A former vice president in Citigroup Inc.’s treasury finance department, Gary Foster, was charged with embezzling more than $19 million from the bank in what a U.S. prosecutor called “the ultimate inside job.”
Foster, 35, was arrested June 26 at New York’s John F. Kennedy International Airport after returning from Bangkok and charged with bank fraud, U.S. Attorney Loretta Lynch in Brooklyn, New York, said yesterday in a statement. Foster is accused of transferring money from various Citigroup accounts and ultimately to his own account at JPMorgan Chase & Co.
“The defendant allegedly used his knowledge of bank operations to commit the ultimate inside job,” Lynch said.
Foster faces a maximum sentence of 30 years in prison if convicted of bank fraud, according to the statement. He lives in Englewood Cliffs, New Jersey, the government said.
“These are obviously serious charges and we will undertake a serious investigation to defend our client,” Isabelle A. Kirshner, one of Foster’s lawyers, said in a phone interview.
Foster was released yesterday on an $800,000 bond secured by his parents’ house in Teaneck, New Jersey. His mother works as a teller for Bank of America Corp., Kirshner told U.S. Magistrate Judge Ramon E. Reyes Jr. during the court appearance.
From last July to December, Foster, who worked for Citigroup in the Long Island City section of Queens, New York, caused about $900,000 to be moved from its interest-expense account and about $14.4 million from its debt-adjustment account to the bank’s cash account, according to prosecutors.
Then, in eight transfers, his actions led to the money being wired from the cash account into his personal account, prosecutors said. During the alleged fraud, which spanned from May 2009 to the end of 2010, Foster wired out of Citigroup a total of $19.2 million, according to the criminal complaint.
Foster caused a fraudulent contract or deal number to be put in the reference line of the wire-transfer instructions to make it appear the transfers supported an existing contract, the complaint charged.
“We are outraged by the actions of this former employee,” Shannon Bell, a spokeswoman for New York-based Citigroup, said in an e-mail. “Citi informed law enforcement immediately upon discovery of the suspicious transactions and we are cooperating fully to ensure Mr. Foster is prosecuted to the full extent of the law.”
The case is U.S. v. Foster, 11-mj-00645, U.S. District Court, Eastern District of New York (Brooklyn).
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Philip Morris Says Australia Plain-Pack Law Violates Treaty
Philip Morris International Inc., the world’s largest publicly traded tobacco company, said an Australian proposal requiring cigarettes to be sold in plain packages violates a treaty with Hong Kong and may cause billions of dollars in damages.
The maker of Marlboro and Peter Jackson cigarettes said it served the government with a notice of claim stating its intention to pursue its case in international arbitration. Hong Kong has a 1994 treaty with Australia prohibiting the forced removal of trademarks, Anne Edwards, a Philip Morris spokeswoman, said in a phone interview yesterday.
The Australian proposal is the first in the world to ban all logos and different colorings on cigarette packages. New Zealand, Canada and the U.K. had considered the move and didn’t put it in place because of concerns it would be illegal, British American Tobacco Plc said in April. British American Tobacco said it’s also considering its legal options.
“There’s a massive public policy argument here,” Wayne Condon, a partner at Griffith Hack who specializes in intellectual property law, said in a phone interview. “The Commonwealth government would be facing a multimillion dollar claim, if not more,” should the tobacco companies succeed.
Australian Prime Minister Julia Gillard said she won’t be intimidated by the tobacco companies.
“We’re not taking a backward step,” she told Australian Broadcasting Corp. radio yesterday. “We’ve made the right decision and we’ll see it through.”
The government raised tobacco taxes by 25 percent last year as it seeks to curb smoking, which is the nation’s largest single preventable cause of death, according to Health Minister Nicola Roxon.
“We don’t believe that taking that action is in breach of any of our international obligations,” Roxon told Sky News yesterday. “We believe that we are able, and the Australian people I think would expect their government, to take action in the interests of public health.”
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Meat Industry Gets Supreme Court Hearing on California Law
The U.S. Supreme Court agreed to hear a meat industry trade group’s challenge to a California law that requires slaughterhouses to immediately euthanize animals that are too sick to stand up.
