May 13 (Bloomberg) -- Galleon Group LLC co-founder Raj Rajaratnam had a ready answer for every question U.S. regulators put to him about possible insider trading three years ago, Bloomberg News’s David Glovin and Andrew M. Harris report.
“AMD on August 1st, now 13th,” Rajaratnam wrote in an Aug. 2, 2006, instant message sent to an RBC Capital Markets analyst. The analyst responded: “Hey, for the tickets have to choose package B?”
“What’s going on?” Securities and Exchange Commission lawyer Andrew Michaelson asked Rajaratnam during a formal agency deposition on June 7, 2007. He wanted to know about the link between “package B” and the ticker symbol for computer component-maker Advanced Micro Devices Inc.
“We were going to see cricket in Trinidad,” he told Michaelson. “We were talking about the cricket packages.” Rajaratnam said he didn’t recall the significance of Aug. 13.
Rajaratnam was indicted in December as part of the largest-ever hedge fund insider trading prosecution. The previously undisclosed deposition, taken at the SEC’s New York office as part of an agency investigation, was filed May 7 in Manhattan federal court by defense lawyers in the criminal case.
Rajaratnam, who has pleaded not guilty, is scheduled for trial in October for conspiracy and securities fraud. He faces more than 10 years in prison if convicted. Government lawyers, including Michaelson, who joined the prosecution team, claim that Rajaratnam used inside tips to trade in AMD shares in 2008.
Prosecutors may use the deposition to question Rajaratnam, 52, if he testifies at trial, said Jacob Frenkel, a former federal prosecutor who is now a partner at Shulman Rogers Gandal Pordy & Eckerin in Potomac, Maryland.
“His prior testimony before the SEC could be used for impeachment -- to show inconsistencies” in his account, said Frenkel, who isn’t involved in the Galleon investigation.
The deposition was filed as part of a defense effort to suppress secret government wiretaps of Rajaratnam, evidence central to the prosecution’s case. His attorneys claim Justice Department lawyers misled the judge who approved the wiretap.
At trial, Rajaratnam’s defense team may be able to point to the daylong deposition as evidence that he was “extremely forthcoming” with the investigators probing Galleon, said lawyer Roger Zuckerman of Zuckerman Spaeder LLP in Washington.
At the same time, Zuckerman said there are “strong indications” that prosecutors may have misled the judge by not disclosing this and other events related to the SEC’s probe in their 2008 request for a wiretap of Rajaratnam’s cell phone.
Jim McCarthy, a spokesman for Rajaratnam, declined to comment.
The deposition stemmed from an SEC investigation into suspected insider trading at Sedna Capital Management, a hedge fund run by Rajaratnam’s brother, Rengan. During the agency questioning, much of which focuses on Galleon’s trading, Raj Rajaratnam denied using confidential tips.
Janice Oh, a spokeswoman for U.S. Attorney Preet Bharara in New York, declined to comment.
Rajaratnam’s defense lawyers submitted the 2007 deposition to U.S. District Judge Richard Holwell in an effort to show that prosecutors lied in their wiretap application the next year, when they claimed they’d been investigating Rajaratnam for only a brief period.
The deposition and other documents filed with the court show the government had been probing him since 2000, the lawyers said.
The case is U.S. v. Rajaratnam, 09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
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Ackermann Says Deutsche Bank Didn’t Cause IKB Crisis
Deutsche Bank AG Chief Executive Officer Josef Ackermann told a Dusseldorf court that the lender wasn’t responsible for the 2007 funding crisis that forced IKB Deutsche Industriebank AG to seek a bailout.
Ackermann testified that IKB’s capital base was in peril before its credit line was cut by Deutsche Bank. Ackermann testified yesterday at former IKB Chief Executive Officer Stefan Ortseifen’s trial on charges he misled investors.
