Richard Holwell, the Manhattan federal judge overseeing the trial of Raj Rajaratnam, is a former corporate lawyer who condemned insider trading in two recent cases he has handled during his eight years on the bench.
At the 2008 sentencing of Eugene Plotkin, then a 28-year-old former Goldman Sachs Group Inc. banker who pleaded guilty to insider trading, a defense attorney urged Holwell to impose a sentence below federal sentencing guidelines because of Plotkin’s youth and because a co-defendant was the mastermind behind the scheme. The judge refused.
“This was not a simple and singular lapse of judgment, but an egregious breach of trust, a fraud, pure and simple, by a person who had no moral compass,” Holwell said, sentencing Plotkin to 57 months in prison, within federal guidelines.
Rajaratnam, the co-founder of hedge-fund company Galleon Group LLC, is accused of making $45 million in illicit trades from insider tips. The 53-year-old native of Sri Lanka, who faces as much as 20 years in prison on the most serious charges against him, denies wrongdoing. It’s the largest insider-trading case ever involving hedge funds.
Rajaratnam’s trial, which starts today with jury selection, may last two months and feature evidence from 2,400 wiretapped conversations with 130 people and involves alleged inside tips on 37 companies, including Goldman Sachs, Google Inc., Hilton Hotels Corp. and Advanced Micro Devices Inc.
Before he was nominated to the bench by President George W. Bush, Holwell spent more than 30 years as a business litigator, rising to be chairman of the litigation department at New York-based White & Case LLP. Holwell, who was confirmed as a judge in 2003, declined to be interviewed for this story.
White & Case declined to permit any of its lawyers to be interviewed, citing a policy not to talk about partners who become judges. It said in an e-mail that Holwell is a lawyer “of the highest quality and integrity.”
The case is U.S. v. Rajaratnam, 09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
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Rajaratnam Trial May Tarnish Goldman, McKinsey, Spark Suits
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.
Ed Canaday, a spokesman for New York-based Goldman; Pen Pendleton, a spokesman for New York-based Morgan Stanley; Yolande Daeninck, a spokeswoman for New York-based McKinsey; and Paul Fox, a spokesman for Cincinnati-based Procter & Gamble, and Andrew Merrill, a spokesman for Ruiz, declined to comment. Carrie Kizer, a spokeswoman for Berkshire Hathaway, didn’t return a call.
Chuck Mulloy, a spokesman for Santa Clara-based Intel, and Jeff Young, a spokesman for Cambridge, Massachusetts-based Akamai, said their firms have been cooperating with prosecutors. Intel’s cooperation began a decade ago as part of a probe of leaks by Khan, Mulloy said. Spokespeople for other companies didn’t return calls or declined to comment on whether they feared they’d be sued or see their corporate reputations suffer.
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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Attorneys General Push for Loan Reductions, Seek Bank Accord
State attorneys general are pushing lenders to reduce loan balances and said they hope to reach a final settlement with banks over their mortgage-servicing and foreclosure practices within two months.
The states along with federal agencies submitted a 27-page settlement proposal last week to the country’s five largest mortgage servicers and aim to reach an agreement that leads to more loan modifications for homeowners having trouble making their payments, attorneys general said yesterday.
“The result we come to can have an impact on the housing market and the economy,” North Carolina Attorney General Roy Cooper told reporters at a meeting of attorneys general in Washington. “We don’t want uncertainty to linger very long.”
State attorneys general and federal agencies, including the Justice Department, the Treasury Department and the Consumer Financial Protection Bureau, submitted the proposal as a starting point for negotiating a settlement with the servicing industry, said Iowa Attorney General Tom Miller, who is helping to lead the talks with the banks.
Miller declined to comment about the role of banking regulators in the negotiations. Officials are talking with investors in mortgage-backed securities, Miller said.
The companies that received the settlement terms from officials are Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., Ally Financial Inc. and Citigroup Inc. They service 59 percent of U.S. home loans, Miller said.
Jumana Bauwens, a Bank of America spokeswoman, declined to comment, as did Mark Rodgers, a Citigroup spokesman, and Gina Proia, an Ally spokeswoman.
Vickee Adams, a Wells Fargo spokeswoman, and JPMorgan spokeswoman Jennifer Zuccarelli didn’t immediately respond to requests for comment yesterday.
