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Morgan Stanley, BNP, HP, Goldman, KWL in Court News

Updated on

Nov. 11 (Bloomberg) -- Fairfield Sentry Ltd., a feeder fund that transferred $3.2 billion to convicted swindler Bernard Madoff, sued a Swiss unit of Morgan Stanley to try to recover money.

Fairfield Sentry is seeking $10.2 million from Bank Morgan Stanley AG. The lawsuit, filed yesterday, is similar to a group of so-called clawback actions Fairfield Sentry began filing in August, when it said it had no way to repay the $3.2 billion without recovering the money its shareholders received since about 2004.

The lawsuits, including the latest against Bank Morgan Stanley, are in U.S. Bankruptcy Court in Manhattan. More than 120 cases have been filed related to Fairfield Sentry’s bankruptcy case in New York.

“Bank Morgan Stanley has been unjustly enriched to the detriment of the Funds, their creditors and the current holders of shares in the funds,” Fairfield Sentry said in its complaint.

A Morgan Stanley spokesman, Mark Lake, didn’t return a call for comment.

Fairfield Sentry is being liquidated under the supervision of the Commercial Division of the High Court of Justice in the British Virgin Islands. The liquidators are Kenneth Krys and Joanna Lau, according to court papers.

Fairfield Sentry filed a Chapter 15 bankruptcy in New York. That part of the bankruptcy code is used by foreign companies to protect their U.S. assets while they are liquidated or reorganized overseas.

Irving Picard, the trustee liquidating Madoff’s former firm, sued Fairfield Sentry to recover more than $3.5 billion in allegedly fraudulent payments. Fairfield Sentry’s suits are designed to recover the fictitious Madoff profits paid to its investors.

Fairfield Sentry said it raised money for Madoff without knowing he was running a Ponzi scheme.

The first clawback case filed is Fairfield Sentry Ltd. v. Theodoor GGC Amsterdam, 10-03496. The latest case is Fairfield Sentry Ltd. v. Bank Morgan Stanley AG. Both are in 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.

Trials/Appeals

BNP, Credit Agricole Face Ex-Traders in Paris Trial

BNP Paribas SA and Groupe Credit Agricole are confronting three former bond traders at a Paris criminal trial on claims the men orchestrated deals in the 1990s to inflate bond prices and pocket the profits.

The traders, who worked for what are now units of the banks, are accused by Paris prosecutors of abuse of trust and fraud after a nearly 12-year probe found as much as 200 million French francs ($34 million) was siphoned into overseas funds for their use.

An investigation found the men “deliberately hid what was being done from superiors,” Judge Agnes Quantin said in opening the four-day trial Nov. 8.

The trial spotlights the practices of bond traders a decade before Jerome Kerviel’s unauthorized derivatives trading cost France’s second-largest bank, Societe Generale SA, 4.9 billion euros. Testimony at times echoed Kerviel’s June trial, with two traders asserting they followed “normal” practices while the banks said they had no idea what was happening.

“Mr. Kerviel was just one man,” Claude Bendel, a lawyer for the Credit Agricole units, said yesterday. While the affairs are “very closely related,” he said, “here we are in the presence of a gang -- no one acted alone.”

Defendants Ariel Cheminaud, 46, Noureddine Benameur, 49, and Olivier Moulines, 49, deny the charges, and claim they never collaborated or benefited on the trades. The men face as much as 375,000 euros in fines and five years in jail if convicted.

“These transactions were perfectly normal,” Cheminaud, a broker for CPRI, part of Credit Agricole since 2000, said in testimony Nov. 8.

The men traded illiquid bonds, selling them at a slightly higher price to intermediaries in the U.K. that were acting for offshore accounts, according to the investigation. Those offshore groups, which the men allegedly controlled, then sold the bonds back to the traders for even more, producing profits that were hidden in the offshore funds.

“These intermediaries were useless,” BNP Paribas lawyer Arnaud de la Cotardiere said. They were “a fake way to send the profits abroad.”

For more, click here.

HP’s Apotheker, Like Carmen Sandiego, Focus at Trial

The hottest new game at the Oracle Corp.-SAP AG infringement trial has become “Where in the World is Leo Apotheker?”

Oracle lawyers want to put the former SAP chief executive officer on the stand in federal court in Oakland, California, to testify about the conduct of a now-defunct SAP unit that illegally downloaded Oracle’s copyrighted software. Apotheker, a 22-year SAP veteran, was on the software maker’s executive board when it bought TomorrowNow in 2005, and he oversaw the unit’s sales, according to court documents and trial testimony.

