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Citigroup, Morgan Stanley, Madoff in Court News

Sept. 15 (Bloomberg) -- Citigroup Inc. must face a trial set for Oct. 18 over claims it tricked private equity firm Terra Firma Capital Partners Ltd. into overpaying for EMI Group Ltd. in 2007, a U.S. judge ruled.

Citigroup had asked U.S. District Judge Jed Rakoff in Manhattan to dismiss Terra Firma’s lawsuit. The private equity firm alleges in its complaint that it was misled by New York-based Citigroup into believing that Cerberus Capital Management LP was also bidding for the music recording and publishing company.

Rakoff dismissed two of Terra Firma’s claims while rejecting Citigroup’s bid to dismiss allegations of fraudulent misrepresentation and concealment, according to a copy of yesterday’s order provided by Terra Firma. The ruling wasn’t yet available on the court’s website. The judge said he will issue a more detailed opinion explaining the ruling “in due course.”

Citigroup argued there was no evidence that David Wormsley, one of its bankers, knew Cerberus wasn’t planning to bid when, according to Terra Firma, he told the buyout firm’s principal, Guy Hands, that Cerberus would bid 2.62 pounds ($4.07) a share for EMI.

“We are pleased that Judge Rakoff has rejected Citi’s attempt to avoid a trial on both of Terra Firma’s fraud claims,” Jonathan Doorley, a spokesman for London-based Terra Firma, said in an e-mailed statement. “We look forward to the beginning of the trial on Oct. 18, when Citi will have to answer to a group of New York jurors.”

Shannon Bell, a Citigroup spokeswoman, didn’t immediately return a call seeking comment after regular business hours yesterday.

The case is Terra Firma v. Citigroup, 09-cv-10459, U.S. District Court, Southern District of New York (Manhattan).


Lehman Brothers Defies Bankruptcy to Become a Business Again

Lehman Brothers Holdings Inc. is a business again two years after declaring the biggest bankruptcy in history, with billions of dollars in cash, 500 employees, real estate and investments in other bankruptcies, Bloomberg’s Linda Sandler and David McLaughlin report.

The defunct New York-based investment bank, being run by Bryan Marsal, has almost $20 billion in cash and a monthly payroll of as much as $45 million for managers and advisers. Hard-to-sell investments are being managed by 400 employees, and the firm is spending tens of millions of dollars on litigation set to stretch to at least 2012.

Lehman’s strategy is unusual for a bankrupt company that’s liquidating. Marsal, 59, is betting that he’ll raise twice as much by holding Lehman’s worst-performing investments as he would by conducting a fire sale.

“The liquidating estate is acting like an ongoing investment concern,” said Lawrence A. Larose, a lawyer with Winston & Strawn LLP’s financial-restructuring practice in New York. “It’s trying to slowly extricate itself from these billions of dollars of investments around the world.”

Marsal is not only pouring cash into distressed assets he inherited. He spent $1.4 billion to buy a bankrupt affiliate’s loans on a bet he could sell them at a profit.

Creditors haven’t pushed Marsal to “dump these assets into a very questionable market,” Larose said.

Lehman, once the fourth-largest investment bank, with assets of $639 billion, foundered on Sept. 15, 2008, because of risky real estate bets and too much debt, which it tried to hide from investors, according to a report by examiner Anton Valukas.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

For more, click here.

Court Rulings

Judge Says Obama Health Suit Will Probably Proceed

A legal challenge to the health-care overhaul signed by President Barack Obama will “probably” be allowed to proceed, a federal judge in Florida said.

U.S. District Judge Roger Vinson in Pensacola said yesterday he will make a decision by Oct. 14 on whether the states have jurisdiction to sue. He told lawyers he would probably dismiss part of the suit, while allowing other claims to proceed.

“The states are left almost powerless to affect Congress,” Vinson said. “It’s enforced upon them whether they like it or not.”

The states allege the government’s requirement that people buy health insurance exceeds Congress’s powers under the Constitution, while the U.S. counters that provision is allowed under its commerce powers because of the billions of dollars a year in unpaid medical bills absorbed by the market each year.

