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UBS, Bank of America, Spitzer, Goldman Sachs: Compliance

U.S. prosecutors won a victory in their crackdown on offshore tax evasion when a federal appeals court said a former UBS AG client must turn over his bank records to a U.S. grand jury.

The client, identified only as M.H., must produce records sought by a federal grand jury in San Diego, according to the 9th U.S. Circuit Court of Appeals. A three-judge panel rejected M.H.’s constitutional argument that the Fifth Amendment right against self-incrimination should cover records on foreign bank accounts.

“It’s a huge win for the government,” said tax attorney Ed Robbins of Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills, California, who is not involved in the case. “This ruling says that the government has the right to go to any taxpayer anywhere and say, ‘Give me your foreign bank records’ and they’d have no Fifth Amendment protection.”

Prosecutors seek information that M.H. must keep under the Bank Secrecy Act, asking for the name and number of each account, the name and address of each bank, and the maximum values of accounts, according to the Aug. 19 opinion. Such record-keeping requirements mean M.H. must comply, the appellate panel ruled.

“Because the records sought through the subpoena fall under the Required Records Doctrine, the Fifth Amendment privilege against self-incrimination is inapplicable, and M.H. may not invoke it to resist compliance with the subpoena’s command,” according to the panel.

The grand jury issued a subpoena in June 2010 to M.H., who is the target of an investigation into whether he used secret Swiss bank accounts to evade taxes, according to the ruling. He transferred securities from his UBS account in 2002 to a different Swiss bank, UEB Geneva, according to the ruling.

M.H. attorney Pamela Naughton of Sheppard, Mullin, Richter & Hampton LLP in San Diego didn’t return calls seeking comment.

The case is In re Grand Jury Investigation M.H. v. United States of America, 11-55712, 9th U.S. Circuit Court of Appeals (San Francisco).

Compliance Action

Bank of America Unit Pays $5 Million in San Francisco Accord

Bank of America Corp.’s credit card unit agreed to pay $5 million and suspend arbitrations of consumer debt collections in California for two years to settle San Francisco’s lawsuit over its collection practices.

The agreement, filed yesterday in state court in San Francisco, resolved a 2008 lawsuit alleging that Bank of America’s FIA Card Services unit used an arbitration service that was biased in favor of the bank and against consumers. The National Arbitration Forum Inc., based in Minneapolis, employed unfair business practices while administering arbitrations for consumer who owed credit-card debt to the unit, according to the lawsuit.

FIA agreed not to use the mediation service in arbitrations for five years or enforce unconfirmed arbitration awards obtained through the company, said San Francisco City Attorney Dennis Herrera in an e-mailed statement. FIA is prohibited from barring consumers from suing the company as a group, according to the statement.

“Both sides agreed to the settlement to avoid the costs and uncertainty of further legal action,” Shirley Norton, a Bank of America spokeswoman, said in an e-mail.

Bank of America denies any wrongdoing, Norton said. The Charlotte, North Carolina-based company discontinued mandatory arbitration for consumer credit card disputes in August 2009 and hasn’t used National Arbitration Forum since then, she said.

The bank, the largest U.S. lender, also eliminated mandatory arbitration and requirements barring group lawsuits from consumer and small business credit card agreements, Norton said.

Mark Fellows, a spokesman for National Arbitration Forum, didn’t immediately return a voice-mail message seeking comment.

The case is People of State of California v. National Arbitration Forum, 473569, California Superior Court, County of San Francisco.

Ex-Duane Reade Chief Cuti Gets Three-Year Prison Sentence

Former Duane Reade Inc. Chief Executive Officer Anthony Cuti was sentenced to three years in prison for falsely inflating income and misleading investors.

Cuti, 65, of Saddle River, New Jersey, was convicted in June 2010 of conspiracy and securities fraud after a federal jury trial in U.S. District Court in Manhattan. U.S. District Judge Deborah Batts yesterday also ordered Cuti to pay a $5 million fine.

