Hedge Funds, JPMorgan, Goldman, Lehman in Court News

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FBI raids seeking documents from three investment firms are related to hedge fund insider trading investigations directed by the office of Manhattan U.S. Attorney Preet Bharara, according to a person familiar with the probes.

The offices of Level Global Investors LP and Diamondback Capital Management LLC, firms founded by alumni of SAC Capital Advisors LLC, were searched by Federal Bureau of Investigation agents, the government said yesterday. Agents also executed a search warrant at the offices of Loch Capital Management, according to another person familiar with the matter. Both declined to be identified because the probes are ongoing.

“The government has decided it needs to use force to obtain all the information,” said Jacob Frenkel, a former federal prosecutor and lawyer with the Securities and Exchange Commission. “It has opted not to issue grand jury subpoenas but instead use the search warrant process.”

Steve Bruce, a spokesman for Diamondback, and Andy Merrill, a spokesman for Level Global, confirmed the FBI had searched their offices and said they are cooperating. Timothy McSweeney of Boston-based Loch Capital didn’t respond to a phone message seeking comment.

Ellen Davis, a spokeswoman for Bharara, declined to comment.

Diamondback, based in Stamford, Connecticut, owned U.S.- listed stocks in 706 companies at the end of the third quarter, with a market value of $4.13 billion, most of it in energy companies and financial services, according to data compiled by Bloomberg. Level Global, with offices in Greenwich and New York, owned stocks in 77 companies valued at $3.08 billion, with 34 percent of that in consumer discretionary stocks and 31 percent in information technology companies.

Its biggest U.S. stock holding by market value is a 5.8 percent stake in Virgin Media Inc., the U.K.’s second-largest pay-television company, according to regulatory filings for the third quarter. Diamondback has about 215 employees as of Aug. 1, according to an investor letter.

Frenkel, the former prosecutor, said that it’s likely the government has cooperating witnesses providing information to help it obtain the warrants from federal judges.

“The availability of those tools is very fact and cooperator intensive,” he said. “In order to get a warrant, the government has to have information that would enable it to get court authorization.”

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JPMorgan, Ex-Asia Private Equity Head Settle Dispute

JPMorgan Chase & Co. settled a dispute with Varun Bery, who had sued the bank in Hong Kong for breaching an agreement that allowed him to leave with the private equity team and platform he managed.

Bery will provide private equity consulting services to JPMorgan, they said in a joint statement announcing the “amicable resolution.”

Bery, who co-founded private equity firm TVG Capital Partners Ltd., sued JPMorgan Private Capital Asia Corp. in April, claiming damages “in the region of $30.8 million.” Bery joined JPMorgan in 2008 to head the bank’s Asian private equity business and was told in 2009 that the bank wouldn’t commit more capital to it, or allow it to be spun out, according to the lawsuit. He left the bank in November 2009.

Bery continues to operate as managing director of TVG and JPMorgan wishes him every success in the future, according to the statement.

JPMorgan spokesman Ray Bashford and TVG spokeswoman Emily Chow declined to comment on whether the spinout will be allowed.

Enron Broadband’s Shelby Pleads Guilty to Insider Trading

Former Enron Broadband Services executive Rex Shelby pleaded guilty to one insider trading count as prosecutors dropped more serious charges stemming from the collapse of the world’s largest energy trader nine years ago.

Shelby, 58, agreed to serve as long as six months in a federal halfway house, plus as long as six months’ house arrest, and forfeit about $2.5 million to end the final prosecution linked to what the government claimed was a conspiracy to overstate the capabilities and performance of Enron Corp.’s Internet unit.

“This ends Enron, because Rex was the very last Enron defendant standing from prosecutions that resulted from the company’s bankruptcy,” Ed Tomko, Shelby’s lawyer, said in a telephone interview before yesterday’s plea hearing.

U.S. District Judge Vanessa Gilmore accepted Shelby’s plea in her Houston courtroom yesterday. A retrial for Shelby, the Internet unit’s former senior vice president of engineering operations, had been set for January. He will remain free on $1 million bond until sentencing, scheduled for Feb. 28.

