Health Law, AIG, Morgan Stanley, BofA in Court News

The Obama administration’s requirement that most citizens maintain minimum health coverage as part of a broad overhaul of the industry is unconstitutional a federal judge ruled, striking down the linchpin of the plan.

U.S. District Judge Henry Hudson in Richmond, Virginia, yesterday ruled that the requirement in President Barack Obama’s health-care legislation goes beyond Congress’s powers to regulate interstate commerce. While severing the coverage mandate, which was to become effective in 2014, Hudson didn’t address other provisions such as expanding Medicaid.

“At its core, this dispute is not simply about regulating the business of insurance -- or crafting a scheme of universal health insurance coverage -- it’s about an individual’s right to choose to participate,” wrote Hudson, who was appointed by President George W. Bush in 2002.

The ruling is the government’s first loss in a series of challenges to the law mounted in federal courts in Virginia, Michigan and Florida, where 20 states have joined an effort to have the statute thrown out. Constitutional scholars said unless Congress changes the law, its fate on appeal will probably hinge on the views of the U.S. Supreme Court.

“We are disappointed in today’s ruling but continue to believe -- as other federal courts in Virginia and Michigan have found -- that the Affordable Care Act is constitutional,” Justice Department spokeswoman Tracy Schmaler said in a statement. The government is “confident that we will ultimately prevail,” she said.

White House spokesman Robert Gibbs said at a press briefing yesterday said that the administration still believes the legislation is constitutional.

The case is Commonwealth of Virginia v. Sebelius, 10-cv-00188, U.S. District Court, Eastern District of Virginia (Richmond).

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U.S. Supreme Court Divides in Costco Gray Market Case

The U.S. Supreme Court divided evenly in a clash over the multibillion-dollar “gray market,” leaving intact a ruling that lets manufacturers use copyright laws to keep some products out of U.S. discount stores.

The 4-4 high court split, which doesn’t set a nationwide precedent, upholds a lower court ruling favoring Swatch Group AG’s Omega unit in a dispute with Costco Wholesale Corp., the largest U.S. warehouse club, over discounted Seamaster watches.

Costco had support in the case from EBay Inc., Google Inc., Inc., GameStop Corp., Target Corp., Intel Corp., a consumer-advocacy group and six library associations. Omega had backing from the film and music industries, office equipment makers including Seiko Epson Corp.

Justice Elena Kagan, who played a role in the litigation as the Obama administration’s solicitor general, didn’t take part in the Supreme Court’s consideration of the case, opening the way for the 4-4 divide. The court, as is its practice in such cases, didn’t reveal the vote.

The gray market, also known as parallel sales, costs manufacturers as much as $63 billion in sales a year, according to a Deloitte LLP analysis conducted for Bloomberg last year. A manufacturer with $10 billion in sales can lose as much as $450 million, Deloitte found.

The Supreme Court case turned on the scope of the first- sale doctrine, which says a copyright holder can profit only from the original sale of a product. In 1998, the Supreme Court unanimously ruled against copyright holders by saying the doctrine applies to U.S.-made products sold overseas. The court said copyright holders can’t block those goods from being brought back into the U.S. through unauthorized channels.

The case now returns to a federal trial court, where Costco will have a chance to mount additional arguments in its defense.

The case, which the court will decide by July, is Costco v. Omega, 08-1423, U.S. Supreme Court (Washington).

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AIG’s Insurers Will Pay $90 Million to Settle Investor Suit

American International Group Inc.’s settlement of a shareholder lawsuit will go forward after the company’s insurers agreed to fund the $90 million agreement.

In a letter yesterday to U.S. District Judge Denise Cote in New York, Felipe Arroyo, a lawyer representing shareholders in the case, said the settlement announced in August was dependent on insurance funding.

“The August 25 agreement was conditioned on funding by the directors and officers insurance carriers,” according to the letter. As of Dec. 8, those insurers “have funded the agreed-upon settlement amount of $90 million into an escrow account,” Arroyo wrote.

