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Google, Immigration, JPMorgan, Swiss Accounts: Compliance

Google Inc. agreed to pay $500 million to settle U.S. allegations that advertising for online Canadian pharmacies on its website allowed illegal imports of prescription drugs.

Google was aware as early as 2003 that the shipment of prescriptions to the U.S. from outside the country is illegal, the Department of Justice said in a statement yesterday. The payment represents revenue that Google generated from the ads and that Canadian pharmacies reaped from online drug sales to American consumers, the DOJ said.

“This settlement ensures that Google will reform its improper advertising practices with regard to these pharmacies while paying one of the largest financial forfeiture penalties in history,” Deputy Attorney General James Cole said in the statement.

Google, owner of the world’s most popular search engine, is grappling with increasing scrutiny from governments around the world, including an investigation of its business practices by the U.S. Federal Trade Commission. As part of the settlement, there will be “a number of compliance and reporting measures,” the DOJ said, without providing further details.

Google had $29.3 billion in revenue last year, almost entirely from advertising. The Mountain View, California-based company said in May that it had set aside $500 million to resolve an investigation of its ad business.

“We banned the advertising of prescription drugs in the U.S. by Canadian pharmacies some time ago,” Google said in an e-mailed statement yesterday. “However, it’s obvious with hindsight that we shouldn’t have allowed these ads on Google in the first place.”

In December 2010, Google joined Microsoft Corp., Yahoo! Inc. and other companies in helping establish a nonprofit organization to fight illegal Internet pharmacies. Counterfeit drug sales account for about $75 billion in global sales, the National Association of Boards of Pharmacy said at the time. About 1 percent to 2 percent of prescription medicines in North America are counterfeit, according to the pharmacy group.

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Compliance Policy

Alabama Immigrant Status Checks May Spark Suits, Judge Says

Alabama’s new immigration law requiring that police officers check immigrants’ legal status might lead to lawsuits for unlawful detention, a judge said in a hearing on challenges to the statute.

“There are a lot of problems with this statute,” U.S. District Judge Sharon Blackburn in Birmingham, Alabama, said yesterday in a hearing on three cases filed by the federal government, groups including the American Civil Liberties Union and Christian clergy. “My job is to decide if this is constitutional.”

The measure, to go into effect Sept. 1, requires police officers to verify the immigration status of anyone they stop and suspect may be in the U.S. illegally. Businesses must use a federal database called E-Verify to determine whether job applicants are eligible to work. And it’s a crime to rent housing to illegal immigrants.

The U.S. Justice Department and the ACLU argue that federal law governs the handling of undocumented immigrants. Roman Catholic, Episcopal and Methodist clergy say the statute makes it illegal for them to fulfill their mission to feed, clothe and give communion to undocumented aliens.

Alabama is the fifth U.S. state to enact such legislation. The three lawsuits are consolidated before Blackburn.

Governor Robert Bentley signed the bill into law in June.

The cases are Hispanic Interest Coalition of Alabama v. Bentley, 5:11-cv-2484, Parsley v. Bentley, 5:11-cv-2736, and U.S. v. Bentley, 5:11-cv-2746, U.S. District Court, Northern District of Alabama (Birmingham).

Compliance Action

Switzerland, U.K. Agree to Settlement in Tax-Evasion Dispute

Switzerland and the U.K. completed an agreement to end a dispute over tax evasion by wealthy Britons holding offshore accounts with Swiss private banks.

Swiss banks will pay 500 million Swiss francs ($629 million) to the U.K. government to cover the failure by their clients to disclose undeclared money in the past, Switzerland’s Finance Ministry said yesterday. The banks will later be reimbursed from taxes paid by their customers.

The accord “respects the protection of bank clients’ privacy, but also ensures the implementation of legitimate tax claims,” the ministry said in an e-mailed statement from the Swiss capital, Bern.

The treaty comes after Switzerland agreed in March 2009 to meet international standards to avoid being blacklisted as a tax haven by the Organization for Economic Cooperation and Development. The settlement may trigger outflows by Britons who question the value of cross-border accounts as Swiss banking secrecy crumbles and follows a similar accord with Germany earlier this month.

“The days when it was easy to stash the profits of tax evasion in Switzerland are over,” U.K. Chancellor of the Exchequer George Osborne said in an e-mailed statement. “We will be as tough on the richest who evade tax as on those who cheat on benefits.”

Swiss banks will levy a withholding tax of 48 percent on investment income and 27 percent on capital gains earned by Britons with offshore accounts, according to yesterday’s statement. Revenue generated will go to the British Treasury, while client identities remain secret.

The initialed tax agreement should be signed by both governments in the next few months and is expected to come into force in 2013, the Treasury said.

Switzerland is the world’s biggest center for offshore wealth with about 1.96 trillion francs of assets last year, according to Boston Consulting Group.

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SEC Wins Civil Judgment Against Fugitive Analyst Deep Shah

The U.S. Securities and Exchange Commission won a judgment against Deep Shah, who has been declared a fugitive in the insider trading case of Galleon Group LLC co-founder Raj Rajaratnam, that includes a civil penalty of $24.6 million.

Shah, an ex-analyst at Moody’s Investors Service Inc., was charged in November 2009 by Manhattan U.S. Attorney Preet Bharara and sued by the SEC for allegedly passing along inside information about acquisitions involving Hilton Hotels Corp. and Kronos Inc.

The commission sought a default judgment in June against Shah claiming that he had not responded to its suit. U.S. District Judge Jed Rakoff signed the order Aug. 22 and it was filed Tuesday in federal court in Manhattan.

The judgment says Shah must pay back $8.2 million in profits gained or losses avoided as a result of the conduct alleged in the complaint, along with prejudgment interest of $1.76 million and the civil penalty.