The Justice Department claims the lawsuit is premature and fails to identify any injury the states have suffered.

Any injuries to state budgets fall short of the imminent harm required to bring a claim, the U.S. argued before Vinson.

With at least part of the case surviving yesterday’s hearing, Vinson scheduled further arguments for Dec. 16.

A federal judge in Richmond, Virginia, last month allowed a similar lawsuit brought by that state to proceed, rejecting the federal government’s motion to dismiss the claim. He scheduled an Oct. 18 hearing for further arguments.

The case is State of Florida v. U.S. Department of Health and Human Services, 10-cv-00091, U.S. District Court, Northern District of Florida (Pensacola).

For more, click here.

Wells Fargo Wins Baltimore Foreclosure Suit Dismissal

Wells Fargo & Co. for the second time won dismissal of a lawsuit by Baltimore claiming its lending practices discriminated against black borrowers and led to foreclosures that harmed the city.

U.S. District Judge J. Frederick Motz yesterday dismissed the city’s amended complaint, saying it failed to establish a causal connection between decreases in property tax revenue and its allegation that Wells Fargo steered borrowers who were qualified for prime loans to more expensive subprime loans.

Motz allowed the city until Oct. 22 to file a third amended complaint to address this issue.

“Theoretically, the city does have viable claims if it can prove property specific injuries inflicted upon it at properties that would not have been vacant but for improper loans made by Wells Fargo,” Motz said. “It is in the interest of justice that the city be granted leave to file a third amended complaint.”

Wells Fargo said in a statement that the challenges Baltimore faces can’t be attributed to the small number of loans in the city foreclosed on by the bank.

John Relman, a Washington lawyer representing the city, didn’t return a call seeking comment after regular business hours.

Baltimore sued Wells Fargo in 2008, accusing it of “reverse redlining” by targeting black borrowers though loans they couldn’t afford. That led to foreclosures, a drop in city tax revenue and increased costs for police to fight crime in neighborhoods with vacant homes, the city said.

The case is Mayor and City Council of Baltimore v. Wells Fargo Bank N.A., 08-00062, U.S. District Court, District of Maryland (Baltimore).

Pennsylvania Fund Manager Liable for Securities Fraud

A Pennsylvania hedge-fund manager committed securities fraud by misrepresenting his holdings when doing trades in two companies conducting private placements of their shares, a federal judge ruled.

Robert A. Berlacher misrepresented his positions when he signed agreements for the private placements, U.S. District Judge Mitchell S. Goldberg in Philadelphia found. Berlacher was accused of securities fraud in a lawsuit by the U.S. Securities and Exchange Commission. Goldberg, who held a three-day nonjury trial in March, ruled in Berlacher’s favor on other claims.

“The SEC has not sustained its burden of proof on the insider-trading count and two of the fraud claims,” the judge wrote in his ruling yesterday. “The SEC has met its burden on two separate fraud claims.”

The SEC said Berlacher, 56, made $680,000 in ill-gotten gains trading in four companies’ shares in 2004 and 2005 before the so-called private investment in public equity, or PIPE, issues were publicly known.

Nicolas Morgan, a lawyer for Berlacher at DLA Piper LLP in Los Angeles, said in an e-mailed statement that he was pleased that the decision “rejects the lion’s share of the SEC’s claims and its overreaching attempt to mischaracterize certain conduct as a violation of federal law.” He called the decision a “strike out” for the SEC.

Berlacher’s case stemmed from a probe by the federal government into hedge funds that short-sold the stock of companies after learning, before the public, that they would issue PIPE shares.

PIPEs, issued by companies to raise money quickly, are typically sold for less than market prices and often drive down the price of the publicly traded shares.

The SEC attacked the hedge funds’ practice of covering their short positions with the cheaper shares they got in the PIPE issues, almost guaranteeing a profit.

In yesterday’s ruling, Goldberg found fraud with regard to only two deals by Berlacher. The judge ordered the Villanova, Pennsylvania, resident to surrender profits of $352,364. He declined to impose penalties or interest. The commission sought potential money remedies totaling $1.5 million, Morgan said.