The so-called derivative suit was filed by investors against executives and directors on behalf of AIG. In July, the company paid $725 million to investors who lost money when the insurer’s stock plunged amid a 2004 investigation into bid rigging and faulty accounting.

Similar shareholder suits in different courts claimed former top executive Maurice “Hank” Greenberg and other executives used accounting tricks and fraudulent schemes to hide problems at AIG. The lead derivative case is in Delaware Chancery Court, where a final settlement hearing is scheduled on Jan. 18, according to Arroyo’s letter.

The money is being paid to AIG and not investors, and another $60 million is going to Greenberg and former AIG Vice Chairman Howard Smith to reimburse their legal fees, according to an AIG regulatory filing.

AIG is “pleased the matter was satisfactorily resolved and we continue to focus on our task of repaying the American taxpayers,” Mark Herr, a spokesman for AIG, said in an e-mail.

The derivative case is American International Group Inc. Consolidated Derivative Litigation, CA769-VCS, Delaware Chancery Court (Wilmington).

Shell Rejected by U.S. High Court on $54 Million Award

The U.S. Supreme Court rejected a Royal Dutch Shell Plc unit’s appeal of a $54 million punitive damage award in a decades-old Oklahoma dispute over oil and gas profits.

Declining to consider putting tighter restrictions on damages, the justices yesterday left intact an Oklahoma state court decision that said the award was within constitutional bounds.

The case stemmed from Shell’s failure from 1973 to 1985 to pay $750,000 to the owners of rights connected to an Oklahoma lease. The jury that considered the case added as much as 12 percent a year in interest, as allowed under an Oklahoma oil-and-gas statute, bringing the sum to $13 million. The jury then added the punitive damages for a total award of $67 million.

Shell’s appeal pointed to Supreme Court rulings that tie the constitutional limit for punitive awards to the amount awarded in so-called compensatory damages, those designed to pay people for the losses they suffered.

In upholding the award, an Oklahoma state appeals court classified the interest portion as compensatory damages. That meant the punitive award was about four times the compensatory damages -- within constitutional boundaries, the court said.

Houston-based Shell Oil said in its appeal that the interest award was “functionally punitive” and shouldn’t have been used to justify adding even more damages.

The group suing Shell, led by Nancy Fuller Hebble, countered in court papers that Oklahoma set the interest rate at 12 percent to give producers an incentive to make payments on time and to provide compensation for the “time value of money.”

The case is Shell Oil v. Hebble, 10-349, U.S. Supreme Court (Washington).

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Morgan Stanley Wins Dismissal of Lawsuit Over Pay

Morgan Stanley Chairman John Mack, Chief Executive Officer James Gorman and other executives won a dismissal of a shareholder lawsuit filed over $45 billion paid to the firm’s employees over three years.

New York State Supreme Court Justice Shirley Werner Kornreich threw out the lawsuit, citing a requirement that shareholders first make a demand on a board before suing on behalf of a company or show that such a move would be futile, according to a Dec. 10 decision.

The “complaint fails to show” that a demand on Morgan Stanley’s board “would be futile,” Kornreich wrote. “There is no reasonable doubt that the respective board approvals were not a valid exercise of business judgment.”

The complaint by shareholders including the Security Police and Fire Professionals of America Retirement Fund said employee compensation during 2006, 2007 and 2009 was “unconscionable” given the firm’s performance, including its reliance on a government bailout.

The shareholders argued in court papers that making a demand on Morgan Stanley’s board would have been futile because its members were “beholden” to the firm. Kornreich rejected that argument, saying the plaintiffs didn’t show that the board couldn’t make disinterested decisions.

“We are pleased with the court’s ruling, which dismisses all claims with prejudice,” Mark Lake, a Morgan Stanley spokesman, said in an e-mailed statement.

Jay Eisenhofer, a lawyer for the plaintiffs, didn’t immediately return a phone call seeking comment.

The case is Security Police and Fire Professionals of America Retirement Fund v. John J. Mack, 600359-2010, New York State Supreme Court (Manhattan).