Apotheker, who resigned from SAP in February, was hired by Hewlett-Packard Co. in September and was to start as CEO on Nov. 1. HP has refused to accept papers seeking to call Apotheker to the stand, and Oracle attorneys have said they can’t find him.

“We are trying real hard to find him and he’s trying real hard not to let us find him,” David Boies, Oracle’s lead attorney at the trial, said Nov. 8. “We’ve got to find him, and we’ve got to find him in California.”

Apotheker gave an interview to the Nikkei business daily on Nov. 5, published in Japanese a day later, that said he was in Tokyo.

Redwood City, California-based Oracle, which has a video of sworn testimony that Apotheker gave its lawyers in 2008, says it’s important for the jury in Oakland to hear live testimony from him. Oracle claims Apotheker, 57, “was at the center of the infringement” and “personally approved” the activities of the Bryan, Texas-based TomorrowNow software maintenance unit, Boies said in a news conference outside the courthouse in Oakland.

Oracle, the second-largest maker of software for business applications behind Walldorf, Germany-based SAP, is seeking damages of as much as $2 billion in the trial.

HP said Nov. 3 that Apotheker had limited knowledge of TomorrowNow. Oracle is trying to harass him and interfere with his new role at HP, said Mylene Mangalindan, a spokeswoman for the Palo Alto, California-based company, in an e-mailed statement on Nov. 3.

The case is Oracle Corp. v. SAP AG, 07-01658, U.S. District Court, Northern District of California (Oakland).

For more, click here.

BankAtlantic Lied About Loans’ Risks, Lawyer Argues

BankAtlantic Bancorp Inc. executives duped investors into buying the bank’s shares at an inflated price by lying about the riskiness of its real-estate-loan portfolio during 2007’s economic downturn, a lawyer told jurors.

Officials of the Fort Lauderdale, Florida-based bank ignored lending guidelines in approving land-development loans and then sought to hide the losses to prop up the institution’s stock price, Mark Arisohn, a lawyer representing disgruntled BankAtlantic shareholders, said in closing arguments yesterday in the trial of investors’ securities-fraud lawsuit.

“When the truth was revealed and hidden risk materialized, the stock plunged,” Arisohn told jurors in federal court in Miami. “Investors who put their hard-earned money into BankAtlantic stock were misled by those lies.”

BankAtlantic’s defense attorney countered yesterday that executives didn’t foresee the collapse of Florida’s real-estate market in the fallout over subprime mortgages and alerted investors to problems within the bank’s loan portfolio when they became clear.

The case is In re BankAtlantic Bancorp Inc. Securities Litigation, 07-cv-61542, U.S. District Court, Southern District of Florida (Miami).

For more, click here.

U.S. Says Closing Ex-Goldman Programmer’s Trial Needed

The trial of former Goldman Sachs Group Inc. computer programmer Sergey Aleynikov should be held partly behind closed doors because the U.S. says he may disclose the firm’s trade secrets “in great detail.”

Aleynikov was arrested in July 2009 and indicted Feb. 11 in what a prosecutor said was the “most substantial” theft that New York-based Goldman Sachs could recall. The trial is scheduled to begin Nov. 29 before U.S. District Judge Denise Cote in New York.

In court filings, Aleynikov said he will argue that the material he is accused of stealing isn’t a trade secret. He also said he will discuss “either in cross-examination or in a defense case, the way in which the allegedly stolen components interacted with the rest of Goldman Sach’s high-frequency trading system.”

Prosecutors said in a court filing yesterday that they may seek to show the trial jury how those components work together, which would require a sealed courtroom to protect trade secrets.

A closed courtroom is warranted under the Economic Espionage Act, which insures victims of such crimes aren’t “re-victimized” at a trial by public disclosure of their trade secrets, prosecutors said.

Aleynikov, who worked as a programmer at Goldman Sachs from May 2007 through June of 2009, is accused of copying hundreds of thousands of lines of computer source code related to the firm’s high-frequency trading business on his last day of work. Aleynikov told federal investigators that he intended only to copy “open source” code not owned by Goldman Sachs, according to the prosecutors.

The U.S., in its filing yesterday, asked Cote to allow evidence of other “bad acts” by Aleynikov that weren’t charged in the indictment, including an allegation he obtained a proprietary code without authorization from his previous employer, IDT Corp. Investigators found the code on at least two files on his laptop computer after his arrest, prosecutors said.

The case is U.S. v. Aleynikov, 10-00096, U.S. District Court, Southern District of New York (Manhattan.)

For more, click here.

Ex-Leipzig Utility Manager Tried Over Deal With UBS

The former head of a German municipal utility must stand trial over alleged bribes connected to collateralized debt obligation transactions with UBS AG and other banks, a court ruled.