The justices yesterday granted an appeal by the National Meat Association, which argues that U.S. meat-safety law bars California from imposing its requirements on federally inspected slaughterhouses.
The state law was enacted in 2008 after the Humane Society of the United States released a video of so-called downer cows being kicked, electrocuted, dragged with chains and rammed with a forklift at a Westland/Hallmark Meat Co. slaughterhouse.
The California law bans slaughterhouses from buying or selling downer cows and from butchering them for human consumption. The measure also requires humane handling of the animals.
A San Francisco-based federal appeals court refused to grant a preliminary injunction blocking the law. Although the court said the humane-handling provision probably was pre-empted by federal law, the three-judge panel declined to block it, saying the trade group hadn’t shown its members would suffer “irreparable injury.”
The case is National Meat Association v. Harris, 10-224, U.S. Supreme Court (Washington).
Broadcast Profanity, Nudity Get U.S. High Court Scrutiny
The U.S. Supreme Court, accepting a case that will reshape the speech rights of broadcasters, agreed to decide whether federal regulators are violating the Constitution by imposing fines for on-air profanities and nudity.
The justices yesterday said they will review a lower court’s conclusion that the Federal Communications Commission’s indecency policy is unconstitutionally vague. The dispute stems from expletives uttered on two Fox network award shows and from a scene with a naked woman on ABC’s “NYPD Blue.”
Two appeals court rulings “preclude the commission from effectively implementing statutory restrictions on broadcast indecency that the agency has enforced since its creation in 1934,” the Justice Department said in its appeal.
The case gives the high court a chance to issue a sweeping decision. News Corp.’s Fox and Walt Disney Co.’s ABC say the court should overturn decades-old rulings that give the FCC more authority to regulate programming on broadcast stations than on cable or satellite.
The case is Federal Communications Commission v. Fox Television Stations, 10-1293, U.S. Supreme Court (Washington).
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Ex-Illinois Governor Blagojevich Convicted in Second Trial
Former Illinois Governor Rod Blagojevich was found guilty by a federal jury of trying to trade President Barack Obama’s U.S. Senate seat in 2008 for personal favors and campaign cash.
The twice-elected Democrat, standing trial in Chicago for the second time on political corruption charges, was convicted on 17 counts, including all 11 charges relating to his efforts to barter the Senate seat for a Cabinet-level presidential appointment, leadership of a political advocacy group or donations to his Friends of Blagojevich campaign fund.
“I frankly am stunned. There’s not much left to say other than we want to get home to our little girls and talk to them and explain things to them and then try to sort things out,” Blagojevich, with his wife Patti at his side, said in a brief statement to the press after the verdict. He took no questions.
Jurors convicted the former governor of 10 wire fraud counts, two attempted extortion counts and two extortion conspiracy counts, each punishable by as many as 20 years in prison. He was also convicted of one of two solicitation of bribery counts, which carries a maximum sentence of 10 years, and two bribery conspiracy counts, which carry top sentences of five years.
The panel of 11 women and one man acquitted the former governor on the other bribery solicitation count and were unable to agree on a verdict for two other attempted extortion counts.
U.S. District Judge James B. Zagel confined Blagojevich, 54, to the Northern District of Illinois. A sentencing date hasn’t been set.
The case is U.S. v. Blagojevich, 08-cr-00888, U.S. District Court, Northern District of Illinois (Chicago).
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Violent Video Game Limits Struck Down by U.S. Supreme Court
The U.S. Supreme Court struck down a California law prohibiting sales of violent video games to minors, saying the ban is an unconstitutional infringement on speech rights.
The nation’s highest court yesterday rejected the state’s contention that violent games are akin to sexual materials, which the government can restrict to protect children.
“Even where the protection of children is the object, the constitutional limits on governmental action apply,” Justice Antonin Scalia wrote for five justices. The vote to strike down the law was 7-2, with the majority divided in its reasoning.
A decision upholding the law, which was never enforced, might have encouraged enactment of similar measures around the country. The video game industry has more than $10 billion in annual sales.