Moody’s Countrywide Review Backs Claim It Sent Home-Loan Notes

A Moody’s Investors Service review showed no evidence that Bank of America Corp.’s Countrywide Financial Corp. typically failed to deliver mortgage notes to trustees for home-loan securities, the ratings company said.

Questions arose about Countrywide’s procedures after a Bank of America employee testified in a New Jersey bankruptcy case that the lender retained the paperwork. Bank of America, which bought Countrywide in 2008, has said the comments weren’t accurate. Moody’s said its review of the documents supported the bank’s assertion, Bloomberg News’s Jody Shenn reports.

“We don’t believe as a standard practice they failed to deliver the notes to the trustee,” Yehudah Forster, a vice president at New York-based Moody’s, said yesterday in a telephone interview. “That we’re confident in.”

The testimony drew the attention of attorneys for homeowners and mortgage-bond investors because promissory notes are typically needed for foreclosures and companies that sell home loans into securities usually make contractual promises that the paperwork will be delivered to trustees.

Jerry Dubrowski, a spokesman for Bank of America, declined immediate comment.

The case is In the Matter of John T. Kemp, Kemp v. Countrywide Home Loans Inc., 08-02448, U.S. Bankruptcy Court, District of New Jersey (Camden).

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Feinberg to Offer Oil-Spill Victims Quicker Payments

Kenneth Feinberg, administrator of the $20 billion BP Plc oil-spill claims fund faulted for slow payments to victims, is offering a quicker process to final compensation.

Individuals would get $5,000 and businesses $25,000 within two weeks if they accept a fast-track payment process, Feinberg told reporters yesterday on a conference call. Only recipients who received emergency payments are eligible, he said. The checks would be the final, lump-sum payments and in return the claimants must waive their rights to sue BP and the companies involved in the Gulf of Mexico spill.

“This is the quick-payment option,” Feinberg said. The adjustment was made to meet the needs of a diverse group of applicants, he said. “One size does not fit all.”

Government officials and residents of the Gulf Coast have criticized Feinberg and the Gulf Coast Claims Facility he runs for not ruling on claims quickly enough. Businesses face “imminent failure,” Representative Jo Bonner, an Alabama Republican, told Feinberg in a Nov. 23 letter. Associate U.S. Attorney General Tom Perrelli said he had “concerns about the pace of the process” in a Nov. 19 letter.

Claimants who forgo the $5,000 or $25,000 payments may apply instead for interim payments on a quarterly basis, or for final payments in excess of the fast-track limits. Claimants have three years to seek interim and final payments. The deadline for applying for emergency payments was Nov. 23.

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New Suits

Hooters Sues Firm Over Challenge to Chain’s Sale

Hooters of America Inc., a restaurant chain known for its tank top-clad waitresses, sued a buyout firm over its challenge to the proposed sale of the company to Wellspring Capital Management LLC.

Officials of Hooters sued a unit of Chanticleer Holdings Inc. on Dec. 7 in Delaware Chancery Court over the buyout firm’s bid to block the sale to Wellspring, a private-equity firm whose holdings include the Checkers hamburger-restaurant chain, court filings show. While Hooters’ lawsuit has been sealed, other filings detail the company’s arguments in the case.

The family of Hooters Chief Executive Officer Robert “Bob” Brooks, who died in 2006, is selling the company to resolve a dispute over Brooks’s estate, according to South Carolina’s Myrtle Beach Sun News newspaper. Brooks lived in the Myrtle Beach area, the newspaper said.

Chanticleer executives contend they got an option to buy Atlanta-based Hooters when they loaned money to the chain in 2006, Kevin Abrams, a lawyer for an affiliate of the Charlotte, North-Carolina investment firm, said in a Dec. 9 court filing.

Hooters is asking a Delaware judge to decide whether Chanticleer “validly exercised its contractual right of first refusal” to bar the Wellspring sale, Abrams said in the filing.

Alexis Aleshire, a Hooters of America spokeswoman, didn’t immediately return phone and e-mail messages seeking comment about the suit. Michael Pruitt, Chanticleer’s CEO, declined to comment on the suit in a telephone interview. Mark Semer, a spokesman for New York-based Wellspring, said in a phone interview that he couldn’t comment.

