Goldman Sachs Group Inc., McKinsey & Co. and Intel Corp. are among the companies that may be sued or suffer damage to their reputations after witnesses at the trial of Galleon Group LLC co-founder Raj Rajaratnam describe insider leaks, Bloomberg News’s David Glovin, Patricia Hurtado and Bob Van Voris report.
Rajaratnam, 52, goes on trial today for trading on tips gleaned from sources inside these and other companies, including Morgan Stanley, International Business Machines Corp. and Moody’s Investors Service Inc. If the billionaire native of Sri Lanka is convicted by a Manhattan jury, U.S. prosecutors may seek to jail him for more than 10 years.
The companies from which the leaks emanated may find themselves in court explaining how sensitive data wound up with traders at Galleon. While the actions of a rogue employee who leaked tips won’t justify a lawsuit, evidence that a firm’s executives intentionally gave data to favored traders to manipulate share price may be grounds to sue a company, said Mark Rifkin, a New York lawyer who represents investors.
“If a company made a decision for whatever reason that it wanted to make information available to select individuals, that in my opinion would be unlawful,” said Rifkin, of Wolf Haldenstein Adler Freeman & Herz LLP, in an interview. “We’re paying close attention to the entire insider trading case as it unfolds because you never know what’s going to happen.”
Rajaratnam denies wrongdoing in a case that is the centerpiece of the largest U.S. crackdown on hedge fund insider trading. Prosecutors said he used tips from a network of traders, corporate officials and colleagues to generate $45 million in profits in a scheme that went on for seven years.
Rajaratnam said his and his funds’ trades were based on Galleon research and that investment advisers routinely speak to company insiders in the search for news.
Prosecutors have cited about three dozen companies in which there were tips, some coming from company employees and some from workers at professional firms representing the companies. Proof about the leaks will come from corporate officials, ex-Galleon traders, and wiretaps of Rajaratnam’s phone calls in which accused accomplices refer to companies such as Intel and Broadcom Corp., prosecutors said.
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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Officials Said to Aim for Foreclosure Deal Within Two Months
State attorneys general and federal officials hope to reach a final settlement with banks over their mortgage-servicing and foreclosure practices within two months, a person familiar with the negotiations said.
The officials, who submitted a 27-page settlement proposal last week to start negotiations, aim to reach an agreement with the banks in six weeks to two months, said the person, who didn’t want to be identified because the talks are private.
Attorneys general met yesterday in Washington, where they were scheduled to get an update on the investigation into the mortgage-servicing practices of banks and the efforts to reach a settlement that could overhaul their procedures. The states began the probe last year after complaints that financial institutions submitted faulty paperwork in foreclosure cases.
Homeowner activists protested outside the meeting of the attorneys general, criticizing banks and demanding state and federal officials reach a tough settlement with the companies. They also called for criminal prosecutions.
The proposal given to the banks last week calls for “a binding legal requirement” for how they service loans and conduct home foreclosures, said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller. Miller is helping to lead the investigation and settlement talks.
The proposal didn’t include the monetary penalties officials would seek.
Tam Ormiston, a deputy attorney general in Iowa, declined to comment yesterday about the settlement discussions. He didn’t rule out criminal prosecutions.
Atheros Delays Shareholder Vote on $3 Billion Qualcomm Sale
Atheros Communications Inc. postponed a shareholder vote on a planned $3.2 billion takeover of the company by Qualcomm Inc. after a judge ordered that more information be released about the deal.
The vote was scheduled for yesterday and will be delayed until March 18, San Jose, California-based Atheros said in a statement.
“The proxy statement currently fails to provide the required disclosures” about advisory fees and “all material facts” about deal-negotiations by Craig Barratt, chief executive officer of Atheros, and what he would be paid if the sale goes through, Delaware Chancery Court Judge John Noble said in a 38-page opinion made public yesterday in Wilmington.
Atheros was sued in January by shareholders contending the $45 per-share offer is inadequate. Atheros provides expertise in wireless technology and home-computer networking. Qualcomm, based in San Diego, is the world’s largest maker of semiconductor chips for mobile-phones.
“The proposed transaction arose out of a nearly non-existent sales process that was orchestrated” by Barratt, who stands to gain benefits including $24 million in stock options, plaintiffs’ lawyer P. Bradford deLeeuw said in court papers.
Molly Mulloy, an Atheros spokeswoman, said in a phone interview the company doesn’t think delaying the vote “will impact the completion of our original timetable and we expect to close in the first half of this year.”
The consolidated case is In re Atheros Communications Inc. Shareholder Litigation, CA6124, Delaware Chancery Court (Wilmington).
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Lehman Mortgage Bondholders Fail to Win Note Default Ruling
Investors in mortgage-backed bonds sold by Lehman Brothers Holdings Inc. lost a case to have the notes declared in default, which they’d brought to increase their chances of getting paid earlier.
