JPMorgan Chase & Co. and the biggest U.S. banks face billions of dollars in legal costs related to their role in the financial crisis, threatening their profits and the stock price gains they made in 2010, Bloomberg News’s Linda Sandler reports, citing analysts.
JPMorgan, the second biggest bank by assets, reported $5.2 billion of legal costs in the first nine months of 2009, compared with a gain of $10 million in the same period a year earlier. The costs would rise if the bank reserves for multibillion-dollar lawsuits by Lehman Brothers Holdings Inc. and the trustee liquidating Bernard L. Madoff’s firm.
Bank of America Corp., the largest U.S. bank, and Citigroup Inc., ranked third, are also besieged by lawsuits stemming from the credit crisis, brought by plaintiffs ranging from foreclosed-upon homeowners to institutional investors whose mortgage-backed bonds turned out to be money-losers.
“They’re under legal attack,” said Richard Bove, an analyst at Rochdale Securities in Lutz, Florida, who rates JPMorgan’s stock a “buy.” “They’re similar to the asbestos or the tobacco industry, and they’re going to be repeatedly sued in the next few years.”
JPMorgan’s third-quarter net profit of $4.4 billion, up 23 percent from the year earlier, would have been larger if it hadn’t set aside $1.3 billion of pretax income for lawsuits and $1 billion for mortgage repurchases. Banks haven’t yet reported their results for the fourth quarter.
Litigation “ain’t going away,” Chief Executive Officer Jamie Dimon told analysts on an Oct. 13 conference call. “It’s becoming a cost of doing business.”
At least JPMorgan’s shareholders are more likely to be informed about legal expenses than some other bank investors. The bank, which used the word “litigation” about 50 times in its latest 10-Q filing with the Securities and Exchange Commission, discloses more about lawsuits’ effect on results than Citigroup or Wells Fargo, and has been taking larger reserves than some rivals, according to company filings.
Stephen Cutler, JPMorgan’s in-house lawyer and a former SEC enforcement chief, declined to comment through bank spokesman Joseph Evangelisti.
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Some Galleon Defendants May Plead Guilty, Lawyer Tells Judge
The lawyer for former Galleon Group LLC trader Zvi Goffer, who lost a legal bid to have insider-trading charges dismissed, told a judge that she expected guilty pleas from some defendants in the case.
U.S. District Judge Richard Sullivan in Manhattan yesterday refused a request from Goffer, traders Craig Drimal, Emanuel Goffer and Michael Kimelman and lawyer Jason Goldfarb to dismiss the charges against them. He set a trial for May 9 for them and a sixth man, attorney Arthur Cutillo.
“I’m not sure all the defendants will be going to trial,” Cynthia Monaco, an attorney for Goffer, told Sullivan after he ruled. After court, she said in an interview that some of the defendants may enter guilty pleas. She didn’t say which ones.
Jeffrey Hoffman, the attorney for Goldfarb, disagreed, saying after court that there had been “no meaningful negotiations” with prosecutors, as far as he knew. “There’s absolutely no indication that any of the cases will be resolved without a trial,” he said.
Goffer and the others are accused in insider-trading cases involving Galleon Group co-founder Raj Rajaratnam. Rajaratnam, who denies wrongdoing, was arrested in October 2009 in a first wave of charges accusing him and others of trading on leaks from corporate officials and hedge-fund traders. His trial in Manhattan is scheduled for Feb. 28.
Goffer was part of a second wave of arrests, in November 2009. Prosecutors say he and others traded on tips originating from lawyers at the Ropes & Gray LLP law firm in New York and from an ex-trader at New York-based Schottenfeld Group LLC, where Goffer also worked. The U.S. has placed Goffer at the center of the scheme and claimed his accomplices called him “Octopussy,” a reference to the 1983 James Bond movie, because of his many sources of information.
Separately, Rajaratnam yesterday asked a judge to block the U.S. Securities and Exchange Commission, which has filed a civil lawsuit against him, from obtaining duplicates of his wiretapped conversations. He said the wiretaps shouldn’t be given to the SEC until after his criminal trial ends.
The case is U.S. v. Goffer, 10-cr-00056, U.S. District Court, Southern District of New York (Manhattan).
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Google Wins Freeze on U.S. Contract With Microsoft
Google Inc. won a temporary court order halting the award of a $49.3 million contract favoring Microsoft Corp. for an e-mail system serving the U.S. Interior Department.