“We are pleased with the ruling, which finds that Mr. Berlacher committed securities fraud and orders him to disgorge more than $350,000 of illicit gains that he obtained as a result of his misconduct,” Julie Riewe, assistant director of the SEC Enforcement Division’s Asset Management Unit, said in an e-mailed statement.

The case is SEC v. Berlacher, 07-cv-03800, U.S. District Court, Eastern District of Pennsylvania (Philadelphia).

For more, click here.

California Suit Against Ex-Calpers Official Villalobos Blocked

California’s influence-peddling lawsuit against a former board member of the state’s public pension fund was put on hold by a federal bankruptcy judge.

California Attorney General Jerry Brown lost his bid to proceed with a lawsuit against Alfred Villalobos, a former California Public Employees’ Retirement board member, while Villalobos is seeking bankruptcy protection from creditors, according to a ruling yesterday by Judge John Peterson of the U.S. Bankruptcy Court in Nevada.

“We are disappointed with the decision and intend to appeal it,” Christine Gasparac, a spokeswoman for Brown’s office in Sacramento, said yesterday in an e-mail.

Villalobos was a Calpers board member from 1993 to 1995 who later became a so-called placement agent, a private middleman hired by money managers to help win investing assignments from pension funds. Brown accused Villalobos in May of trying to improperly influence Calpers personnel to favor Apollo Global Management LLC and other private-equity clients. Villalobos has denied any wrongdoing.

Brown’s lawsuit, filed in Los Angeles County Superior Court, sought $95 million in civil penalties. Villalobos filed for Chapter 11 bankruptcy protection in June. Under bankruptcy law, all litigation against a company or person who seeks protection is put on hold while the case is pending. A judge can grant a request to allow claims to proceed outside bankruptcy court in some circumstances.

The state also sued Federico Buenrostro Jr., a former Calpers chief executive officer who left the fund in June 2008 to work for Villalobos. Buenrostro was accused of taking gifts from Villalobos and using the agent’s Lake Tahoe mansion for his 2004 wedding. Buenrostro also has denied wrongdoing.

Brown’s lawsuit stemmed from federal and state investigations into influence-peddling for access to the $2 trillion in U.S. public retirement funds.

The case is In re Alfred J.R. Villalobos, BK-N-10-52248, U.S. Bankruptcy Court, District of Nevada (Reno).

Madoff Trustee Picard Wins Court Approval of $34.6 Million Fee

Irving Picard, the lawyer in charge of liquidating con man Bernard Madoff’s firm, won court approval of his request for $34.6 million in fees for four months of work.

U.S. Bankruptcy Judge Burton Lifland in Manhattan approved the interim fee request for Picard and his law firm, Baker & Hostetler LLP, at a court hearing yesterday, Picard said in an e-mailed statement. The fees covered work from February through May.

“Judge Lifland said that, as required by the Securities Investor Protection Act, he was approving the interim fee requests of the trustee, his counsel and special counsel,” Picard said.

Picard was appointed to recover money for Madoff’s victims. He said the fees in the case are paid by the Securities Investor Protection Corp. and don’t reduce the amount of money available to pay Madoff’s creditors.

Madoff pleaded guilty to running the biggest Ponzi scheme in history. He is serving a 150-year prison term in a federal prison in North Carolina.

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).

For the latest new suits news, click here. For copies of recent civil complaints, click here.


DHB Ex-Chief Guilty of Fraud at Military Contractor

David Brooks, a founder and former chief executive officer of military contractor DHB Industries Inc., was found guilty of committing a $185 million fraud and looting the company to pay for personal expenses.

Brooks, 55, and former Chief Operating Officer Sandra Hatfield, 56, were convicted yesterday of insider trading, fraud and obstruction of justice in manipulating financial records to increase DHB’s reported earnings and profits, according to Robert Nardoza, a spokesman for U.S. Attorney Loretta Lynch. Brooks was also convicted of lying to auditors.

“Corporate executives who lie to and steal from their employers -- the shareholders -- put the investing public at grave financial risk,” Lynch said in a statement yesterday.