Tam Ormiston, a deputy attorney general in Iowa, declined to comment yesterday about the settlement discussions. He didn’t rule out criminal prosecutions.
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U.S. Forms Criminal Task Force on Deepwater Horizon Disaster
The U.S. Justice Department has formed the Deepwater Horizon Task Force to consolidate its investigation into possible criminal charges stemming from the drilling rig explosion that killed 11 workers and caused the worst offshore oil spill in U.S. history.
The Justice Department said in a statement that the task force brings together “separate and simultaneous investigations” by its criminal and environmental and natural resources divisions and the U.S. Attorney’s Office in New Orleans.
“After assessing the overlap of the cases and in an effort to avoid duplication of effort, Deputy Attorney General James Cole has decided to establish a single task force with authority to oversee all facets of the investigation,” Wyn Hornbuckle, a Justice Department spokesman, said in the statement.
The three groups have been probing the April 20 “fire, explosion and aftermath” of the Deepwater Horizon incident since U.S. Attorney General Eric Holder announced on June 1 that the government would seek potential criminal charges and civil penalties.
The task force will be led by John Buretta, criminal division senior counsel, and supervised by Assistant Attorney General Lanny Breuer of the criminal division, according to the statement. Much of the task force’s activities will be based in New Orleans, where the Justice Department established a command post last year, Hornbuckle said.
Eleven rig workers died and more than 4.1 million barrels of crude gushed into the Gulf of Mexico after the Deepwater Horizon rig exploded and sank. The U.S. has sued BP Plc, which owned the well, and Transocean Ltd., which owned the rig.
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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Connecticut Hedge Fund Manager Pleads Guilty to Fraud
Francisco Illarramendi, a hedge fund manager in Connecticut, pleaded guilty to fraud and two other men were charged with conspiracy in a U.S. probe of an alleged Ponzi scheme with potential investor and creditor losses of hundreds of millions of dollars, prosecutors said.
Illarramendi, 42, pleaded guilty yesterday in federal court in Bridgeport to two counts of wire fraud and one count each of securities fraud, investment-adviser fraud and conspiracy to obstruct justice, said U.S. Attorney David Fein in Connecticut in an e-mailed statement.
The plea couldn’t be confirmed immediately in electronic court records. John Gleason, an attorney for Illarramendi, declined to comment.
From 2006 to February, Illarramendi used money from new investors to pay returns he promised to earlier ones using fraudulent documents that purported to show the hedge funds had hundreds of millions of dollars in credits, Fein said. Illarramendi, Juan Carlos Guillen Zerpa, 43, and Juan Carlos Horna Napolitano, 40, allegedly conspired to obstruct a Securities and Exchange Commission investigation of the hedge funds, according to the statement.
Robert Targ, an attorney for Zerpa, couldn’t immediately be reached for comment. Dan Forman, an attorney for Napolitano, didn’t immediately return a message seeking comment.
The SEC case is SEC v. Illarramendi, 11-78, U.S. District Court, District of Connecticut (New Haven).
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.
The company said in an e-mailed statement that it “has already fully accrued the estimated liability in relation to this litigation.”
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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Stern Firm to Cease Foreclosure Work, Unit Says in Filing
The Law Offices of David J. Stern PA, under investigation in Florida for its foreclosure practices, will stop processing home-seizure cases by the end of the month, according to an affiliated company.
Stern’s firm “will be ceasing the practice of law with respect to all pending foreclosure matters,” according to a filing yesterday with the U.S. Securities and Exchange Commission by DJSP Enterprises Inc., which provides non-legal services for the firm. “As a result, the company does not expect to receive any further file referrals from this customer.”
Stern and his firm are under investigation in Florida for allegedly “fabricating and/or presenting false and misleading documents in foreclosure cases,” according to the attorney general’s website. Shannon Knowles, a spokeswoman for Attorney General Pam Bondi, said the investigation hasn’t ended.
“It doesn’t stop” because the firm is closing its foreclosure practice, Knowles said.
No one answered the phone at the Plantation, Florida, office that the law firm and DJSP share. Stern’s attorney, Jeffrey Tew, said the firm would stop handling foreclosures and declined to comment further.
Fannie Mae and Freddie Mac last year barred the firm from handling their foreclosure cases. Citigroup Inc. said in October that it had stopped directing foreclosure work to the firm.