IKB was bailed out in 2007 by KfW Group and banking associations and has subsequently received guarantees of as much as 12 billion euros ($15 billion) from the Soffin bank-rescue fund. Ortseifen is charged with misleading investors by downplaying the effect of the looming crisis in a press release on July 20, 2007. IKB received a bailout package 10 days later.
“We didn’t cause the reputational damage that put IKB in the crisis,” Ackermann said yesterday. “We only cut the credit line when it became obvious that IKB was already in a crisis.”
At the opening of the case in March, Ortseifen had blamed Deutsche Bank for causing IKB’s near-collapse in 2007. Deutsche Bank halted all transactions with IKB on July 27 of that year, hurting IKB’s reputation and triggering the crisis, the former executive told the Dusseldorf Regional Court.
“My client never wanted to blame Deutsche Bank for causing the crisis,” Ortseifen’s lawyer, Rainer Hamm, said following Ackermann’s testimony. “He only wanted to express that the line was cut without warning and the move took IKB by surprise.”
Dusseldorf prosecutors in July charged Ortseifen with manipulating IKB’s share price before the near collapse of the lender in 2007. Ortseifen “consciously in a misleading fashion” downplayed the likely impact of the looming crisis in the July 20, 2007, press release, prosecutors said.
Given the evidence so far, the court considers the press release misleading, Presiding Judge Brigitte Koppenhoefer said at an earlier hearing. The court’s assessment is preliminary and may change in the course of the trial, she said.
Ortseifen denies the charges.
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Iceland’s Glitnir Bank Sues in U.S., U.K. to Recoup $2 Billion
Glitnir Bank hf sued Jon Asgeir Johannesson, the former chairman of FL Group hf, and other people connected with the investment company that controlled the failed lender, accusing them of taking $2 billion.
Johannesson led a group that wrested control of the Icelandic bank and drained it of money to prop up their own failing companies, according to the lawsuit filed May 11 in New York state Supreme Court in Manhattan. Glitnir Chairman Thorsteinn Jonsson and PricewaterhouseCoopers hf, Glitnir’s external auditor, also are defendants.
Glitnir was among the trio of banks that collapsed in October 2008 after they amassed $61 billion of debt, equivalent to 12 times Iceland’s gross domestic product. The government took over the three banks and was forced to seek an International Monetary Fund bailout as its currency lost as much as 80 percent of its value.
“Glitnir collapsed in 2008 in no small part due to the Johannesson Transactions,” the bank said in its complaint. The deals and associated loans cost Glitnir and its creditors more than $2 billion, according to the suit, which says Glitnir raised funds through the sale of notes to investors in New York.
The bank also secured an order in the U.K. freezing Johannesson’s assets worldwide, including two apartments in Manhattan’s Gramercy Park neighborhood, Glitnir’s liquidators said in a statement yesterday. Glitnir has already filed separate lawsuits in Iceland, the liquidators said.
“It’s just politics,” Johannesson, 42, said yesterday about the lawsuits when reached on his mobile phone. He declined to discuss his whereabouts. “I have full proof that we were repaying loans that were maturing 20 to 40 days later. This was just the refinancing of older loans.”
PricewaterhouseCoopers didn’t return a voice-mail message.
The case is Glitnir Bank hf v. Johannesson, 601217/2010, New York state Supreme Court (Manhattan).
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Adelphia’s Rigases Win New Hearing in Tax-Fraud Case
Adelphia Communications Corp. founder John Rigas and his son Timothy won a new hearing on their bid for dismissal of tax indictments stemming from a fraud involving the cable company.
A federal appeals court in Philadelphia ruled yesterday that a judge must allow the pair to produce evidence showing prosecutors are seeking to try them twice for the same crime. John Rigas, 84, is serving 12 years in prison, and Timothy Rigas, 53, a 17-year term, for looting the cable company and lying about its finances.
After their convictions by a federal jury in New York in 2004, prosecutors in Pennsylvania charged the men with failing to pay taxes on $1.9 billion they were accused of stealing. The executives contend the tax charges focus on the same conduct that was at issue in the New York trial.