More than 5,000 jobs and $60 billion in shareholder value were wiped out when Enron plunged into bankruptcy in December 2001 after widespread accounting fraud was revealed. Enron’s former chief executive officers Jeffrey Skilling and Kenneth Lay were convicted of conspiring to mislead investors about the company’s performance, including the broadband division’s prospects.

“Rex was conflicted about pleading guilty, but we got a deal that was fair considering the passage of time and the risk involved,” Tomko said in the interview. “It ensures that Rex won’t have to go through the uncertainty of another trial like the last one, which so confused the jury.”

The case is U.S. v. Shelby, H-03-093, U.S. District Court, Southern District of Texas (Houston).

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Morris Pleads Guilty in New York State Pension Probe

Henry “Hank” Morris pleaded guilty to a single count of securities fraud stemming from New York Attorney General Andrew Cuomo’s probe of corruption in the state pension fund.

“You’re pleading guilty?” New York state Supreme Court Justice Lewis Stone asked yesterday at a hearing in Manhattan. “Yes, your honor,” Morris said. The judge said the crime carries a sentence of 1 1/3 to four years in prison or no jail time at all.

Morris is the eighth person to plead guilty in connection with the New York corruption probe. Former state Comptroller Alan Hevesi in October admitted to receiving a reward for official misconduct. Last week, Cuomo sued Steven Rattner, former head of Quadrangle Group LLC, accusing him of arranging kickbacks to Morris.

Morris, chief political adviser to Hevesi, was accused of corrupting the investment process at the pension fund, recently valued at $132.8 billion, to favor deals that would benefit himself, his associates and contributors to Hevesi’s campaign.

Ellen Biben, a prosecutor from Cuomo’s office, told Stone that Morris’s plea yesterday established “once and for all that his conduct wasn’t just unethical, but was criminal.” Morris had faced more than 70 charges.

Morris reaped $19 million in fees for himself through 23 state pension-fund investments for which he acted as an undisclosed placement agent, or middleman, according to Cuomo.

The case is People v. Morris, 0025/2009, New York State Supreme Court, New York County (Manhattan).

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Novartis Told by Jury to Pay $12.8 Million Over Bone Drugs

Novartis AG must pay $12.8 million to a North Carolina woman’s family over claims that the company’s bone-strengthening drugs Aredia and Zometa caused irreplaceable bone damage, a jury ruled.

The award will be reduced to about $1.1 million under state law. Jurors in federal court in Winston-Salem, North Carolina, deliberated about 12 hours over three days before finding today that Basel, Switzerland-based Novartis failed to adequately warn Rita Fussman about the drugs’ risks. Fussman’s family alleged the drugs ate away her jaw while she struggled through treatments for breast cancer before dying last year.

“We’re pleased that the jury saw fit to award punitive damages because the evidence produced more than justified such an award,” Robert Germany, Fussman’s lawyer, said in an interview after jurors returned the verdict.

The Fussman family’s lawsuit was the third product- liability case to go to trial over the bone-strengthening treatments. Last month, a New Jersey jury rejected a woman’s claims that Aredia and Zometa caused her jaw deterioration. In October 2009, a Montana jury ordered Novartis to pay $3.2 million in damages to a cancer patient who made the same claims over the medicines.

Novartis is facing about 700 suits over the bone-strengthening medicines, according to court filings. Some of the cases have been consolidated before a federal judge in Tennessee. Others, like Fussman’s, have been sent back to their home courts for trial. Still other cases have been heard in state courts around the country.

Julie Masow, a U.S.-based spokeswoman for Novartis, said the company was disappointed with the jury’s verdict. “We are reviewing our appellate options,” she said in an e-mailed statement.

The case is Estate of Rita Fussman v. Novartis Pharmaceuticals Corp., 06-CV-000149, U.S. District Court, Middle District of North Carolina (Winston-Salem).

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Siemens Agrees on Payment to Settle Nigerian Case

Siemens AG, Europe’s largest engineering company, agreed to pay 7 billion naira ($46.5 million) to settle charges of illegal payments to officials in Nigeria, Justice Minister Mohammed Adoke said.

