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Goldman, Rajaratnam, Imperial, Tribune in Court News

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Goldman Sachs Group Inc. faces a regulatory probe in Britain and scrutiny from the German government after the U.S. Securities and Exchange Commission sued the firm for fraud tied to collateralized debt obligations.

Prime Minister Gordon Brown called April 17 for the Financial Services Authority to start an inquiry, saying he was “shocked” at the “moral bankruptcy” indicated in the lawsuit. Germany’s financial regulator, Bafin, asked the SEC for details on the suit, a spokesman for Chancellor Angela Merkel said.

Politicians who were forced to bail out banks during the financial crisis are turning on Goldman, which critics say helped caused the turmoil and profited from it. The European Union is also probing Goldman’s role in arranging swaps for Greece that may have masked the country’s budget deficit.

“We will see politicians throughout the world piling on Goldman Sachs,” said Scott Moeller, a former investment banker now teaching at Cass Business School in London. “Now they have vulnerability. Everyone and anyone, especially politicians, are going to be trying to make hay with this one.”

The SEC said that in early 2007, as the U.S. housing market teetered, Goldman Sachs created and sold a CDO linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle, known as Abacus 2007-AC1.

The firm denies any wrongdoing. Fiona Laffan, a spokeswoman for Goldman Sachs, and Heidi Ashley, a spokeswoman for the FSA, declined to comment.

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New Suits

Goldman Sachs Sued by SEC for Fraud Tied to CDOs

Goldman Sachs Group Inc. was sued by U.S. regulators for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression. The firm’s shares tumbled as much as 16 percent and financial stocks slumped.

Goldman Sachs misstated and omitted key facts about a financial product tied to subprime mortgages as the U.S. housing market was starting to falter, the Securities and Exchange Commission said in a statement April 16. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president.

“The product was new and complex but the deception and conflicts are old and simple,” SEC Enforcement Director Robert Khuzami said in the statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

The SEC alleged that Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein, 55, structured and marketed CDOs that hinged on the performance of subprime mortgage-backed securities. The New York-based firm failed to disclose to investors that hedge fund Paulson & Co. was betting against the CDO, known as Abacus, and influenced the selection of securities for the portfolio, the SEC said. Paulson wasn’t accused of wrongdoing.

Goldman Sachs spokesman Lucas Van Praag didn’t return a call and an e-mail seeking comment. A call to Richard Klapper, an attorney for Goldman Sachs at Sullivan & Cromwell LLP, wasn’t returned. Tourre, reached by phone in London April 16, declined to comment. A call to Pamela Chepiga, a lawyer for Tourre at Allen & Overy LLP, wasn’t returned.

Stefan Prelog, a spokesman for New York-based Paulson & Co., said he couldn’t comment. The company oversees $32 billion.

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Ex-Blackwater President Indicted on Weapons Charges

The former president of Blackwater Worldwide Inc., the military contractor now called Xe Services LLC, was charged with illegal possession of machine guns and falsifying documents.

Gary Jackson, 52, and four other former Blackwater officials were indicted April 16 in federal court in Raleigh, North Carolina. They are accused of using sheriff department stationery to buy AK 47s and other guns for Blackwater’s training facility to get around restrictions on the number of fully automatic weapons permitted in their inventory.

The indictment also charges the five with falsifying documents to make it appear that weapons Blackwater gave the king of Jordan and his entourage in 2005, during a visit to the Moyock, North Carolina, training facility, were purchased by the defendants.

They are also accused of putting short barrels on rifles for use in Iraq and Afghanistan, where Blackwater provided security services for the U.S., without registering them as such and obstructing an investigation into the altered weapons.

Kenneth Bell, a lawyer for Jackson, and Stacy DeLuke, a spokeswoman for Xe, didn’t return calls for comment.

The case is U.S. v. Gary Jackson, 10-8, U.S. District Court, Eastern District of North Carolina (Raleigh.)

Ex-Credit Agricole Banker Sues on Bonus Exchange Rate

A former Credit Agricole SA banker responsible for derivatives is suing over the exchange rate the bank used to convert his bonus from euros to pounds.

Peter Ollila, formerly an executive director in sales covering derivatives and securitized products for Nordic countries and Poland, is seeking at least $96,000, plus interest, from the Paris-based bank, according to a London lawsuit made public this week.