“The record reveals no factor that would have prevented the government from bringing the counts charged in the Pennsylvania indictment in the New York prosecution,” the full court said in its 7-4 decision.
In New York, the Rigases were convicted of securities fraud and bank fraud, as well as conspiring to commit securities fraud, bank fraud, falsify books and records and make false statements to the Securities and Exchange Commission. Adelphia was once the fifth-largest U.S. cable-television company.
The Pennsylvania case charges them under the same conspiracy statute with plotting to defraud the U.S. of more than $300 million in tax revenue. It also charges them with six counts of tax evasion.
George Rocktashel, a prosecutor with the U.S. Attorney’s Office in Williamsport, Pennsylvania, declined to comment immediately on the appeals court’s ruling. Prosecutors filed the charges against the Rigases in that court.
Lawrence G. McMichael, a Philadelphia-based lawyer for the executives, didn’t return a call for comment.
The case is U.S. v. Rigas, 08-3218, U.S. Court of Appeals for the Third Circuit (Philadelphia).
Starr Seeks Order for Cuomo to Disclose AIG Records
Maurice “Hank” Greenberg’s Starr International USA Inc. asked a New York court to compel state Attorney General Andrew Cuomo to disclose records related to American International Group Inc.
Starr called “unlawful and arbitrary” Cuomo’s office’s refusal to disclose records dating from 2005 submitted by an independent consultant to Cuomo’s office, in a May 7 filing in Manhattan state Supreme Court.
“Starr is entitled to these records,” the company said in its court papers, citing New York’s Freedom of Information Law. “FOIL imposes a broad duty of disclosure on government agencies.”
Cuomo’s office has a pending lawsuit accusing Greenberg, 84, and former AIG Chief Financial Officer Howard Smith of using sham reinsurance deals and other transactions to distort AIG’s reported financial condition.
Richard Bamberger, a spokesman for Cuomo, didn’t return a call and an e-mail for comment.
The case is Starr International USA Inc. v. the New York State Office of the Attorney General.
The earlier case is New York v. Greenberg, 401720/2005, New York Supreme Court (Manhattan).
Miami Hotel Builders Face Tax Prosecution, Judge Says
Two Miami Beach hotel developers must face charges that they hid more than $45 million from the Internal Revenue Service, a federal judge ruled.
Lawyers for Mauricio Cohen Assor and his son Leon Cohen Levy, who built residential hotels under the Flatotel name, failed yesterday to convince a judge in federal court in Fort Lauderdale, Florida, that prosecutors lacked evidence to file charges. U.S. Magistrate Judge Lurana Snow said testimony by IRS Agent Scott Johnson convinced her the case should proceed.
“We have probable cause, and this will be bound over to the grand jury for further proceedings,” Snow ruled.
Both men have been held without bail since their arrest in New York on April 15 and Snow set a bail hearing for May 20. At yesterday’s hearing, defense lawyer Michael Pasano questioned Johnson about his 14-page arrest affidavit, seeking to show how the government’s claim that the men controlled companies at the heart of the case was incorrect.
The case is USA v. Cohen Assor, 10-mj-06159, U.S. District Court, Southern District of Florida (Fort Lauderdale).
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AIG Reviewing Possible Recovery in Goldman Trades
American International Group Inc. attorneys are reviewing whether the company may recover funds tied to transactions with Goldman Sachs Group Inc., the insurer’s chief executive officer said.
“We have fine lawyers, we are looking at all of the activities that occurred,” CEO Robert Benmosche said yesterday at AIG’s annual meeting in New York after a shareholder asked about transactions with Goldman Sachs. “To the extent we find anything that was done wrong, or any harm to AIG that should not have happened, our legal staff will take appropriate actions.”
Benmosche, hired in August, is seeking to stabilize a firm that reported almost $100 billion in net losses in 2008 after bad bets on mortgage-related investments including collateralized debt obligations. Collateral calls from Goldman Sachs and other investment banks forced AIG to the brink of collapse in September 2008. The insurer’s bailout that year provided funds to help meet obligations to Wall Street firms.