Cuti was “a gifted, arrogant, driven, entitled individual,” Batts said, adding that he had “bullied people into committing fraudulent acts to make the company look better than it actually was” to increase his executive compensation.

Batts said Cuti was also guilty of “the height of hubris” for re-writing his employee compensation plan.

Cuti didn’t admit any wrongdoing when he spoke in court before the sentence was imposed. “I’ve always led my life with integrity,” Cuti said as his wife, adult daughter and brother sat in the courtroom. “The conviction is so at odds with what I’ve tried to be.”

Cuti’s lawyer, Reid Weingarten, yesterday asked Batts to impose no jail time and allow his client to remain free to perform public service.

“He was not a guy motivated by greed and driven to line his pockets,” said Weingarten. Investors weren’t harmed, he argued, and said they had profited from Cuti’s transformation of Duane Reade from “a sleepy nearly bankrupt drug store on a Manhattan street corner to being a force to be reckoned with.”

Former Duane Reade Chief Financial Officer William Tennant, who was tried with Cuti and convicted of one count of securities fraud, is scheduled to be sentenced Aug. 29. The U.S. said both men engaged in a scheme to falsely increase revenue and lower expenses from 2000 to 2005.

Batts yesterday directed Cuti to surrender to U.S. Bureau of Prisons officials on Jan. 31.

The case is U.S. v. Cuti, 08-cr-00972, U.S. District Court, Southern District of New York (Manhattan).

America Movil Mexico Dominance Rulings to Get Speedy Review

America Movil SAB will get a speedy review by Mexico’s Federal Competition Commission in an appeal of its findings that the company is dominant in five aspects of the phone business, the nation’s antitrust chief said.

The antitrust agency will honor a Supreme Court decision last week requiring it to review its 2009 and 2010 rulings that America Movil’s Mexican units were dominant in fixed-line and mobile telecommunications, Eduardo Perez Motta said yesterday. While the agency has 60 business days to review an appeal, it will seek to complete the process more quickly, he said.

The court decision stalls Mexican regulators’ plans to chip away at the market share of America Movil, controlled by billionaire Carlos Slim. The Federal Telecommunications Commission, which had expected to issue new rules this year based on the antitrust agency’s findings, will have to await the results of the review, Perez Motta said.

“What we’re going to do is issue our findings as soon as possible,” Perez Motta said in a phone interview. “I welcome this decision by the Supreme Court because it clears up where we go from here.”

America Movil, based in Mexico City, has about 70 percent of Mexico’s wireless subscribers. Its Telefonos de Mexico SAB unit, also known as Telmex, has about 78 percent of the fixed-line market.

The antitrust agency must wait for instructions from lower courts before beginning the review process, Perez Motta said.

Telmex dominates the markets for originating phone calls, carrying local calls, completing calls and leasing lines to rivals, the antitrust agency found in 2009. The agency found America Movil’s wireless unit dominant in the mobile-phone market the following year.

America Movil asked the antitrust commission to review those rulings. Perez Motta’s agency didn’t find a legal basis for granting a review and denied America Movil’s request, setting up a court fight that led to the Supreme Court ruling.

The dominance findings are separate from antitrust commission decisions this year to assess fines of $1 billion against America Movil and of $7.4 million against Telmex for anticompetitive practices. The antitrust agency has accepted America Movil’s requests to review those cases.

Blankfein Hires Lawyer Weingarten for Justice Investigation

Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein and other employees hired attorneys this year when the U.S. began a probe of matters raised by the Senate’s Permanent Subcommittee on Investigations.

Attorney General Eric H. Holder said on May 3 that the Justice Department was reviewing an April report on the financial crisis by the Permanent Subcommittee, led by Carl M. Levin, a Michigan Democrat, and Thomas A. Coburn, Republican of Oklahoma. The report accused Goldman Sachs of misleading clients about complex mortgage-related investments in 2007, and Levin alleged that Blankfein misled Congress.

“As is common in such situations, Mr. Blankfein and other individuals who were expected to be interviewed in connection with the Justice Department’s inquiry into certain matters raised in the PSI report hired counsel at the outset,” the company said yesterday in an e-mailed statement.