Ollila, who worked for the bank from Feb. 1, 2008, until Nov. 21, 2008, said he is owed 33,000 pounds ($51,000) because Credit Agricole converted his 327,500-euro ($443,000) bonus using 2007 exchange rates rather than 2008 rates. He is also seeking a 33,865 euro deferred payment, which he said he never received.

“It was an implied term” of the contract that Credit Agricole would determine the exchange rate “reasonably and in good faith and that the defendant’s exercise of its discretion would not be irrational or perverse,” Ollila said in the lawsuit that was originally filed in March.

A Credit Agricole spokeswoman in Paris didn’t respond to a request for comment.

The case is Peter Ollila v. Credit Agricole Corporate & Investment Bank, claim no. 2010/893, High Court of Justice, Queens Bench Division (London).

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Miami Beach Hotel Developers Charged With Hiding Funds

A pair of Miami Beach hotel developers were arrested and charged with conspiring to defraud the Internal Revenue Service by hiding more than $45 million in offshore accounts.

Mauricio Cohen Assor and his son Leon Cohen Levy, who built residential hotels under the Flatotel name, never told the IRS about proceeds of the $33 million sale in 2000 of a New York hotel, according to a complaint in federal court in Miami. Cohen Assor also used offshore nominee accounts to hide the ownership of a Swiss account at an international bank that held $45.6 million in 2004, according to the complaint.

The men were arrested in New York April 15, the deadline for filing federal tax returns for 2009, as the Justice Department also charged seven former UBS AG clients with tax crimes for hiding funds abroad. The developers were detained after an initial appearance in federal court in Manhattan.

The two also used bank accounts in the name of their business, American Leisure Resorts, to fund a “luxury lifestyle” for themselves and family members, according to the complaint. They paid for “lavish personal residences, living expenses, and car expenses relating to luxury automobiles, including a $67,000 Dodge Viper, a $188,000 Bentley, and $700,000 of other vehicles,” according to the complaint.

An attorney for the men, Sharon McCarthy of Kostelanetz & Fink LLP in New York, didn’t return a call seeking comment April


The case is USA v. Mauricio Cohen Assor, 10-cr-06159, U.S. District Court, Southern District of Florida (Miami).

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DynCorp Sued by Holder Over $1.5 Billion Cerberus Bid

DynCorp International Inc., the defense contractor that has helped train Iraqi police, was sued by a stockholder claiming his shares are undervalued in a $1.5 billion takeover bid by Cerberus Capital Management LP.

DynCorp, based in Falls Church, Virginia, said in a statement on April 12 it would be bought by the New York-based investment fund for $17.55 a share in cash -- a 49 percent premium at the time.

“The proposed transaction is unfair and grossly inadequate” and “Cerberus may be taking advantage of a temporarily depressed stock price,” shareholder Shawn K. Naito said in a Delaware Chancery Court complaint filed April 16. Lawyers for Naito ask a judge to stop the deal and award damages and legal fees.

Craig R. Reed, a DynCorp senior vice president, didn’t return a call seeking comment on the lawsuit after business hours on April 16.

The case is Naito v. Dyncorp International Inc., CA5419, Delaware Chancery Court (Wilmington).

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Merrill Used Same Alleged Fraud as Goldman, Bank Says

Merrill Lynch & Co. engaged in the same investor fraud that the U.S. Securities and Exchange Commission accused Goldman Sachs Group Inc. of committing, according to a bank that sued the firm in New York last year.

Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, known as Rabobank, claims Merrill, now a unit of Bank of America Corp., failed to tell it a key fact in advising on a synthetic collateralized debt obligation. Omitted was Merrill’s relationship with another client betting against the investment, which resulted in a loss of $45 million, Rabobank claims.

Merrill’s handling of the CDO, a security tied to the performance of subprime residential mortgage-backed securities, allegedly mirrored Goldman Sachs’s conduct that the SEC detailed in a civil complaint filed April 16. The SEC claims Goldman omitted the same key fact about a financial product tied to subprime mortgages as the U.S. housing market was starting to falter.

“This is the tip of the iceberg in regard to Goldman Sachs and certain other banks who were stacking the deck against CDO investors,” said Jon Pickhardt, an attorney with Quinn Emanuel Urquhart Oliver & Hedges, who is representing Netherlands-based Rabobank.

“The two matters are unrelated and the claims today are not only unfounded but weren’t included in the Rabobank lawsuit filed nearly a year ago,” Bill Halldin, a Merrill spokesman, said April 16 of the Dutch bank’s claims.