The Delaware case is Hooters of America Inc. v. Neighborhood Restaurants International Inc., 6054, Delaware Chancery Court (Wilmington).

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Nicor Investor Suit Calls $2.4 Billion AGL Bid Too Low

A Nicor Inc. investor group sued the Illinois gas distribution company and its board over a proposed $2.4 billion sale to AGL Resources Inc., saying the price is too low.

Plumbers Local No. 65 Pension Fund filed the lawsuit in Illinois state court in Chicago yesterday on behalf of itself and other shareholders seeking to block the takeover. The suit accuses the Naperville-based company’s managers and directors of breaching their fiduciary duty to shareholders.

The companies said Dec. 7 that Nicor holders will receive $21.20 in cash and 0.8382 share of Atlanta-based AGL for each share they own, valuing Nicor at about $53 a share, 13 percent more than the Dec. 6 share price.

Annette Martinez, a Nicor spokeswoman, didn’t immediately return a voice-mail message seeking comment. Tami Gerke, an AGL spokeswoman, didn’t immediately return a voice-mail message left after regular business hours.

The case is Plumbers Local No. 65 Pension Fund v. Nicor, 10CH52627, Cook County Circuit Court (Chicago).

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BGC Appeals Part of Tullett Prebon U.K. Broker-Poaching Ruling

BGC Partners Inc. shouldn’t have been barred by a court order from hiring staff away from rival broker Tullett Prebon Plc for almost a year, a lawyer for the firm told a London court.

BGC is seeking to overturn portions of a March ruling that found the firm took part in an unlawful conspiracy to poach brokers from Tullett. A hearing on the request started yesterday at the Court of Appeal and is due to finish next week.

Andrew Hochhauser, BGC’s lawyer, said the appeal isn’t an attempt to “retry the case” and that he won’t challenge some of the “very strong” findings against BGC in the judgment.

“I am acutely aware that there were some adverse findings about my clients -- but they were not all one way,” he said.

Tullett, the second-largest inter-dealer broker by market value, sued BGC last year claiming Anthony Verrier, BGC’s executive managing director, spent tens of millions of pounds inducing the heads of various Tullett trading desks to breach their contracts by getting colleagues to defect.

In March, Justice Raymond Jack ruled in Tullett’s favor and said the damages BGC should pay will be decided at a trial next year. During the litigation BGC was bound by a court order stopping it from hiring anybody from Tullett. The order was in force for around a year, Hochhauser said.

“There was no basis for that unusual remedy to be applied,” the lawyer said. If the Court of Appeal agrees with him, it will be of use during the damages trial, he said.

Nigel Szembel, a Tullett spokesman, said the firm had “nothing to say” about the appeal. “The judgment speaks for itself,” he said in a telephone interview.

The case is Tullett Prebon Plc v. BGC Brokers LP, HQ09X01241, High Court (London).

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On the Docket

India’s Top Court to Hear Sterlite Appeal in January

India’s top court said yesterday that Sterlite Industries (India) Ltd.’s appeal against a lower court order asking it to shut a copper unit in southern India will be heard in the last week of January next year.

Sterlite, the nation’s biggest copper producer, will be allowed to run its factory at Tuticorin in Tamil Nadu, pending the next hearing, a two-judge bench, headed by Justice R.V. Raveendran, said in an interim order.

The Madras High Court on Sept. 28 ruled Sterlite’s 400,000 metric ton Tuticorin smelter should be shut for breaching environmental standards. India is tightening rules to protect ecologically sensitive regions, prevent illegal mining and safeguard the resources and livelihood of the people living around mines and factories.

The Supreme Court in an interim order on Oct. 18 allowed Sterlite to run the factory until mid-December and asked the state and the federal governments to clarify certain issues related to the plant’s operations. The court also asked Sterlite, a unit of Vedanta Resources Plc, to give details of the environmental impact of the waste generated from the facility.