A federal judge in Washington stopped the U.S. from proceeding with a Microsoft system for the department’s 88,000 employees in an order unsealed Jan. 4. U.S. Court of Federal Claims Judge Susan Braden the cited deficiencies in the procurement process in her order freezing award of the contract.
Google, based in Mountain View, California, and Onix Networking Corp., a licensed Google seller, sued the Interior Department in October, claiming the department didn’t provide a “full and open” competition for the contract.
“Without a preliminary injunction, the award will put into motion the final migration of Interior’s e-mail system, achieve ’organizational lock-in’ for Microsoft, and cost Google the opportunity to compete,” the judge wrote in a 27-page decision.
Braden said she was informed that the department intended to award the contract on Jan. 25.
In its Oct. 29 complaint, Google said the bid request put out by Interior “specified that only the Microsoft Business Productivity Online Suite-Federal could be proposed,” making it impossible for the company to compete for the work.
“As a proponent of open competition on the Internet and in the technology sector in general, we’re pleased with the court’s decision,” Google said in an e-mailed statement.
Jack Evans, a spokesman for Redmond, Washington-based Microsoft, didn’t respond to requests for comment on the decision. The U.S. Justice Department also didn’t respond to an e-mail seeking comment.
The case is Google Inc. v. U.S., 10-743, U.S. Court of Federal Claims (Washington).
Barclays Wins Dismissal of Lawsuit Over Disclosures
Barclays Bank Plc, Britain’s third-largest bank, won dismissal of an investor lawsuit claiming that it failed to disclose its full credit market exposure during offerings for $5.45 billion in American depositary shares.
U.S. District Judge Paul Crotty in Manhattan yesterday dismissed the 2009 suit by investors who accused London-based Barclays and underwriters of four offerings, including units of Bank of America Corp., Goldman Sachs Group LP and Morgan Stanley, of not disclosing that the bank held large amounts of risky mortgage-backed assets.
The plaintiffs “argue that defendants’ disclosures led them to believe that Barclays’ securities were less risky than its competitors’,” Crotty said yesterday in a written opinion. “Barclays, however, offered substantial risk disclosures regarding its valuations.”
Between April 2006 and April 2008, Barclays made four offerings of American Depositary Shares, generating proceeds of $5.45 billion, according to the complaint.
“We are pleased with the court’s ruling,” Barclays said in a statement.
Andrew Brown, a lawyer for the investors, didn’t return a call for comment.
The case is In Re Barclays Bank Plc Securities Litigation, 09-cv-1989, U.S. District Court, Southern District of New York (Manhattan).
Madoff Aide Bongiorno Asks Appeals Court to Set Bail
Annette Bongiorno, who is accused of helping her former boss, Bernard L. Madoff, run a multibillion-dollar Ponzi scheme, asked a federal appeals court to free her from jail, where she has been held since Dec. 21.
Bongiorno yesterday petitioned the U.S. Court of Appeals in New York to set her bail at $2.5 million, which she said she would be able to meet. A lower-court judge had set bail at $5 million before deciding there were “no conditions” that would ensure Bongiorno wouldn’t flee, according to the brief.
For two years, Bongiorno, 62, has known to a “moral certainty” that she would be arrested, and she has “done nothing” that would help her run, her lawyers wrote in the brief. “There is no proof whatsoever that Ms. Bongiorno is a risk of flight,” wrote the defense attorneys, Maurice Sercarz, Roland Riopelle and Diane Ferrone.
Bongiorno, who denies wrongdoing, is being held in a Lower Manhattan jail. She’s among five people facing charges of helping Madoff defraud investors of billions of dollars. Madoff, 72, is serving a 150-year sentence.
The case is U.S. v. Bongiorno, 10-cr-228, U.S. District Court, Southern District of New York (Manhattan).
Anadarko, Kerr-McGee Must Face Tronox Liability
Anadarko Petroleum Corp. and its Kerr-McGee Corp. unit must face some fraud claims brought by Tronox Inc. shareholders over the chemical maker’s bankruptcy, a judge ruled.
U.S. District Judge Shira Scheindlin in Manhattan yesterday denied Anadarko’s motion to throw out allegations that it was responsible for the actions of Kerr-McGee, which served as its agent to control how Tronox reported reserves for environmental cleanup costs. She dismissed claims that Anadarko’s purchase of Kerr-McGee was a fraudulent act.