The SEC is “pleased with the decision,” spokesman John Nester said.

Lawyers for the SEC said in court documents filed in March that the commission had located Shah in Mumbai, where a bailiff found Shah’s residence in the Juhu neighborhood of the city and left an amended complaint on March 22, 2010.

Shah is accused of tipping Roomy Khan, a former Intel Corp. product-marketing engineer, in 2007 to material nonpublic information about pending takeover bids for Hilton Hotels Corp. and Kronos Inc. Khan then passed on the tips to Rajaratnam, prosecutors said; she pleaded guilty in 2009.

The case is Securities and Exchange Commission v. Galleon Management LP, 09-cr-8811, U.S. District Court, Southern District of New York (Manhattan).

Chicago Hedge Fund Principal Pleads Guilty to Wire Fraud

Philip J. Baker, principal of the collapsed Chicago hedge fund Lake Shore Asset Management Ltd., yesterday pleaded guilty to one count of wire fraud for his role in an alleged $292 million global scheme.

Indicted in absentia in February 2009 for his role in the scheme that ensnared about 900 investors, Baker had faced 27 criminal counts including 17 for wire fraud and two for commodities fraud, as well one count of embezzlement of commodity pool funds. He pleaded not guilty last year after being extradited from Hamburg.

Baker is also liable for $154 million in restitution, U.S. District Judge John W. Darrah in Chicago said. Sentencing is set for Nov. 17.

“The government will recommend the maximum term of 20 years in prison when Baker is sentenced,” Chicago U.S. Attorney Patrick Fitzgerald said in an e-mailed statement after the plea was entered. A trial had been scheduled for Sept. 19.

Baker’s lawyer, Kurt Stitcher of Baker & Daniels LLP, declined to comment after the hearing.

The criminal case is U.S. v. Baker, 1:09-cr-00175, and the civil case is U.S. Commodity Futures Trading Commission v. Lake Shore Asset Management Ltd., 1:07-cv-03598, U.S. District Court, Northern District of Illinois (Chicago).

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CIFG Opposes BofA’s Mortgage-Bond Accord With Investors

Bank of America Corp.’s proposed $8.5 billion mortgage-bond settlement, which has drawn criticism from a group of investors and two states, is opposed by bond insurance company CIFG Assurance North America Inc.

The accord requires approval from a New York state judge, and CIFG filed a “notice of intention to appear and object” to the agreement yesterday in New York State Supreme Court.

The proposed settlement calls for Bank of America to pay $8.5 billion to resolve claims from investors in Countrywide Financial Corp. mortgage bonds. Charlotte, North Carolina-based Bank of America acquired Countrywide in 2008.

Lawrence Grayson, a Bank of America spokesman, declined to comment.

The case is In the matter of Bank of New York Mellon, 651786/2011, New York State Supreme Court, New York County (Manhattan).

New Suits

JPMorgan Sues Homebuilder Over Share of $381.7 Million Loan

JPMorgan Chase & Co., leader of a group of lenders owed $381.7 million on a bankrupt homebuilding project in Henderson, Nevada, sued Meritage Homes Corp. to recover the builder’s share of a guarantee.

JPMorgan and other lenders agreed in 2004 to advance as much as $535 million to builders including Meritage and Beazer Homes USA Inc., taking repayment guarantees from each builder, according to a complaint filed Aug. 22 in Las Vegas. The share of Meritage for the loans advanced to date is $13.3 million, JPMorgan said in the filing as it asked a judge to compel payment.

“JPMorgan has made due demand under the repayment guaranty, and the defendants have failed and refused to pay their liabilities,” the bank said.

South Edge LLC, which is owned by the builders, is in bankruptcy court in Nevada. The bankruptcy triggered the repayment guarantee, JPMorgan said.

Meritage sued the bank Aug. 19 in state court in Ohio, where the JPMorgan unit that is the trustee for the lenders is based. Meritage asked a judge to rule the homebuilder doesn’t have any obligations to the lenders and seeks $8 million in damages.

Meritage claims that it tried to pay the lenders in April 2008 but JPMorgan refused to accept the payment.

Meritage’s claim for damages is based on losses related to the drop in value of the property and legal fees, company Chief Financial Officer Larry W. Seay said yesterday in a telephone interview.

The case is JPMorgan v. Meritage Homes, 11-cv-01364, U.S. District Court, District of Nevada (Las Vegas).

FDIC Sues Ex-First National Bank of Arizona CEO Over Losses

Ex-First National Bank of Arizona Chief Executive Officer Gary A. Dorris and former director Philip A. Lamb “sacrificed safety” and promoted risky nontraditional mortgage loans that ultimately caused the bank’s failure, the Federal Deposit Insurance Corp. said in a lawsuit.

Dorris and Lamb were negligent in exercising their duties, given the obvious risks of the bank’s business model, the agency said yesterday in a complaint in federal court in Phoenix.

“Although these risky loans returned record profits in the near term, they produced losses once the real estate market softened, and ultimately caused the bank’s failure,” the agency said in the complaint, which seeks to recover more than $193 million in damages.

As of Aug. 4, the FDIC has authorized lawsuits against 266 officers and directors in an effort to recoup more than $6.8 billion in losses stemming from the credit crisis, the agency said on its Web site. An additional 172 residential malpractice and mortgage fraud lawsuits are pending, consisting of lawsuits filed and inherited, the agency said. More than 350 lenders have failed since the start of 2008.

A woman who answered the phone at Dorris’s home in Scottsdale, Arizona, said he was unavailable. Lamb has no public phone listing and couldn’t immediately be reached for comment.

The case is Federal Deposit Insurance Corp. v. Dorris, 2:11-cv-01652, U.S. District Court, District of Arizona (Phoenix).

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