“The federal government has agreed to discontinue the criminal prosecution it instituted against Siemens,” Adoke told reporters in Abuja, the capital, yesterday. The company agreed to be “of good conduct” in future business dealings in the West African nation, he said.

In December 2008, Siemens agreed to pay $800 million to settle U.S. charges that it violated anti-corruption laws by funding bribes to governments around the world, including in Nigeria. Siemens’s payment to Nigeria is about three times higher than the alleged bribes, Adoke said, without providing further details.

Siemens’s agreement with the Nigerian government is “the last step toward improving relationships with Nigeria,” Joern Roggenbuck, a spokesman for the company, said in a phone interview from Munich yesterday.

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New Suits

Valero Shareholder Sues to Stop Stock Incentive Plan

Valero Energy Corp.’s stock incentive plan is wasteful and exposes the company to excessive taxes, a shareholder said in a lawsuit that seeks to throw out the oil refiner’s compensation program.

Valero shareholder Milton Pfeiffer said that the stock plan is worth as much $20 million per participant, according to a complaint filed Nov. 19 in U.S. District Court in Wilmington, Delaware. Pfeiffer sued the company’s board of directors, Valero’s chief executive officer and chairman William R. Klesse and four other executives.

“These excessive payments are not justified in light of the fact that the company suffered a loss of net income of almost $2 billion for the fiscal year ending 2009,” Pfeiffer said in the complaint.

The San Antonio-based refiner will lose millions of dollars of tax benefits because the compensation program is defective, according to the lawsuit.

Company spokesman Bill Day said he couldn’t comment because he hasn’t yet seen the lawsuit.

The case is Milton Pfeiffer vs. Kimberly S. Bowers, 01-cv-01000, U.S. District Court, District of Delaware (Wilmington).

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Ex-Goldman Programmer Asks Judge to Admit Statements

Sergey Aleynikov, the former Goldman Sachs Group Inc. programmer charged with stealing secret computer-trading software, wants to tell jurors about exaggerated claims he says the government made, then took back, in his case.

The government “once believed that Sergey Aleynikov had stolen Goldman Sachs’s entire high frequency trading platform, worth millions of dollars, and that unless he was detained he would sell it to the highest bidder and throw the world’s financial markets into turmoil,” he said in court papers filed yesterday in federal court in Manhattan.

Prosecutors now claim Aleynikov stole only parts of the trading system, he claimed. The change in the government’s position will help him prove he didn’t have the necessary intent to violate the two laws he’s charged with breaking, he claimed.

Aleynikov is charged with violating the Economic Espionage Act and the Interstate Transportation of Stolen Property Act. U.S. District Judge Denise Cote, who is presiding over the trial set to begin Nov. 29, dismissed a third criminal count of unauthorized computer access against Aleynikov in September.

Jessie Erwin, a spokeswoman for the U.S. Attorney’s office in New York, declined to comment on Aleynikov’s request.

Aleynikov was arrested in July 2009 and charged with stealing computer trading code from Goldman Sachs on his last day of work with the bank the month before. He’s seeking to admit into evidence a series of statements made at a July 4, 2009, detention hearing by Assistant U.S. Attorney Joseph Facciponti.

The case is U.S. v. Aleynikov, 1:10-cr-00096, U.S. District Court, Southern District of New York (Manhattan).

Chiesi Claims FBI Delayed Advising Her of Rights

Danielle Chiesi, accused with Raj Rajaratnam in the largest insider-trading case involving hedge funds, testified that U.S. agents questioned her before advising her of her right to remain silent and to seek a lawyer’s advice.

Chiesi, testifying for the first time in a hearing yesterday, told U.S. District Judge Richard Holwell in New York that a group of five federal agents who woke her up and arrested her in her apartment Oct. 16, 2009, asked her questions and tried to get her to cooperate with their investigation before giving her a so-called Miranda warning.