Goldman Sachs received about $12.9 billion related to credit-default swaps and securities-lending contracts that the insurer wound down after its rescue. The Securities and Exchange Commission sued Goldman Sachs last month for misleading clients including ABN Amro Bank NV in CDO trades. Benmosche, 65, didn’t specify which trades AIG is reviewing.
Mark Herr, a spokesman for AIG, and Goldman Sachs’s Michael DuVally declined to comment. Goldman Sachs has said the SEC suit is unfounded.
The U.S. government owns about 80 percent of AIG, a stake it took after rescuing the company in September 2008. Fairholme Capital Management, the investment firm run by Bruce Berkowitz, has the second-largest stake. Berkowitz raised his bet on AIG’s recovery by increasing holdings to 25.5 million shares, according to a filing this week.
AIG’s rescue includes a $60 billion Federal Reserve credit line, a Treasury Department investment of as much as $69.8 billion and up to $52.5 billion to buy mortgage-linked assets owned or backed by the company.
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Coventree Misled Investors About Subprime Risks, OSC Says
Coventree Inc., the biggest seller of non-bank asset-backed commercial paper in Canada when the market collapsed in 2007, misled investors about the risks of some of the securities, a lawyer for the country’s main stock-market regulator said.
In a July 2007 e-mail, Toronto-based Coventree alerted dealers, including pension manager Caisse de Depot et Placement du Quebec, that some of its debt funds had ties to U.S. subprime mortgages, said Jane Waechter, a lawyer for the Ontario Securities Commission.
After being notified, Caisse “began to withdraw, and demand for Coventree-sponsored ABCP deteriorated rapidly,” told a three-member OSC panel yesterday at the start of a hearing in Toronto. As a result, about C$16 billion ($15.7 billion) of debt couldn’t be refinanced, leading to the collapse of the market, she said.
The collapse resulted in the biggest insolvency in Canadian history, with C$32 billion of notes pooled into trusts that filed for bankruptcy protection. At least 100 companies and institutional investors, and more than 1,750 individuals, were stuck with notes that couldn’t be traded. An Ontario judge in January 2009 approved a plan to swap the insolvent commercial paper for longer-term notes.
Canadian Imperial Bank of Commerce, National Bank of Canada and brokerages agreed to pay a total of C$134 million in fines and penalties to settle regulators’ claims they improperly sold the paper just before the market collapsed. Bank of Nova Scotia’s Scotia Capital unit agreed to pay C$29.3 million to resolve the claims.
The OSC also accuses Coventree Chief Executive Officer Geoffrey Cornish and former CEO Dean Tai of misleading investors in April 2007 presentations by telling them that 7.4 percent of its asset-backed commercial paper was tied to U.S. subprime mortgages. The figure exceeded 15 percent in some investments and in one case topped 40 percent, the OSC said.
“This is misleading to ABCP investors by omission,” Waechter told the commission panel. “Disclosure is the cornerstone of securities’ regulations.”
Coventree and the executives have denied any wrongdoing.
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AstraZeneca Case Rewards Repeat Whistleblowers With $45 Million
Blowing the whistle on drugmakers is becoming a habit for a salesman and a psychiatrist splitting a $45 million award after AstraZeneca Plc settled claims of illegally marketing a schizophrenia drug, Bloomberg News’s David Voreacos and Margaret Cronin Fisk report.
James Wetta, a former company sales representative, sued in 2004 claiming AstraZeneca marketed Seroquel to children, prisoners and the elderly for uses not approved by regulators. Stefan Kruszewski, a psychiatrist, sued two years later, saying the company misrepresented Seroquel’s risks and benefits.
The U.S. Justice Department joined their cases and settled April 27 with the company for $520 million under the False Claims Act. The men received payments after years of waiting. Each previously won awards in such litigation, an event that attorney Erika A. Kelton said is growing more common.
