Madoff, Bank of America, RBS, Janus in Court News

Carl Shapiro, one of the first clients of Bernard Madoff’s investment firm, and 19 members of his family agreed to forfeit $625 million in profits from the con man’s fraud, settling potential lawsuits against them.

Shapiro, a Boston-based philanthropist, held an account with Bernard L. Madoff Investment Securities LLC beginning in

1961. His son-in-law, Robert Jaffe, is the former vice president of Cohmad Securities Corp., a feeder fund that shared offices with Madoff’s firm.

“This agreement represents a financially rewarding outcome and it is a strong example of the progress we are making in assembling the largest fund possible for the benefit of BLMIS customers with valid claims,” Irving Picard, the court-appointed trustee overseeing the liquidation of Madoff’s firm, said yesterday in a statement.

With this settlement, Picard, who also sued yesterday the owners of the New York Mets baseball team for the return of profits earned from their Madoff investments, has recovered about $2.5 billion for victims of the fraud. Picard faces a Dec. 11 deadline to file claims for money to return to Madoff investors.

Under the Shapiro settlement, the family agreed to turn over $550 million to Picard for distribution to Madoff creditors. They will pay as much as $75 million more to the U.S. Justice Department, which appointed Picard as a special master to distribute those funds, New York prosecutors said yesterday in a statement.

“The Shapiro family is pleased to have concluded this settlement with the Department of Justice and the trustee,” Stephen Fishbein, the family’s lawyer, said in a statement. “The settlement will allow substantial funds to be distributed to those hurt most by Madoff’s fraud.”

The cases are U.S. v. $625,000,000 on Deposit at JPMorgan Chase Bank N.A., 10-CIV-9116, U.S. District Court, Southern District of New York (Manhattan); Picard v. Katz, 10-ap-5287, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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Bank of America to Pay $137 Million in Muni Cases

Bank of America Corp. agreed to pay $137 million in restitution for its involvement in a conspiracy to rig bids on 88 municipal bond contracts, the U.S. Securities and Exchange Commission and Justice Department said.

Bank of America, based in Charlotte, North Carolina, agreed to pay $36 million to settle an SEC case. The bank will pay an additional $101 million to resolve investigations by other federal and state agencies, the SEC said.

Bank of America has been aiding a nationwide Justice Department antitrust probe of the $2.8 trillion municipal market since at least 2007 in return for leniency. The investigation has ensnared more than a dozen banks, including JPMorgan Chase & Co., UBS AG and Wachovia Corp, which was acquired by Wells Fargo & Co. in 2008, according to documents filed in federal court.

The company’s “cooperation has led to an aggressive, ongoing investigation by the Department of Justice into anticompetitive activity in the municipal bond derivatives industry,” Christine Varney, who heads the Justice Department’s Antitrust Division, said in a statement.

Bank of America won’t be prosecuted as long as it continues to cooperate with the government.

The settlement also involves 20 states, the Office of the Comptroller of the Currency, the Internal Revenue Service and the Federal Reserve Board, Connecticut Attorney General Richard Blumenthal said in a release.

“Bank of America is pleased to put this matter behind it and has already voluntarily undertaken numerous remediation efforts,” the company said in a statement. The bank, which is still facing civil antitrust cases filed by Baltimore, Virginia’s Fairfax County and others, won’t be subject to triple damages in those cases if it cooperates with plaintiffs.

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FDA Loses Appeal, Can’t Regulate E-Cigarettes as Drug

The U.S. Food and Drug Administration lacks the authority to regulate electronic cigarettes under the drug/device provisions of the Food, Drug and Cosmetic Act, an appeals court ruled, upholding a lower-court decision.

The U.S. Court of Appeals in Washington said yesterday that the FDA has the authority only to regulate e-cigarettes as a tobacco product.

The case was brought by e-cigarette companies including Sottera Inc., which argued that their products, battery-powered devices that produce a nicotine vapor instead of smoke, are tobacco products and not drugs.

“We are studying the opinion and considering next steps,” Jeffrey Ventura, a spokesman for the FDA, said in an e-mailed statement.

Sottera, which does business as Njoy, and other e-cigarette manufacturers market their products as alternatives to tobacco for smokers. Sottera argued that the products aren’t marketed for therapeutic use but for “smoking pleasure.”

“We’re thrilled,” Craig Weiss, the president of Scottsdale, Arizona-based Njoy, said in a telephone interview. “Njoy has taken many steps to be the industry leader in terms of responsible marketing of electronic cigarettes. Now we can continue to sell e-cigarettes under the regulations of the Tobacco Act.”

The case is Sottera Inc. v. Food & Drug Administration, 10-5032, U.S. Court of Appeals, District of Columbia Circuit (Washington). The lower-court case was Smoking Everywhere Inc. v. U.S. Food and Drug Administration, 1:09-cv-00771, U.S. District Court, District of Columbia (Washington).

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RBS Wins $30 Million in Bond Dispute With Highland Capital

Royal Bank of Scotland Group Plc, the lender majority-owned by the U.K., was awarded about 19 million pounds ($30 million) in a dispute with affiliates of Highland Capital Management LP over a failed bond transaction.