Goldman Sachs fell 4.7 percent in New York trading on concern that Blankfein’s hiring of a criminal defense attorney could mean the firm will face more legal woes. He has been represented by Reid H. Weingarten, a partner at Steptoe & Johnson LLP in Washington, since the Justice Department inquiry began, according to a person familiar with the matter.

Blankfein, 56, hasn’t been charged with wrongdoing amid federal probes of Wall Street’s role in the housing boom and credit crisis. Goldman Sachs is paying Blankfein’s legal costs, according to the bank.

Goldman Sachs has said the testimony its employees gave to the Permanent Subcommittee “was truthful and accurate and this is confirmed by the subcommittee’s own report.”

“The fact that the attorney was hired months ago rather than recently moderates the impact and implications of the story,” William Tanona, an analyst at UBS AG who has a “buy” rating on the stock, wrote in a note yesterday. Still “these continued distractions increase the probability of a management reshuffle over the next few years, which will undoubtedly cause some investor angst.”

Alisa Finelli, a Justice Department spokeswoman, declined to comment. Weingarten didn’t respond to e-mail and phone messages requesting comment.

Goldman Sachs, the fifth-biggest U.S. bank by assets, was subpoenaed earlier this year by the Manhattan District Attorney’s office for information related to the Permanent Subcommittee’s report, a person familiar with the matter said in early June.

Compliance Policy

Swiss President Says U.S. Approach in Tax Probe ‘Unacceptable’

Swiss President Micheline Calmy-Rey said the way U.S. tax authorities are seeking information from Switzerland on alleged tax evasion by Americans is “legally unacceptable.”

“These means are too drawn out, legally unacceptable or politically unjustifiable,” Calmy-Rey said in the text of a speech given yesterday in Lucerne, Switzerland.

Switzerland said in June that it was in talks with the U.S. to resolve the issue of untaxed assets held by American citizens in Swiss bank accounts. The U.S. Internal Revenue Service and the Justice Department have stepped up enforcement to combat offshore tax evasion after UBS AG, Switzerland’s biggest bank, handed over data on 4,450 accounts to resolve a lawsuit.

“I don’t think there’s an agreement on the table,” Donald Beyer, U.S. ambassador to Switzerland, said in an interview in Geneva yesterday. “The Americans and Justice, the IRS, and certainly the Swiss leaders, would like to find a solution that works for everybody.”

UBS avoided prosecution by paying $780 million, admitting it fostered tax evasion, and giving the IRS data on more than 250 accounts. U.S. prosecutors told Credit Suisse Group AG last month that it’s a target of a probe into its former cross-border banking services to American customers.

New Suits

FDIC Sues Ex-Silverton Directors, Officers for $71 Million

The Federal Deposit Insurance Corp. sued former directors and officers of Atlanta-based Silverton Bank N.A. seeking $71 million to help recoup costs stemming from the biggest bank collapse in Georgia history.

The bank consistently disregarded its own policies when making loans, according to the suit. At the same time, it built a “large and lavish” office building and spent millions on new corporate aircraft, the suit states.

“Silverton’s aggressive expansion plan was accompanied by significant weaknesses in loan underwriting, credit administration and a complete disregard of a declining economy,” the FDIC said in its complaint.

The damages sought by the FDIC represent less than a fifth of the $386 million it spent on Silverton, which was declared insolvent in May 2009, the lawsuit alleges.

Begun in 1986 to serve small community banks, Silverton gained a national charter and expanded into real estate development and acquisition loans, according to the suit. Its assets grew to $3 billion in 2008 from $1.7 billion in 2005, the FDIC said in its complaint.

The suit names former chief executive officer and board member Tom A. Bryan, former Chief Lending Officer Brian D. Bueche, and former Chief Credit Officer and Senior Vice President Brock Fredette. A message seeking comment on the case left at a home number for Bryan, the lead defendant, wasn’t returned.