“Absolutely not,” Chiesi said, in reply to a question from her attorney asking whether she had any doubt about her claim that she wasn’t told her rights until after she was arrested.

Chiesi, a former New Castle Funds LLC consultant, and Rajaratnam, Galleon Group LLC’s co-founder, are charged with profiting from tips from company executives, hedge-fund employees and other insiders. Yesterday’s hearing comes in response to court papers filed by Chiesi asking Holwell to bar the government from using any statements she made that morning to Federal Bureau of Investigation agents.

The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

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Ex-Madoff Employee Bongiorno Must Remain in Custody

Annette Bongiorno, Bernard Madoff’s longtime secretary indicted this month in his Ponzi scheme, lost her bid for bail and was ordered by a federal magistrate in Florida to be taken to New York to face charges.

Bongiorno, 62, who started working for Madoff in 1968, shortly after she graduated from high school, is charged in a federal indictment with conspiracy, securities fraud and tax evasion. U.S. Magistrate Judge Ann E. Vitunac in West Palm Beach yesterday denied Bongiorno’s request to be released with electronic monitoring or under house arrest.

Bongiorno worked as Madoff’s personal secretary in the 1980s. She also had clerical duties at Bernard Madoff Investment Securities LLC. Clients who discovered the wrong Social Security numbers on their statements were told to call Bongiorno, according to a copy of one such notice.

She took $14.4 million out of the investment fund by creating sham trades in her own account, where she deposited a total of $920,000 from 1975 to 2008, the government charged.

She also received $325,000 in off-the-books payments from the firm, prosecutors charged.

She faces a prison sentence of as long as 75 years if convicted of all charges, the U.S. said.

Maurice Sercarz, Bongiorno’s lawyer, said in court that he was continuing to work with federal prosecutors and agents in New York to come up with at least five family members or friends of Bongiorno’s who can post $2 million in assets to secure a $5 million bond.

The case is USA v. Bongiorno, 10-mj-08361, U.S. District Court, Southern District of Florida (West Palm Beach). The New York case is 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan). The Madoff case is U.S. v. Madoff, 09-cr-00213, U.S. District Court, Southern District of New York (Manhattan).

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Lehman Asks Judge to Reverse Barclays’ ‘Windfall’

Lehman Brothers Holdings Inc. asked a judge to reverse billions of dollars in “unauthorized” transfers of assets to Barclays Plc when it bought the defunct investment bank’s brokerage in the 2008 financial crisis, according to a court filing.

Lehman has accused the U.K. bank of making an $11 billion “windfall” on the purchase.

“The sale transaction that was disclosed to the court was based upon false premises from the very outset,” Lehman’s lawyer, Robert Gaffey, told U.S. Bankruptcy Judge James in a court filing yesterday that is his last chance to sway the judge. Peck may rule on Lehman’s yearlong lawsuit against Barclays in January or February, said lawyers in the case.

The fight in U.S. Bankruptcy Court in Manhattan pits the U.K.’s third-biggest bank against Lehman, which wants money to pay off creditors. Peck said after more than 30 days of witnesses that he was in “uncharted territory.” He asked both sides to advise him --in filings due yesterday -- how to apply the law.

Lehman, which filed the biggest bankruptcy in U.S. history on Sept. 15, 2008, got “a strong push” from the U.S. Federal Reserve Bank of New York and the Securities and Exchange Commission to declare itself bankrupt, according to yesterday’s filing. The regulators Lehman’s board the day before it “knows what our opinion is on this,” according to the filing.

Peck must decide whether to alter a deal sealed in a week of financial turmoil, or let all or part of it stand. He said in court last month he had been leaning toward Barclays’ view, expressed by lawyer David Boies, that he would have approved the sale even if he’d known everything he knows now.

Contracts are usually final under federal law. Judges can reopen a contract to correct mistakes or, under so-called Rule 60(b), if new evidence or fraud is discovered. Still, University of California, Los Angeles professor Lynn LoPucki said he knows of no emergency bankruptcy sale in his 898-case database that has been reopened.

