition of Merrill Lynch & Co.

O’Keefe, 54, was interim general counsel since January 2009, when he replaced Brian Moynihan. Moynihan replaced Timothy Mayopoulos, who left the company in December, three months after Bank of America agreed to buy Merrill.

Moynihan was placed in charge of consumer banking as part of a reorganization of senior management on Aug. 3. On the same day, the bank said it would pay $33 million to settle a U.S. Securities and Exchange Commission lawsuit over claims it failed to tell investors last November that it gave Merrill permission to award as much as $5.8 billion in incentives and bonuses.

O’Keefe joined Bank of America in 2004 from Deutsche Bank AG. Mayopoulos, who also joined Bank of America from Deutsche Bank that year, in April was named general counsel of Fannie Mae, the U.S. mortgage-finance company.

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Court News

Sotomayor Vote Makes History Without Changing Court’s Balance

Sonia Sotomayor’s confirmation as the first Hispanic on the U.S. Supreme Court, hailed as a historic moment by her supporters, may have little impact on the outcome of cases the justices will consider during the next year.

Sotomayor won approval on a 68-31 vote yesterday, with nine Republicans joining 59 Democrats in the majority. When she is sworn in tomorrow by Chief Justice John Roberts, she will become the second woman and third Democratic appointee serving on the nine-member court.

“A more diverse Supreme Court is a better Supreme Court,” said Senate Majority Leader Harry Reid, a Nevada Democrat, during the chamber’s debate on her yesterday.

Sotomayor, 55, was nominated by President Barack Obama to succeed the retired David Souter, whose positions she is likely to closely track based on her 17-year record as a trial and appellate judge. Souter supported abortion rights, affirmative action and strict church-state separation, and voted to limit constitutional protections for gun ownership and private property.

“She can be no worse than Souter from our point of view,” said Senator Lindsey Graham, a South Carolina Republican who supported Sotomayor even though he said he had misgivings about her views. “So there is not going to be a major shift in the balance of power here.”

Her first test will come in a campaign finance clash whose outcome probably is in the hands of former President George W. Bush’s two appointees, Roberts and Justice Samuel Alito. The court is considering overturning a century-old ban on corporate political giving. Three other justices -- Antonin Scalia, Clarence Thomas, and Anthony Kennedy -- have already said they would take that step.

The court will hear arguments in the case Sept. 9, holding an unusual second hearing in a dispute that originally had a narrower focus. The case concerns a documentary film critical of Secretary of State Hillary Clinton, then a candidate for the 2008 Democratic presidential nomination.

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