Tronox shareholders sued Anadarko in July 2009, seeking unspecified damages over two transactions. The first split off Kerr-McGee’s liabilities and chemicals business to create the company that went public in 2006 as Tronox. Anadarko then bought Kerr-McGee’s profitable oil and natural-gas business.
Tronox, based in Oklahoma City, filed for bankruptcy in 2009, facing claims of as much as $10.5 billion from the U.S. for environmental cleanup costs. The company’s creditors and the U.S. government also sued Anadarko and Kerr-McGee.
Scheindlin, in yesterday’s order, allowed and also partly denied requests by officers Luke Corbett, Robert Wohleber and Gregory Pilcher to dismiss allegations of fraud.
The case is In re Tronox Inc. Securities Litigation, 09-cv-6220, U.S. District Court, Southern District of New York (Manhattan).
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PharmAthene Due $1 Billion Over Drug, Witness Says
PharmAthene Inc. deserves more than $1 billion in damages from Siga Technologies Inc. for refusing to honor a licensing agreement over a drug designed to fight smallpox outbreaks linked to terrorist attacks, a witness said.
Siga officials’ decision to renege on an agreement giving manufacturing rights to its smallpox antiviral ST-246 to PharmAthene cost the biotech company $1.07 billion in potential profits, Jeffrey Baliban, an economist with Navigant Consulting, testified in a Delaware Chancery Court trial yesterday.
PharmAthene, based in Annapolis, Maryland, sued New York-based Siga in 2006, asking a judge to affirm the purported licensing agreement for the drug, which has gotten the attention of U.S. officials seeking ways to counter potential biological terror attacks.
Both PharmAthene and Siga develop products to counter biological warfare agents such as anthrax and smallpox. PharmAthene had a net loss of $32.3 million on 2009 sales of $27.6 million. Siga had a net loss of $17.6 million on revenue of $13.8 million.
Siga said in October the U.S. Health and Human Services Department selected it for a $500 million contract to produce 1.7 million doses of its smallpox antiviral. The contract may generate as much as $2.8 billion, according to court filings. Federal officials are investigating whether Siga qualifies for the contract.
Baliban, who testified as an expert witness for PharmAthene, said he analyzed the damages tied to the agreement over the smallpox vaccine as of December 2006. That’s when Siga officials informed PharmAthene executives they wouldn’t honor the purported agreement.
The two companies had considered merging in 2006 and discussed a licensing agreement for the vaccine as part of those talks, according to court filings.
The case is PharmAthene Inc. v. Siga Technologies Inc., CA2627, Delaware Chancery Court (Wilmington).
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Stanford Receiver Sues PGA Golfer Toms in Clawback
Professional golfer David Toms was sued by R. Allen Stanford’s receiver for $905,087 in profits Toms earned from certificates of deposit sold by Stanford International Bank, the Antiguan bank that prosecutors claim was the center of a $7 billion investment fraud.
Toms, who has earned $33 million in his PGA Tour career to date, “previously entered into a sponsorship and endorsement relationship” with some of Stanford’s companies, according to a lawsuit filed Jan. 4 in federal court in Dallas by Ralph Janvey, Stanford’s court-appointed receiver.
Toms and his company “either performed no services for the CD proceeds they received (or) performed services that did not constitute reasonably equivalent value” in exchange for CD proceeds he received in 2007 and 2008, Janvey said.
Janvey has sued hundreds of other Stanford investors who, like Toms, are considered net winners, in that they received more in proceeds than they originally invested in their Stanford CDs. These so-called clawback suits seek to repay more than 20,000 investors by recovering funds from the few investors who cashed out CDs before Stanford’s companies were seized by U.S. regulators in February 2009 on allegations of fraud.
Stanford, 60, is in jail awaiting trial on allegations he bilked investors of more than $7 billion by paying above-market returns to early buyers of his Antiguan bank certificates with funds taken from later CD buyers. Stanford has denied all wrongdoing and has asked for a two-year delay in his trial, currently set to begin later this month, to give his lawyers time to prepare his defense.
Adam Young, Toms’s representative, said the golfer wasn’t a net winner because he hadn’t invested in any Stanford CDs.
“He never had any Stanford CDs,” Young said in a telephone interview yesterday. “He had a straight brokerage account, all 100 percent legit, no offshore bank.”