Justice Michael Burton at the High Court in London decided the case yesterday, ruling solely on the amount. Burton in June ruled in favor of the bank’s interpretation of its agreement with Dallas-based Highland over a collateralized debt obligation which failed to close “because of the collapse of the financial markets in the latter part of 2008,” according to the ruling.

At a hearing in September, RBS said Highland should cover a shortfall of about 40 million euros ($53 million), which it says is the difference between the value of the portfolio of loans acquired for the CDO and the outstanding amount of the financing RBS provided to buy them.

A call to a Highland spokesman in New York before normal business hours wasn’t immediately returned.

The case is Royal Bank of Scotland v. Highland Financial Partners LP, 2009-605.

Abbott Agrees to Settle U.S. Overpayment Charges

Abbott Laboratories and two other drugmakers agreed to pay $421 million to settle claims they overcharged the U.S. for certain medications, according to the Justice Department.

The other companies agreeing to pay were Boehringer Ingelheim GmbH’s Roxane unit and B. Braun Melsungen, both closely held, the department said in a statement yesterday.

The settlements resolve claims that the companies participated in a scheme to report inflated prices for pharmaceutical products, knowing that U.S. health-care programs relied on the prices to set payment rates, according to the statement.

Roxane is paying $280 million, Abbott is paying $126.5 million and B. Braun agreed to pay $14.74 million, according to the Justice Department.

Commerzbank Didn’t Need Investor Vote for Dresdner, Court Says

Commerzbank AG didn’t have to ask shareholders for approval before it acquired Dresdner Bank for 5.1 billion euros ($6.8 billion), a German appeals court said.

The Frankfurt Higher Regional Court yesterday dismissed a minority investor suit that sought to reverse a 2009 shareholder meeting decision approving actions of management and supervisory board members. The judges overturned a lower tribunal that had granted the suit, the court said in an e-mailed statement.

The court said the Commerzbank charter granted executives the power to make acquisitions that support the lender’s business goals. Because of that provision, no additional shareholder approval was necessary, the judges said.

The plaintiff argued that the takeover was a “disaster” which brought Commerzbank to the brink of insolvency.

Yesterday’s case is OLG Frankfurt, 5 U 29/10.

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Allen Stanford Too Drugged for Trial, Lawyer Says

Jailed financier R. Allen Stanford is too heavily medicated to prepare for or testify at his January trial on charges he led a $7 billion investment fraud, his lawyer claimed in a bid for bail.

Stanford, 60, has been held as a flight risk in a Houston federal lockup since June 2009, when he was charged in an indictment with selling bogus certificates of deposit at his Antigua-based Stanford International Bank Ltd.

“Mr. Stanford’s mental, emotional and physical health are drastically deteriorating,” Ali Fazel, the financier’s co-lead lawyer, said Dec. 6 in papers in federal court in Houston seeking Stanford’s release. “These medications have left Mr. Stanford in an unfocused and numbed state of mind” and have “created a condition where the accused can no longer assist counsel or invoke basic constitutional rights.”

Before his arrest, Stanford wasn’t taking any prescription medications, the lawyer said. “Currently, due to his incarceration,” Stanford is prescribed “a variety of medications,” Fazel said.

Stanford has denied any wrongdoing in connection with allegations he ran a Ponzi scheme that took funds from later investors to pay above-market returns to earlier buyers of certificates of deposit issued by his Caribbean bank.

In addition to 21 criminal counts, Stanford faces parallel civil fraud accusations by the U.S. Securities and Exchange Commission.

The criminal case is U.S. v. Stanford, 09-cr-342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09-cv-298, U.S. District Court, Northern District of Texas (Dallas).

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New Suits

Lehman Retirement Plan Sues Fuld Over Repo 105

A Lehman Brothers Holdings Inc. 401(k) retirement plan and its participants sued ex-Chief Executive Officer Richard Fuld and other former executives of the defunct firm for failing to disclose Repo 105, a financing method allegedly used to conceal billions of dollars of debt.

The amended lawsuit, based partly on a 2,200-page report by Lehman bankruptcy examiner Anton Valukas, was filed under seal in September and ordered unsealed by a judge on Nov. 30, according to a filing in U.S. District Court in Manhattan. The original suit was filed in 2008.

The 401(k) plan had $228.7 million invested in the Lehman Brothers Stock Fund, which had 10.6 percent of its assets in Lehman shares trading at $65.44 each on Dec. 31, 2007, according to the lawsuit. The company’s benefits committee liquidated the fund nine months after Lehman went bankrupt in September 2008 and its stock was worthless, the suit said.

Fuld and other executives “knew or should have known” about Repo 105 and other risks taken by Lehman, “and therefore knew or should have known that the plan’s assets should not have been invested in company stock,” according to the complaint.

The plaintiffs asked the judge to force the executives to “make good” all losses to the 401(k), pay damages equal to the losses, and restore profits that participants “would have made if defendants had fulfilled their fiduciary obligations.”