DHB, now called Point Blank Solutions Inc., makes body armor for the military and police. It filed for bankruptcy protection on April 14. Brooks and Hatfield lied about inventory of “Interceptor” combat vests that were shipped to the U.S. armed forces and falsely inflated the company’s value and their own stock, the government said.

Brooks and Hatfield face as much as 25 years in prison on the most serious counts of securities fraud, conspiracy to commit securities fraud and insider trading.

Kenneth W. Ravenell, a lawyer for Brooks, and Roland G. Riopelle, a lawyer for Hatfield, didn’t immediately return phone calls seeking comment on the verdicts.

The trial in federal court in Central Islip, New York, began with opening statements Jan. 25. The jury began deliberating Aug. 2.

Brooks earned $185 million in the scheme while Hatfield earned $5 million, according to prosecutors. Brooks spent company funds “lavishly” on perks and expenses for himself and his family, including purchases of a Bentley and a Ferrari and grooming of 100 purebred trotting horses, Assistant U.S. Attorney Richard Lunger told jurors in his opening statement.

The case is U.S. v. David Brooks and Sandra Hatfield, 06-CR-550, U.S. District Court, Eastern District of New York (Central Islip).

For more, click here.

New Jersey Woman Admits to Ponzi Scheme, U.S. Says

A New Jersey woman pleaded guilty to federal charges that she directed a $45 million real estate Ponzi scheme that defrauded investors in New York and New Jersey, prosecutors said.

Antoinette Hodgson, 58, of Montclair, New Jersey, entered her plea yesterday to conspiracy and wire fraud in Manhattan federal court. Hodgson paid off early investors in her business with funds from later participants and spent some of their money on herself, U.S. Attorney Preet Bharara said in a statement.

“Hodgson promised investors high rates of return,” Bharara said. “Most of the $45 million she received from investors was immediately used to repay other investors.”

Hodgson used only about $6 million of the $45 million she received to buy real estate, prosecutors said. She was arrested in June.

Jack Arseneault, Hodgson’s lawyer, didn’t immediately return a call.

The case is U.S. v. Hodgson, 10-mj-01261, U.S. District Court, Southern District of New York (Manhattan).

For the latest verdict and settlement news, click here.


Lego Can’t Get EU-Wide Toy Trademark After Court Loss

Lego A/S, Europe’s biggest toymaker, lost a court challenge seeking European Union-wide trademark rights for the shape of its toy bricks.

The ruling by the EU’s highest court in Luxembourg yesterday puts an end to Lego’s chances to get a trademark to protect the shape of its building blocks in the region’s 27 nations. The dispute has its origins in 1999, when Billund, Denmark-based Lego won an EU trademark on the blocks’ shape which Mega Brands Inc., Lego’s biggest competitor in snap-together toys, then succeeded in overturning.

A shape such as Lego’s toy brick that “merely performs a technical function cannot be registered as a trademark,” the European Court of Justice ruled yesterday. “Such a registration would unduly impair the opportunity for competitors to place on the market goods whose shapes incorporate the same technical solution.”

Lego had claimed the knobs on top of its toy bricks make them “highly distinctive” and eligible for a trademark. The EU trademark agency said the toy can’t be protected because its shape serves a technical purpose, a decision backed by a lower EU court in 2008.

“It is naturally a matter of concern to us that use of the brick by others can dilute the trademark,” Peter Kjaer, head of Lego’s intellectual property department, said in a statement on the company’s website. “The worst aspect is that consumers will be misled.”

“Analyses show that 40 percent to 60 percent of shoppers believe they are buying a Lego product when in fact they are purchasing a different product,” said Kjaer.

Mega Brands, based in Montreal, Canada, said in a statement that the ruling “has no impact on Mega Brands’ extensive footprint” in the EU, because it confirms previous decisions by a lower court and the region’s trademark agency.

L’Oreal Heiress Gift Probe Can Continue, Appeals Court Says

L’Oreal SA heiress Liliane Bettencourt lost a bid to block an investigation into gifts worth 1 billion euros ($1.3 billion) that she gave to a photographer friend.