Kenneth Lench, head of the SEC’s Structured and New Products unit, said that the agency “continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress.”

In its complaint, the SEC said New York-based Goldman Sachs, which had a record $13.4 billion profit last year, failed to disclose to investors that hedge fund Paulson & Co. was betting against the CDO, known as Abacus, and influenced the selection of securities for the portfolio. Paulson, which oversees $32 billion and didn’t market the CDO, wasn’t accused of wrongdoing by the SEC.

The SEC allegations are “unfounded in law and fact, and we will vigorously contest them,” Goldman said in a statement.

SEC spokesman John Heine declined to comment on whether it is investigating Merrill’s actions.

The case is Cooperatieve Centrale Raiffeisen-Boerenleenbank BA v. Merrill Lynch & Co, 09-601832, New York State Supreme Court (New York County).

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Rajaratnam Sought Tips on Berkshire’s Goldman Buys, U.S. Says

Galleon Group founder Raj Rajaratnam, who faces federal insider trading charges, sought to acquire secret information about Berkshire Hathaway Inc.’s 2008 purchase of preferred shares in Goldman Sachs Group Inc., federal prosecutors said in a court filing.

A letter from federal prosecutors to Rajaratnam’s lawyers detailing new allegations of insider trading was made public April 16 in a filing in federal court in Manhattan. In it, prosecutors elaborated on an earlier claim that Rajaratnam tried to use confidential information to trade on Goldman Sachs stock.

Rajaratnam “conspired to obtain material, nonpublic information about the quarterly earnings of Goldman Sachs” before its public announcement of earnings in June 2008 and December 2008, according to the letter. “In addition, Rajaratnam conspired to obtain material, nonpublic information about the purchase by Berkshire Hathaway of preferred stock in Goldman prior to Goldman’s public announcement” on Sept. 3, 2008, prosecutors said.

Lawyers for Rajaratnam are asking a judge to exclude evidence of additional allegations of insider trading, saying prosecutors waited too long to disclose it.

The filing doesn’t identify Rajaratnam’s source for information about Goldman Sachs. It does provide details about other alleged efforts to obtain inside information.

“The allegation is false,” said Jim McCarthy, a spokesman for Rajaratnam.

Rajaratnam, who was arrested Oct. 16, is the central figure in a probe in which 21 people have been charged criminally. He claimed prosecutors are “sandbagging the defense” in violation of his constitutional rights, including the right to defend himself at trial.

The case is U.S. v. Rajaratnam, 09-cr-1184, U.S. District Court, Southern District of New York (Manhattan).

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Bank Class-Actions Bid in U.K. Not Dead, BBA Says

U.K. consumers are likely to get another chance to file class-action lawsuits against banks after a clause allowing such cases was dropped from legislation written to respond to the financial crisis.

The provision will probably be taken up by a new government following the May 6 general election, according to Eric Leenders, a director at the London-based British Bankers’ Association, which didn’t object to the bill.

“This isn’t going away,” Leenders said in a phone interview April 16. “Whichever party comes into power will be looking at some kind of collective proceedings. We have another opportunity to think about how they could be constructed.”

The Financial Services Bill became law on April 8, after a clause allowing groups to sue financial services firms was abandoned when lawmakers ran out of time to debate it before parliament was dissolved ahead of the election.

The clause was considered amid increasing complaints about bank fees, which U.K. antitrust regulators were barred from examining for fairness. The language would have allowed lead plaintiffs in a case to file claims on behalf of unspecified customers who would have then needed to opt out of the case.

Rachael Mulheron, a Queen Mary University of London law professor who helped draft court rules for the dropped provision, also said the class-action law has a chance with the new government.

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U.K. Tobacco Makers and Retailers Fined $346 Million

Imperial Tobacco Group Plc, Gallaher Group Ltd. and 10 retailers were fined 225 million pounds ($346 million) for coordinating cigarette prices between 2001 and 2003, a U.K. antitrust regulator said.

Imperial, the maker of the West, Davidoff and JPS brands, received the largest penalty of 112.3 million pounds, the U.K. Office of Fair Trade said April 16 in a statement. Gallaher, a unit of Japan Tobacco Inc., was fined 50.4 million pounds. The fine is the largest of its kind by the regulator.

Wal-Mart Stores Inc.’s Asda unit was fined 14.2 million pounds and The Co-operative Group was fined 14.1 million pounds for their roles in a price-fixing scheme that the OFT says barred retailers from setting their own prices. The affected markets are worth about 13 billion pounds, the regulator said.