Patricia Hynes, a lawyer for Fuld, didn’t return a call seeking comment. She has said that Fuld wasn’t aware of Repo


The lawsuit is In re Lehman Brothers ERISA Litigation, 08-cv-05598, U.S. District Court, Southern District of New York (Manhattan).

MBIA Sues Morgan Stanley Over Mortgage-Backed Debt

MBIA Insurance Corp. sued Morgan Stanley over allegations the securities firm “fraudulently induced” the insurer to issue policies covering $223.2 million in mortgage-backed securities.

The bond-insuring unit of MBIA Inc. claims Morgan Stanley and one of its units failed to disclose that most of the 5,000 underlying loans didn’t meet the underwriting guidelines of the firm or the originators, according to a complaint filed Dec. 7 in New York state court in White Plains.

“A vast number of the mortgage loans were made to borrowers who could not reasonably have been expected to repay their mortgage debt,” MBIA’s attorneys alleged in the complaint.

MBIA’s subsidiary is the biggest insurer of bonds and mortgage-backed debt instruments. In a 2008 complaint, it claimed the Countrywide Financial unit of Charlotte, North Carolina-based Bank of America Corp. misrepresented its underwriting standards, causing the insurer cover more than $459 million in losses.

“We believe the suit is without merit and we intend to defend ourselves vigorously,” Morgan Stanley spokesman Mark Lake said in a telephone interview yesterday.

The case is MBIA Insurance Corp. v. Morgan Stanley, 29951-2010, Supreme Court of the State of New York, County of Westchester (White Plains).

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


Mutual Fund Shareholder Suits May Divide U.S. High Court

The U.S. Supreme Court, hearing arguments in a case involving Janus Capital Group Inc., debated placing new restrictions on securities-fraud suits by shareholders of mutual fund companies.

The justices yesterday reviewed a federal appeals court decision letting shareholders sue Janus and a subsidiary for helping produce allegedly misleading prospectuses for Janus mutual funds. Janus contends that the funds are separate legal entities and that neither the parent company nor the subsidiary were responsible for the prospectuses.

The case is a follow-up to a 2008 Supreme Court decision that restricted securities suits against a company’s banks and business partners. That decision divided the court along ideological lines, and yesterday’s hour-long argument in Washington suggested the likelihood of a similar split, possibly leaving Justice Anthony Kennedy as the deciding vote.

The latest fight stems from allegations that the Janus funds allowed preferred clients to engage in market timing, a practice of making frequent, short-term trades at the expense of other investors. Denver-based Janus agreed in 2004 to pay $201 million and cut fees by $125 million to settle claims by state and federal regulators.

The prospectuses said the funds had taken steps to deter market timing. In the lawsuit, Janus shareholders say those assurances were revealed to be false in 2003 when New York officials filed a complaint against the company, causing its share price to fall. The Obama administration is backing the shareholders in the case.

The case is Janus Capital Group v. First Derivative Traders, 09-525, U.S. Supreme Court (Washington).

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Renaissance Capital Sues Camec Over $14 Million Deal Fee

Renaissance Capital Ltd., the Russian investment bank part-owned by billionaire Mikhail Prokhorov, is suing a unit of Eurasian Natural Resources Corp. over an unpaid 9 million-pound ($14 million) bill for takeover advisory work.

RenCap is owed for its work, beginning in July last year, as financial adviser to Central African Mining and Exploration Co. in its sale, the Moscow-based bank’s lawyer, Andrew Popplewell, said yesterday at the first day of trial in London.

Camec, which was acquired by Eurasian Natural Resources in September last year for about 584 million pounds, disputes the terms of the agreement with RenCap and how much is owed to the bank, according to court papers.

“Their original case was that Renaissance Capital was entitled to nothing,” Popplewell said. “It is now accepted that Renaissance Capital are entitled to be paid a substantial sum. The question is now, how much?”

ENRC spokesman Hugh Morrison declined to comment.

Andrew Groves, the former chief executive officer of Camec who’s now CEO of Sable Mining Africa Ltd., and Toby Mannock, a RenCap metals and mining banker, may testify in the case, according to court papers.

The case is Renaissance Capital Ltd. v. Central African Mining & Exploration Co. Plc, 10-264, High Court of Justice, Queen’s Bench Division (London).

For the latest trial and appeals news, click here.

Litigation Departments

Goldman Sachs Hires Markowitz From New York Attorney General

Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, hired David A. Markowitz from the New York Attorney General’s office.

Markowitz will be an associate general counsel and a senior member of the litigation and regulatory proceedings group, said David Wells, a spokesman for New York-based Goldman Sachs. Before joining the attorney general’s office in 2008, where he was chief of the investor protection bureau, Markowitz worked on the New York office staff of the U.S. Securities and Exchange Commission for eight years.

Goldman Sachs paid $550 million in July to settle fraud charges filed by the SEC, the largest such settlement ever by a Wall Street firm. The Wall Street Journal said last month that Goldman Sachs bankers are under investigation for allegedly leaking information about health-care transactions to help certain investors. Wells declined to comment.

At the SEC, Markowitz’s last role was as assistant regional director. He led insider-trading cases among others, according to a biography published on the Practising Law Institute website.

For the latest litigation department news, click here.

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