The appeals court in Versailles, near Paris, said judge Isabelle Prevost-Desprez could continue the investigation. Prevost-Desprez suspended a trial over the gifts while she investigated secretly made recordings in the case.

The dispute pits France’s richest woman against her only child, Francoise Bettencourt Meyers, over gifts including art, real estate and insurance policies given to photographer and author Francois-Marie Banier. The family battle spawned a French political scandal after the recordings of Bettencourt’s conversations with friends and advisers prompted inquiries into claims including campaign-finance law breaches tied to President Nicolas Sarkozy’s 2007 campaign.

The decision “is a victory for the independence of justice,” said Olivier Metzner, a lawyer for Bettencourt Meyers, saying his client had renewed a request for an independent doctor to review her mother’s mental fitness.

Bettencourt will appeal the decision to France’s highest appeals court, according to her lawyer, Matthieu Boccon-Gibod.

“The court simply said that our appeal was not immediately admissible,” Boccon-Gibod said. “We find the decision debatable.”

New Suits

Adobe, Symantec Among Companies Sued by Uniloc Over Software

Symantec Corp. and Adobe Systems Inc. were among 10 companies sued for patent infringement by Uniloc USA Inc., the business that’s been in a legal battle over anti-piracy technology with Microsoft Corp. since 2003.

Uniloc USA and Uniloc Singapore Ltd., which owns the patent, also sued CA Inc., National Instruments Corp., Pervasive Software Inc., SafeNet Inc. and its Aladdin Knowledge unit, Avid Technology Inc.’s Pinnacle Systems unit, Sonic Solutions Inc. and Onyx Graphics Inc. The complaint was filed yesterday in federal court in Tyler, Texas.

The company, with U.S. offices in Irvine, California, has sued 60 companies and reached licensing agreements with more than 20, Chief Executive Officer Brad Davis said in a telephone interview. Uniloc won a $388 million jury verdict in 2009 that Microsoft violated a patent related to product activation technology. The decision was later thrown out by a trial judge.

Uniloc is contesting the decision to vacate, and arguments were heard on the case by an appeals court on Sept. 7. In the complaint filed yesterday, Uniloc is seeking unspecified cash compensation and a court order that would block further use of its technology.

Adobe, Avid, CA, Symantec, Onyx and National Instruments declined to comment. Officials with the other companies targeted in Uniloc’s lawsuit didn’t immediately return messages.

The new case is Uniloc USA Inc. v. National Instruments Corp., 10cv472, U.S. District Court for the Eastern District of Texas (Tyler).

Morgan Stanley Sued by China Development Over CDO Losses

Morgan Stanley was sued by China Development Industrial Bank for fraud to recover losses from an investment tied to residential mortgage-backed securities.

The complaint, filed in New York state Supreme Court on July 15, was made public yesterday. The Taiwanese bank claims Morgan Stanley made an investment linked to U.S. subprime mortgage bonds in mid-2006 and, after learning of problems with it, “dumped those losses” on CDIB in April 2007.CDIB claims it was sold a $275 million interest in what Morgan Stanley called the STACK 2006-1 Ltd., a hybrid collateralized debt obligation. CDOs are pools of assets such as mortgage bonds packaged into new securities.

“Morgan Stanley structured and sold CDIB a security that was a house of cards built on a shoddy foundation of fraudulently manipulated credit ratings,” Samuel Rudman of Robbins Geller Rudman & Dowd LLP, lead counsel for CDIB, said in a statement.

“We believe these allegations are wholly without merit,” Mark Lake, a spokesman for New York-based Morgan Stanley, said in a telephone interview. “We intend to defend ourselves vigorously.”

The case is China Development v. Morgan Stanley, 65057/2010, New York state Supreme Court (Manhattan).

For the latest new suits news, click here. For copies of recent civil complaints, click here.

To contact the reporters on this story: Ellen Rosen in New York at; Elizabeth Amon in Brooklyn, New York, at

To contact the editor responsible for this story: David E. Rovella at

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