The ruling, issued on the final day of the court’s 2010-11 term, divided the justices along unusual lines. Justices Stephen Breyer and Clarence Thomas dissented. Chief Justice John Roberts and Justice Samuel Alito wrote separately to say they would have issued a narrower ruling that struck down the law as being too vague while leaving room for states to enact clearer statutes.
“I would not squelch legislative efforts to deal with what is perceived by some to be a significant and developing social problem,” Alito wrote for the two.
Yesterday’s ruling upheld a decision by a San Francisco-based federal appeals court.
Breyer, in his dissent, said the law wasn’t aimed at censorship. He said the measure merely ensured that parents would decide whether they wanted their children to play violent video games.
The case is Brown v. Entertainment Merchants Association, 08-1448, U.S. Supreme Court (Washington).
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Goodyear Wins U.S. High Court Case on Foreign-Unit Suits
U.S. Supreme Court overturned a ruling that required three overseas units of Goodyear Tire & Rubber Co. to face a lawsuit filed by the families of two North Carolina boys killed in a bus wreck in France.
The ruling was one of two issued yesterday that may give foreign companies and subsidiaries a stronger shield against legal claims filed in American courts.
A North Carolina state appeals court said the Goodyear units had enough of a connection to the state to put them within the jurisdiction of the courts there, even though the accident took place elsewhere.
The Supreme Court has said in past cases that, under the U.S. Constitution, defendants can be sued only in states where they have significant contacts.
Julian Brown and Matt Helms, both 13, were killed in 2004 when a tire on their bus allegedly blew out, causing the vehicle to crash into a concrete wall. They were in France to play in youth soccer tournaments.
Goodyear contended that its three units make tires primarily for European and Asian markets and that the tire at issue was never distributed in North Carolina.
In a second case resolved yesterday, the Supreme Court said an English manufacturer can’t be sued over a New Jersey accident involving one of the company’s metal-shearing machines.
The company, J. McIntyre Machinery Ltd., contended that it never sought to sell its products in New Jersey. The New Jersey Supreme Court said it was enough that the company had distributed its machines elsewhere in the U.S., putting them into the “stream of commerce.”
Robert Nicastro sought to sue J. McIntyre after the machine severed four of his fingers in 2001.
The case is Goodyear Dunlop Tires Operation v. Brown, 10-76, U.S. Supreme Court (Washington).
Cigarette Makers Rejected by Top Court on $270 Million Award
The U.S. Supreme Court refused to question an order that requires the nation’s tobacco companies to spend more than $270 million on a Louisiana smoking cessation program.
Cigarette makers including Altria Group Inc.’s Philip Morris USA and Reynolds American Inc.’s R.J. Reynolds contended that state courts violated the Constitution by letting the case go forward as a class action on behalf of all Louisiana smokers who want to participate in a cessation program. The companies said an individual smoker should have been required to show he or she was entitled to damages.
The question was whether state courts can “impose massive liability in a class action without a truly representative trial of individual claims,” the companies argued in their appeal.
Last week, the court threw out a nationwide gender-bias suit against Wal-Mart Stores Inc. That ruling centered on the rules governing group suits in federal courts and in theory could be overridden by Congress.
The lead Louisiana plaintiff, Deania M. Jackson, urged the Supreme Court not to hear the case, contending she was suing under a state law that doesn’t require individualized proof. Jackson argued that no individual plaintiff would file a suit seeking smoking-cessation services valued at $153 a year.
“That Louisiana makes such a cause of action available as a class action without requiring proof of individualized reliance on misrepresentations does not implicate the due process clause,” Jackson argued.
The current judgment requires the companies to pay $242 million, plus $37 million in interest.
Philip Morris said in a statement that it is responsible for a quarter of the judgment and that it has set aside about $30 million.
“Philip Morris USA is disappointed that the court declined to hear our arguments because we believe the decision in this case rests on a series of constitutional violations and is fundamentally unfair,” Murray Garnick, Altria Client Services senior vice president and associate general counsel, said in a statement.
The case is Philip Morris v. Jackson, 10-735, U.S. Supreme Court (Washington.)