“Repeat whistleblowers exist in the pharma industry because off-label marketing is so prevalent,” said Kelton, of Phillips & Cohen LLP, a Washington law firm that successfully represented about 70 such clients over 15 years. “Sales reps do jump from company to company, so they may be exposed to a number of similarly illegal practices.”
The False Claims Act lets private citizens sue on behalf of the government and share in any recovery. Whistleblowers were paid $2.39 billion from 1987 to 2009, or 16 percent of the $15.19 billion collected in False Claims lawsuits where the U.S. government joined the case, according to the Justice Department.
Kruszewski earlier sued Pfizer Inc. over claims about Geodon, an antipsychotic. He said he’ll get $14.5 million from a settlement last year in which Pfizer agreed to pay $2.3 billion to resolve claims over drugs that included Geodon.
Wetta marketed the antipsychotic Zyprexa at Eli Lilly & Co. before joining AstraZeneca. He sued Indianapolis-based Lilly in 2003 over sales practices and was one of nine whistleblowers who split about $100 million when the company paid $1.42 billion last year to settle state and federal claims. Wetta joined AstraZeneca before the Lilly case was made public.
Tony Jewell, a U.S. spokesman for London-based AstraZeneca, the U.K.’s second-largest drugmaker, declined to comment on Wetta and Kruszewski. The company denied allegations of illegal marketing and settled the case to avoid “the delay, uncertainty and expense of protracted litigation,” Glenn Engelmann, U.S. general counsel, said in a statement.
Chris Loder, a spokesman for New York-based Pfizer, the world’s biggest drugmaker, declined to comment on Kruszewski. He said the company didn’t admit wrongdoing in marketing Geodon.
The Seroquel case is U.S. ex rel. Kruszewski v. AstraZeneca Pharmaceuticals, 06-4004, U.S. District Court, Eastern District of Pennsylvania (Philadelphia).
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Kagan’s Powers of Persuasion Would Be Tested on Supreme Court
Elena Kagan was only 43 when she became dean of Harvard Law School in 2003. One of her goals: Persuade some of her older colleagues to take on more courses and publish more papers.
“She would sit down with them and tell them they had to be more productive,” said professor Alan Dershowitz, a colleague on the faculty. “It wasn’t easy. Some of these faculty members were 20 years older than her. She insisted on high quality work from the professors. She got some people to work a little harder.”
Kagan’s powers of persuasion have served her well in her career -- so well that she has almost reached the pinnacle of success in her field as President Barack Obama’s second U.S. Supreme Court nominee.
The question now is how her interpersonal skills would transfer to the unique, often mysterious world of the Supreme Court, Bloomberg News’s Greg Stohr reports. Kagan, 50, would become not only the newest justice, but also the youngest and by far the least experienced in the art of judging.
Seven of her eight prospective colleagues have served on a federal court -- trial, appellate or Supreme -- for at least 17 years. The eighth, John Roberts, has been a judge since 2003 and chief justice since 2005. Kagan has never been a judge.
She would join a court where Roberts and four colleagues -- Antonin Scalia, Clarence Thomas, Samuel Alito and Anthony Kennedy -- have banded together to strike down campaign finance regulations, limit shareholder lawsuits and protect gun owners’ rights.
“The potential is there for her to have a very significant impact, but it’s hard to know how Scalia and Thomas and Roberts and Alito are going to react to her,” said Stephen Wermiel, a former Supreme Court reporter who now teaches at American University’s Washington College of Law. “These are strong personalities and strong-willed people.”
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Kapadia Becomes New Chief Justice of India’s Supreme Court
Sarosh Homi Kapadia yesterday took over as the chief justice of India’s Supreme Court, succeeding K.G. Balakrishnan.
Kapadia, 62, was administered the oath of office by President Pratibha Patil at her residence in New Delhi. Kapadia will head India’s judiciary until Sept. 29, 2012.
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