The OFT said it dropped allegations made in 2008 about the relationship between the tobacco companies and Tesco Plc, because it didn’t have enough evidence. The regulator also said it abandoned claims relating to indirect exchanges of proposed future retail prices.

Imperial denied breaking any laws and said in a statement it would appeal to the Competition Appeal Tribunal. Japan Tobacco views the fine as a “positive” development since the fine has been formally decided, spokeswoman Yuka Sugimoto said.

William Morrison Supermarkets Plc said it would challenge the fines, saying the OFT’s stance was “illogical and without foundation.” Morrison was fined 2.45 million pounds and Safeway stores, which it acquired, were fined 10.9 million pounds.

J Sainsbury Plc, the U.K.’s third-biggest supermarket owner, alerted the OFT to the price-fixing arrangement and was the first to apply to the watchdog for leniency. The company received full immunity from fines.

Imperial hasn’t taken any provisions for the fine, and “any appeal to the tribunal will lead to the suspension of the fine,” Imperial Tobacco spokesman Simon Evans said April 16 in a phone interview.

Gallaher, Asda, First Quench, One Stop, Somerfield and TM Retail were given reductions to their fines because they admitted liability when they received the OFT’s so-called statement of objections in April 2008.

For the latest verdict and settlement news, click here.

Litigation Departments

Dewey & LeBoeuf Issues Bonds as Law Firms Search for Capital

Dewey & LeBoeuf LLP said it raised money in a bond offering, a rare action by a U.S. law firm. The New York-based firm sold about $125 million in an offering, according to two people familiar with the transaction.

The 1,200-attorney firm used the private placement to refinance existing bank debt, partner Richard Shutran said. He declined to disclose the interest rate for the bonds, saying it was more favorable than the firm’s bank loans.

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Court News

Oboe-Playing Judicial Artist Diane Wood Eyed for High Court

Diane Wood and her colleagues on the 7th U.S. Circuit Court of Appeals in Chicago have philosophical differences. That didn’t stop Judge Richard Posner, the court’s most outspoken conservative, from officiating at her wedding when she married for the third time in 2006.

Wood has demonstrated a willingness to challenge her fellow jurists without offending, say lawyers and clerks who have observed her in court. Those attributes may be an asset as President Barack Obama considers her to replace retiring Justice John Paul Stevens on an often-divided U.S. Supreme Court.

In 1995, Wood persuaded Posner and other jurists to rethink the case of an Indiana inmate fighting his death sentence when she asked whether anyone warned him about repeated federal challenges. “Silence can mislead,” Posner later wrote, reversing an earlier opinion joined by fellow judge Frank Easterbrook.

“That was an example of the art of judging,” said Tom Brown, a former clerk for Wood who is a San Francisco lawyer. “She asked the question in a way not to embarrass Judge Easterbrook.”

While Wood’s opinions supported abortion rights and separation of church and state, her rulings on business matters aren’t easy to pigeonhole.

A 2000 decision favored Ameritech Corp. in a lawsuit filed by consumers. Just days later, she upheld a Federal Trade Commission finding that Toys ‘R’ Us Inc. improperly tried to use its market power to keep the most popular toys out of warehouse-style discount stores.

“She may lean toward the liberal side on social issues,” said Jeffrey Sarles, a partner at Chicago-based Mayer Brown LLP who appeared before Wood on her first day on the bench. “On business issues, she doesn’t seem ideological.”

Wood, 59, who plays oboe in the Chicago Bar Association Symphony Orchestra, said through her staff that she isn’t commenting on her reported candidacy.

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Court Filings

Tribune Bankruptcy Most Popular Docket on Bloomberg System

The bankruptcy docket of the Tribune Co. was the most-read litigation docket on the Bloomberg Law system last week.

Tribune filed bankruptcy in December 2008, one year after real estate billionaire Sam Zell used more than $8 billion in loans to take control of the publishing and television company. The company’s newspapers include the Los Angeles Times and Chicago Tribune.

Last week, Tribune filed a reorganization plan that would reduce debt taken on during a 2007 buyout in exchange for giving its lenders 91 percent of the bankrupt publisher. The plan, filed April 12, in U.S. Bankruptcy Court in Wilmington, reflects the settlement Tribune reached with its main creditors.

To read more about the reorganization plan, click here.

The case is In re Tribune Co., 08-13141, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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