Klaus Heininger, the former managing director of KWL-Kommunale Wasserwerke Leipzig GmbH, will be tried starting Nov. 26 on charges of accepting bribes, breach of trust, falsifying financial statements and tax evasion, the Leipzig Regional Court said in an e-mailed statement yesterday. Two other suspects, charged with bribing Heininger, will also be defendants in the case.

“Heininger allegedly accepted considerable monetary advantages in order to close highly risky agreements in the name of KWL, which may have led to a default risk of 280 million euros ($384 million),” the court said.

KWL in February filed a suit in Leipzig, Germany, against UBS, Landesbank Baden-Wuerttemberg and Depfa Bank Plc to invalidate the CDO transactions in which KWL assumed guarantees for unsecured loans. The utility claims that the transactions were closed without proper authorization.

Uwe Freyschmidt, Heininger’s lawyer, didn’t reply to a call and an e-mail seeking comment. KWL spokesman Jochen Endle declined to comment. UBS and the other banks aren’t accused of wrongdoing in the criminal case.

UBS sued KWL in January in London over the issue. The London High Court of Justice ruled Oct. 15 that it can hear the UBS suit because the transactions fall under English law.

Heininger, who was fired last year and arrested in February, may have evaded 1.6 million euros in taxes because he didn’t declare the alleged bribes as income, the court said.

For more, click here.

For the latest trial and appeals news, click here.

Verdicts & Settlements

Karatz Gets Five Years Probation in KB Home Backdating Case

Bruce Karatz, the KB Home ex-chief convicted of hiding backdated stock options from auditors and regulators, was sentenced to five years of probation by a federal judge who rejected prosecutors’ call for prison time.

U.S. District Judge Otis D. Wright II, at a hearing yesterday in Los Angeles, ordered the former chief executive officer to pay a $1 million fine, serve eight months of home detention with electronic monitoring and perform 2,000 hours of community service.

Wright said he had “lost a lot of sleep over the right thing to do in this case.” He said his decision on how to punish Karatz was consistent with federal sentencing guidelines and his own record of not meting out prison time to defendants with no criminal record and no history of violence.

In April, Karatz, 65, was found guilty by a jury of two counts of mail fraud and two counts of making a false statement. The conviction stemmed from Karatz’s actions in 2006 during an internal investigation of backdated options. He was acquitted of 16 charges, including securities fraud, related to the actual options prosecutors said he illegally backdated.

The judge acquitted him of one count of mail fraud on Oct. 15, finding that prosecutors had failed to provide evidence that a misleading report on the homebuilders’ process of picking option dates had been sent to KB Home’s auditors by mail.

Prosecutors said in an Oct. 14 filing that sentencing Karatz to home detention at his 24-room mansion in Bel Air, California, would suggest that there is a two-tier justice system in which well-connected chief executives can break the rules with virtual impunity.

Karatz declined to speak to reporters afterwards.

“We were nervous,” his attorney, Elliot Peters, said after the sentencing. “He was acquitted of 17 of 20 counts. He’s 65 and they were trying to put him in prison for six years. We’re relieved and we have a great deal of respect for the judge.”

Assistant U.S. Attorney Paul Stern, whose office was seeking a 6 1/2-year prison term for Karatz, said, “We respectfully disagree with the judge’s decision.” He declined to comment further.

The case is U.S. v. Karatz, 09-00203, U.S. District Court, Central District of California (Los Angeles).

For more, click here.

Harley, a Madoff Feeder, Ordered to Pay $1 Billion

Harley International (Cayman) Ltd., an insolvent Cayman Islands-based fund that allegedly funneled money to Bernard Madoff, was ordered to pay $1.07 billion to creditors of the convicted con man.

Irving Picard, the trustee overseeing the liquidation of Madoff’s former firm, Bernard L. Madoff Investment Securities LLC, sued Harley in May 2009, seeking to recover phony profits paid to Harley in the six years before the Madoff bankruptcy was filed.

U.S. Bankruptcy Judge Bernard Lifland in New York yesterday entered a judgment against Harley, which is being liquidated in the Cayman Islands, after ruling the fund had failed to contest the suit within the deadline for doing so.

In an Oct. 29 report to Lifland detailing his efforts over the past six months, Picard said he plans to sue Harley in a Cayman Islands court.

“We will take such action as we deem appropriate to seek to recover on the judgment,” Kevin McCue, a spokesman for Picard, said in an e-mail yesterday.

A phone message seeking comment from Nicolas Matthews and Mark Longbottom of Kinetic Partners, the joint liquidators of Harley, wasn’t returned.