The agency sued 14 other former directors as well.

The case is Federal Deposit Insurance Corporation v. Bryan, 1:11-CV--2790, Northern District of Georgia (Atlanta).

ShengdaTech Board Sues CEO in Chinese Reverse Merger Case

Board members of ShengdaTech Inc., a Chinese company that gained access to U.S. investors through a reverse merger, sued the chief executive officer of the bankrupt chemical maker, claiming he’s obstructing an internal fraud investigation.

A special committee of ShengdaTech sued Chen Xiangzhi to prevent him from regaining control of the company, ending a probe of its finances and ousting a newly appointed chief restructuring officer.

Reorganizing ShengdaTech requires “the continued existence of the special committee and the CRO, and the preservation of their independent powers,” the board members said in court papers filed Aug. 20 in U.S. Bankruptcy Court in Reno, Nevada.

Chen could not be immediately reached for comment at ShengdaTech offices, where no one answered the phone before business hours in China.

ShengdaTech makes nano precipitated calcium carbonate, or NPCC, a chemical additive used in automotive and polyvinyl chloride products. The company was organized by a so-called reverse merger in 2006 and traded on the Nasdaq Stock Exchange until April, when it failed to file an annual financial report and its auditor resigned.

Since 2007, more than 150 Chinese companies with a market value of $12.8 billion entered U.S. markets through reverse mergers, according to the Public Company Accounting Oversight Board, which oversees auditors of public companies. During that same period, about 50 Chinese companies filed initial public offerings.

In a reverse merger, a company not listed in the U.S. buys an American public shell corporation, allowing the new entity to avoid the scrutiny of an initial public offering.

U.S. exchanges have frozen or delisted shares of more than a dozen China-based firms since March.

The case is In re ShengdaTech Inc., 11-52649, U.S. Bankruptcy Court, District of Nevada (Reno).

Ex-Marsh & McLennan Executives Sues Spitzer, Slate Magazine

Two former Marsh & McLennan Cos. executives, who had insurance-fraud charges against them dropped, sued ex-New York Attorney General Eliot Spitzer claiming they were defamed in a Slate magazine article.

In the suit, William Gilman claimed Spitzer, in a opinion piece written in response to a Wall Street Journal editorial critical of his investigation, indicated that Gilman, who wasn’t named in the article, had committed crimes. Gilman’s suit was filed in federal district court in Manhattan on Aug. 19. Edward McNenney, another former Marsh & McLennan executive, filed suit in New York State Supreme Court on Friday as well.

Gilman worked for Marsh & McLennan from 1976 to 2004, according to his complaint. In 2004 Spitzer announced an investigation into practices at the company, including fees paid by insurers to brokers who place business with them. Gilman was indicted in 2005 on 37 counts. He was convicted of one charge, restraint of trade and competition.

The convictions of Gilman and McNenney were thrown out by the trial judge, James Yates of state Supreme Court, who said newly discovered contradictory evidence “undermines the court’s confidence in the verdict.”

“I haven’t seen the lawsuit and so will not comment on it,” Spitzer said in a telephone interview. “The illegalities rampant at Marsh & McLennan leading to their fine of $850 million and the multiple judicial findings of illegality are clear from the public record.”

The Slate Group LLC was also sued by Gilman and McNenney. E-mails to the magazine’s press office seeking comment didn’t receive a reply.

Gilman is seeking at least $60 million in damages in the federal suit. McNenney seeks $30 million in the state case.

The federal case is Gilman v. Spitzer, 11-c-5843, U.S. District Court, Southern District of New York (Manhattan). The state case is McNenney v. Spitzer, 109628/2011, Supreme Court of the State of New York.

Comings and Goings

Gary Barnett Named Swaps Division Director by U.S. CFTC

Gary Barnett was named director of the Commodity Futures Trading Commission’s division of swap dealer and intermediary oversight, according to an e-mailed statement from the agency.

Barnett currently heads Linklaters LLP’s U.S. derivatives and structured finance practice group, according to the statement.

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