The case is Janvey v. Toms, 3:11-cv-00018, U.S. District Courts, Northern District of Texas (Dallas).
The criminal case is U.S. v. Stanford, 09cr342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09cv298, U.S. District Court, Northern District of Texas (Dallas).
Former BayernLB Chief Risk Officer Arrested in Probe
Gerhard Gribkowsky, the former chief risk officer of German state-owned bank Bayerische Landesbank, was arrested yesterday over allegations he accepted bribes during his tenure at the lender.
Munich prosecutors are investigating him on bribery, breach of trust and tax evasion allegations, Barbara Stockinger, a spokeswoman for the prosecutors, said in an e-mailed statement. An arrest warrant was issued and executed yesterday, she said.
The probe is reviewing the sale of a stake in Formula One, the motor-sports company, which Gribkowsky, 52, was responsible for overseeing. BayernLB sold the stake in 2006 without it being properly evaluated, Stockinger said.
“According to the current findings, the suspect in turn received $50 million in payments disguised via two consultancy agreements,” Stockinger said.
Gribkowsky met with prosecutors last week to discuss the money, which was deposited into a private foundation in Austria known as Sonnenschein. Because Gribkowsky didn’t declare the money as income in Germany, he may have evaded taxes, Stockinger said.
Gerald Toifl, Gribkowsky’s lawyer, wasn’t available for a comment when Bloomberg News called the offices of his law firm in Vienna, Salzburg and Linz. He didn’t respond to an e-mail. BayernLB spokesman Matthias Luecke declined to comment.
Buyout firm CVC Capital Partners Ltd. acquired BayernLB’s stake in the company as part of a deal with Bernie Ecclestone, who sold a part of his holdings in the car-racing series to CVC. BayernLB acquired the ownership stake when it seized collateral following the 2002 collapse of German media company Kirch Holding GmbH.
CVC has no knowledge of any payment to Gribkowsky or anyone connected with him in relation to its purchase of Formula One, CVC spokesman James Olley said in an e-mailed statement. The firm wasn’t aware of the investigations and didn’t have any contact with authorities or Gribkowsky in the matter, he said. Formula One’s Lucy Hibberd didn’t have an immediate comment.
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Toyota Wins Arbitration Ruling Against Former Company Lawyer
Toyota Motor Corp. said an arbitrator ruled in its favor on all of its claims against Dimitrios Biller, a former in-house attorney who accused the carmaker of racketeering and hiding evidence in rollover lawsuits.
The arbitrator found Biller “liable for breach of contract, conversion and statutory unauthorized computer access” and awarded Toyota $2.5 million for unauthorized disclosures Biller made and $100,000 in punitive damages, Toyota said yesterday in a statement posted on its website.
Biller, who worked at Toyota from 2003 to 2007, sued the carmaker in Los Angeles federal court in July 2009. He claimed the company destroyed engineering and testing evidence relevant in more than 300 suits over sport utility rollover accidents. Biller accused Toyota of racketeering, wrongful termination, infliction of emotional distress and defamation.
“Throughout this process, Mr. Biller has continuously made misleading and inaccurate allegations about Toyota’s conduct, and we feel this award is an appropriate consequence of his actions and completely discredits his meritless attacks on our company and our people,” Christopher Reynolds, Toyota Motor Sales Inc.’s general counsel, said in the statement.
Biller, who represented himself in the lawsuit, didn’t return a call for comment.
A federal judge compelled Biller to arbitrate his claims as was stipulated in his September 2007 severance agreement.
The case is is Biller v. Toyota Motor Corp., 2:09-cv-05429, U.S. District Court, Central District of California (Los Angeles).
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Infineon Settles Civil Dispute With Former Chief Schumacher
Infineon Technologies AG settled its civil dispute with former Chief Executive Officer Ulrich Schumacher, granting him annual pension payments of 560,000 euros ($745,000) starting in 2018.
The settlement, completed Dec. 23, was published in the German electronic federal gazette as part of the agenda for the Feb. 17. annual shareholder meeting. The agreement requires the approval of shareholders, according to the document.
The deal ends a dispute between Infineon and Schumacher, who left the company in 2004. He was later charged and tried over allegations he accepted illicit cash payments during his term as CEO. Schumacher, who settled the criminal charges in 2009, has denied taking bribes.
As part of the deal with Infineon, Schumacher agreed to withdraw a suit he filed against the company in a Munich court.
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