Madoff, 72, is serving a 150-year prison sentence in North Carolina after pleading guilty to orchestrating the biggest Ponzi scheme in history.

The case is Picard v. Harley International (Cayman) Ltd., 09-AP-1187, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Hewlett-Packard to Pay $16.3 Million to Settle Probe

Hewlett-Packard Co., the world’s largest computer maker, agreed to pay $16.25 million to settle a government investigation of fraud in a program that funds Internet connections in schools and libraries, the Justice Department said.

The Justice Department and Federal Communications Commission, acting on tips from whistle blowers, investigated claims that contractors, working with HP and other companies, gave gifts to school districts in Dallas and Houston to win contracts that included $17 million in HP equipment for the E-rate program, the Justice Department said in an e-mailed statement. The FCC’s E-Rate program funds Internet connections for schools and libraries.

“HP requires that all employees and partners adhere to lawful and ethical business practices,” John McCool, an outside spokesman for Palo Alto, California-based HP, said in an e-mailed statement.

“The activities at the center of this investigation occurred more than five years ago, the partner relationships have been terminated and the employees involved are no longer with the company,” McCool said. “HP fully cooperated with the authorities and the matter is now resolved.”

The improper gifts included meals and entertainment, including trips on a yacht and tickets to the 2004 Super Bowl, the Justice Department said.

HP will pay the government $16.25 million, most of which will be returned to the E-rate program, according to the Justice Department’s statement. The FCC will enforce the agreement to ensure HP doesn’t violate the rules again, the government said.

For the latest verdict and settlement news, click here.

Lawsuits/Pretrial

Foreclosure Probe on ‘Fast Track,’ Iowa’s Miller Says

The investigation by attorneys general in 50 U.S. states into banks’ foreclosure practices is on “a fast track” and any resolution might involve multiple settlements, Iowa Attorney General Tom Miller told Bloomberg News’ Margaret Cronin Fisk.

“We’d like to resolve this sooner rather than later,” Miller, who is leading the attorneys general task force, said in an interview. “We want to move quickly if we can, but not so quickly that we don’t do it right.”

A global settlement of the task force investigation is unlikely, said Miller, 66, who also leads a separate foreclosure prevention group of state attorneys general. “It would be one bank at a time.” Miller, who was first elected attorney general in 1978 and whose successes include $809 million from two earlier settlements over home loans, didn’t speculate on when or how this investigation might be resolved.

All 50 states on Oct. 13 announced the coordinated inquiry into whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures. The probe came after JPMorgan Chase & Co. and Ally Financial Inc.’s GMAC mortgage unit said they would stop repossessions in 23 states where courts supervise home seizures and Bank of America Corp. froze foreclosures nationwide.

At least 19 states, including Iowa and Texas, are conducting separate investigations to determine whether state laws were broken. Some began investigations months before the coordinated nationwide probe was announced.

States have asked lenders to halt foreclosures, requested documents and sought better home-loan modification procedures. Ohio’s attorney general sued, accusing Ally Financial of consumer fraud.

Some lenders have acknowledged that employees may have completed court affidavits without confirming their accuracy. In December, a GMAC employee said in a deposition in a foreclosure case in West Palm Beach, Florida, that his team of 13 people signed about 10,000 documents a month without verifying the accuracy of the information in them.

For more, click here.

Judge Tells ESun to Mediate Casino Dispute With Investors

A Hong Kong judge told an eSun Holdings Ltd. unit and its partners in a Macau, China, casino project including Oaktree Capital Management LP and Silver Point Capital LP to settle their dispute through mediation.

Any unreasonable refusal to try to settle would result in a reduced award at the end of a trial, High Court Judge A.T. Reyes said at a hearing yesterday on petitions by each partner for the other to be ordered to drop their interest in the project.

ESun unit East Asia Satellite Television (Holdings) Ltd. and New Cotai LLC, owned by Oaktree, Silver Point and former Las Vegas Sands Corp. executive David Friedman, announced plans for a $4 billion casino complex in 2007. East Asia and New Cotai are now suing each other for hindering the development of the project.

“Instead of the parties sitting at a table arguing, you have someone come in who tries to help the parties perhaps see it from a different perspective,” said Charles Allen, an accredited mediator based in Hong Kong.

Parties who don’t make a reasonable effort to resolve disputes in mediation when directed to do so can have legal costs deducted from any award, according to the court’s rules, he said.

Friedman declined to comment after yesterday’s hearing, citing the ongoing litigation.

David Goh, a lawyer for eSun, said the company is discussing the prospect of mediation with its legal advisers and declined to comment further.

For more, click here.

To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York, at eamon2@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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