Ex-UBS Client Kenneth Heller Pleads Guilty to Tax Evasion
Kenneth Heller, a disbarred lawyer charged with using an offshore UBS AG account to hide more than $26 million from the Internal Revenue Service, pleaded guilty to evading taxes.
Heller, 81, pleaded guilty to three counts of personal income tax evasion from 2006 to 2008 in a hearing yesterday before U.S. District Judge Kevin Castel in Manhattan.
Heller faces as long as 15 years in prison when he’s sentenced Sept. 27. He told Castel he has memory loss and needs a kidney transplant. Based on his health, prosecutors agreed to recommend a sentence below the 30 to 37 months that both sides agreed would be called for under federal sentencing guidelines.
“I did not pay the United States a substantial amount of taxes for the calendar years charged in the indictment,” Heller, reading from a statement, told the judge.
Heller was arrested in April 2010 and charged with evading more than $2.3 million in federal income taxes. He was one of seven ex-clients of Zurich-based UBS arrested on the same day and charged with hiding a total of more than $100 million from the IRS.
UBS admitted in February 2009 that it helped U.S. clients evade taxes. The bank avoided prosecution by paying a $780 million fine and turning over the names of U.S. account holders to investigators.
As part of a plea agreement, Heller agreed to pay a $9.8 million penalty to the IRS.
The case is U.S. v. Heller, 10-mg-742, U.S. District Court, Southern District of New York (Manhattan).
Centro Directors Breached Debt Disclosure Duties, Judge Says
Centro Properties Group directors wrongly approved financial statements that didn’t disclose all the company’s debt, a federal judge ruled, a decision that the stock market regulator said clarifies a board’s duties to shareholders.
Centro’s 2007 annual report failed to disclose A$1.5 billion ($1.6 billion) of short-term liabilities by classifying them as non-current, and the company didn’t declare $1.75 billion of short-term debt guarantees of an associated company, Judge John Middleton wrote in a 189-page ruling yesterday in Melbourne. The mall manager also didn’t disclose A$500 million of short-term debt at one of its units, the judge said.
“This proceeding is not about a mere technical oversight,” Middleton wrote. “The information not disclosed was a matter of significance to the assessment of risks facing” Centro and its unit Centro Retail Group, he said.
The ruling makes clear directors have a responsibility to ensure the accuracy of a company’s financial statements, Greg Medcraft, chairman of the Australian Securities & Investment Commission, said at a news conference in Sydney. The ruling also shows the danger boards face when they rely uncritically on management or auditors, Medcraft said.
Centro is reviewing the ruling and will comment further this week, it said in a statement to the Australian Stock Exchange.
“The critical task of restructuring Centro in the best interests of all investors remains the priority,” the company said. “Today’s decision will not impact the progress being made on that front.”
The case is Australian Securities and Investments Commission v. Healey. VID750/2009. Federal Court of Australia (Melbourne).
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BTA Wins 18-Month Sentence for Ex-Chairman’s Brother-in-Law
Syrym Shalabayev, the brother-in-law of ex-BTA Bank Chairman Mukhtar Ablyazov, was sentenced to 18 months in a U.K. jail in connection with an alleged fraud at the Kazakh bank that defaulted on $12 billion of debt.
Shalabayev, whose whereabouts are unknown, failed to reveal his assets or cooperate in the case, Justice Michael Briggs ruled yesterday in the High Court in London. An arrest warrant was issued against him last month and yesterday he received two 18-month sentences to run concurrently, and a conditional six month sentence if he continues to fail to comply with court orders.
“This is a very serious case of total non-compliance,” Briggs said in his ruling. “It’s a case where the claimants continue to have a pressing need for Shalabayev to comply.”
BTA, Kazakhstan’s biggest lender before it was nationalized in 2009, has sued Ablyazov and ex-Chief Executive Officer Roman Solodchenko in the U.K. over claims they siphoned money from the bank through fake loans to offshore shell companies as early as 2005. Shalabayev allegedly helped create false documents to hide Ablyazov’s ties to the entities.
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