In yesterday’s filing, Gaffey said essential aspects of the sale to Barclays “were either misrepresented to the court, or, worse, never disclosed at all.” They included Barclays’ profit on the deal, which the judge was told would be a “balanced” transaction, and obligations it said it would assume and didn’t, he said.

Barclays’ lawyer David Boies has told Peck in court that federal law doesn’t allow him to rewrite the sale contract.

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

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Oracle Asks Jurors to Find SAP Owes $1.7 Billion

An Oracle Corp. attorney told a federal jury yesterday that SAP AG should pay at least $1.7 billion in damages for copyright infringement even though SAP’s plans to use the copyrights didn’t fully work out.

David Boies, Oracle’s lawyer at a three-week trial in Oakland, California, said the damage award that the jury will decide should be based on SAP’s business plans in 2005 to capture thousand customers from Oracle and not the smaller number of customers that actually left Oracle for SAP.

“The board and top executives expected the infringement would be worth billions of dollars,” Boies said in closing arguments yesterday. ‘When they take it, they own it and they have to pay for it regardless of whether they did well or didn’t do well.’’

Oracle, the second-largest maker of business application software behind Walldorf, Germany-based SAP, sued its competitor in 2007, claiming SAP’s TomorrowNow software maintenance unit made hundreds of thousands of downloads and several thousand copies of Redwood City, California-based Oracle’s software to avoid paying licensing fees and to steal customers.

SAP has agreed that the infringement occurred. The downloads enabled TomorrowNow to fix bugs and provide updates to software customers who otherwise would have had to pay Oracle for maintenance or do the work themselves.

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

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Ex-PM Group Manager Says No Sensitive Data Used in Share Sales

A former PM Group Plc manager on trial for insider trading told a London jury that he didn’t use price-sensitive information.

Neil Rollins, 46, testified that he didn’t believe it would be illegal to trade shares of the company in 2006 prior to PM Group announcing it was experiencing a decline in sales. He said that while he was aware of the figures and knew the company planned to cut jobs, the information didn’t influence his decision.

“I was not using the price-sensitive information to make my decision,” he said.

Rollins sold 74,000 shares in the company in August and September 2006, prosecutors said in the indictment. He transferred 120,000 pounds ($191,000) to his father, prosecutors said. He is also charged with laundering the proceeds of the share sale.

Bradford, England-based PM Group, which was bought by Vishay Intertechnology Inc. in 2007, makes scales used in the waste-management industry. In December 2006, PM Group discovered that Rollins had sold the shares and fired him, prosecutors said at the trial earlier this month.

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Litigation Departments

Lehman Pays Advisers $1.1 Billion in 25 1/2 Months

Lehman Brothers Holdings Inc. paid its lawyers and managers $42.1 million in October, bringing total advisers’ fees to $1.1 billion after 25 1/2 months in bankruptcy, according to a court filing.

Restructuring firm Alvarez & Marsal LLC, which runs the defunct investment bank through its co-founder, Bryan Marsal, led recipients with $369.8 million in fees through October for “interim management,” according to yesterday’s filing in U.S. Bankruptcy Court. Weil Gotshal & Manges LLP of New York has collected $245.8 million for acting as the lead bankruptcy law firm.

Jones Day, which is handling Lehman’s $11 billion lawsuit against Barclays Plc and other litigation, made $40.8 million through October.

Advisers’ fees haven’t faced major challenges from the bankruptcy judge or trustee who monitor such payments.

Lehman became the most expensive bankruptcy to administer in U.S. history in April, when it topped the $757 million cost of energy trader Enron Corp.’s three-year liquidation, according to the database of Lynn LoPucki, a bankruptcy-law professor at the University of California, Los Angeles.

Kimberly Macleod, a Lehman spokeswoman, didn’t reply to an e-mail seeking comment,

Lehman, once the world’s fourth-biggest investment bank, filed the biggest bankruptcy in U.S. history in September 2008 with assets of $639 billion. Creditors include Goldman Sachs Group Inc., UBS AG, the New York Giants professional football team and Abu Dhabi Investment Authority as well as individuals who hold Lehman bonds.

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

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