The Court of Appeal in London upheld a lower court ruling against holders of bonds that were part of the Eurosail-UK 2007-3BL Plc transaction sold in 2007. Lehman, which filed for bankruptcy protection in September 2008, raised 650 million pounds ($1.1 billion) from the deal, which packaged U.K. home loans into bonds.
BNY Corporate Trustee Services Ltd., the financing’s trustee, brought the original case after holders of $405 million of so-called class A3 notes asked it to call an event of default because of the issuer’s insolvency. If they’d won, these investors would no longer have had to wait for their money until the more senior class A1 and A2 noteholders were repaid in full, Fitch Ratings said after the original judgment in September.
Yesterday’s appeal court judgment “is generally positive” for the U.K. mortgage-backed securities market, said Conor Downey, a London-based partner at law firm Paul Hastings Janofsky & Walker LLP. “Most deals even if they have seen drops in asset values, can apply the decision and form decisions that they are solvent and able to continue to trade,” he said.
Eurosail’s risk was hedged with interest-rate and currency swaps with Lehman Brothers Special Financing Inc., which were in turn guaranteed by Lehman Brothers. The financing unit filed for bankruptcy a month after its parent, and the swap agreements were terminated in November 2009. Eurosail has filed claims against Lehman Brothers seeking more than $221 million to cover losses.
The case is BNY Corporate Trustee Services Ltd. v. Eurosail-UK 2007-3BL Plc & ors, A2/2010/2046, Court of Appeal (London).
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Bayer’s Cipro Accord Won’t Be Questioned by U.S. High Court
The U.S. Supreme Court, rebuffing calls to scrutinize “pay for delay” drug settlements, refused to revive a suit accusing Bayer AG of paying almost $400 million to forestall competition to its Cipro antibiotic.
The court, without comment, yesterday rejected an appeal from drugstore chains that sought to press an antitrust suit over a 1997 settlement between Bayer and Barr Laboratories Inc., now part of Teva Pharmaceutical Industries Ltd. Under the accord, Bayer paid Barr $398 million, while Barr dropped its challenge to a Bayer patent and agreed not to sell a generic version of Cipro until June 2003.
Opponents say such settlements are rampant in the drug industry, costing consumers $3.5 billion a year, according to the Federal Trade Commission, which has led the criticism. Consumer advocates and 32 states joined the pharmacies and a drug wholesaler in urging Supreme Court review.
“This case involves one of the most controversial business practices in the United States in one of the most important segments of the economy,” the chains argued in their appeal. The group includes two of the three largest U.S. drugstore companies, CVS Caremark Corp. and Rite-Aid Corp.
The case is Louisiana Wholesale Drug v. Bayer, 10-762, U.S. Supreme Court (Washington).
Apollo Group Rejected by U.S. High Court on $300 Million Award
The U.S. Supreme Court refused to question a jury verdict that may force Apollo Group Inc., the owner of the University of Phoenix, to pay more than $300 million for deceiving shareholders.
The justices yesterday rejected an appeal from Apollo, accused of withholding an Education Department report that said the company was illegally paying recruiters on the basis of enrollment numbers. Apollo, the largest U.S. for-profit college operator, said the suing shareholders didn’t show that the eventual release of the report’s details caused the company’s prices to fall.
Exactly how much Apollo must pay will depend on how many shareholders file claims. An expert witness for the suing shareholders testified at trial that the verdict might affect as many as 50 million shares, meaning Apollo would owe $277.5 million, plus interest.
Phoenix-based Apollo has set aside $177 million to cover damages and other litigation costs. The company said in a regulatory filing in January that it estimates damages will be between $127 million to $228 million.
In a court filing in August, the company said the jury verdict “could result in a total payment of an amount between $200 and $300 million.” That range represents a “worst-case scenario,” said Manny Rivera, a company spokesman.
The dispute stems from an Education Department report delivered to the company privately in February 2004. The report said the company needed to make “substantial and comprehensive changes to the salary compensation system for its recruiters and their direct supervisors.”
Apollo agreed to revamp its compensation system and on Sept. 7, 2004, the company announced it was paying $9.8 million to resolve the Education Department’s investigation. The company revealed the existence of the report, without providing details.
The following day, the company’s shares fell from $82.72 to $82.07, a drop the suing shareholders said would have been greater had the company been upfront about the report. By Sept. 21, after a series of newspaper articles provided more details and a securities analyst had downgraded the stock, shares had fallen to $72.00.
Apollo officials said during the case that they didn’t disclose the report because their lawyers told them it was preliminary and flawed.
The case is Apollo Group v. Policeman’s Annuity and Benefit Fund of Chicago, 10-649, U.S. Supreme Court (Washington).
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