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JPMorgan, Wells Fargo, Allied, Galleon in Court News

JPMorgan Chase & Co. won dismissal of $19 billion in claims in a lawsuit brought by the trustee liquidating Bernard Madoff’s former firm that alleges the biggest U.S. bank aided the fraud.

Trustee Irving Picard lacks standing to demand common-law damages on behalf of customers of Bernard L. Madoff Investment Securities LLC, U.S. District Judge Colleen McMahon ruled yesterday in New York. The decision also eliminates most of the $2 billion in claims Picard sought from UBS AG.

The ruling removes a potential liability for JPMorgan and chips away another chunk of the $100 billion Picard sought for the con man’s investors. U.S. District Judge Jed Rakoff in July threw out almost $9 billion in damages that Picard demanded from HSBC Holdings Plc and feeder funds, saying the trustee couldn’t bring common-law claims against them.

“We are pleased that Judge McMahon agreed with our arguments and has dismissed all of the trustee’s common law claims for damages,” Jennifer Zuccarelli, a JPMorgan spokeswoman, said in an e-mail.

Picard plans to appeal McMahon’s decision to the U.S. Court of Appeals in Manhattan, said Amanda Remus, a spokeswoman for the trustee. Picard claimed in the suits that New York-based JPMorgan and Zurich-based UBS aided in the fraud and are liable to the people who lost money.

“The trustee and his counsel remain confident in the cases brought against JPMorgan Chase and UBS and related entities as well as in the trustee’s standing to pursue all the claims in connection with those cases,” Remus said yesterday in an e-mailed statement.

JPMorgan said it didn’t know about, or in any way become a party to the fraud, and couldn’t be held responsible for a scheme orchestrated by Madoff alone.

Madoff is serving a 150-year prison term following a guilty plea. Picard and his firm have made about $224 million in fees since Madoff’s 2008 arrest.

The cases are Picard v. JPMorgan Chase & Co., 11-cv-913; Picard v. UBS Fund Services (Luxembourg) SA, 11-cv-4212, U.S. District Court, Southern District of New York (Manhattan).

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New Suits

Wells Fargo Sued by Loreley Over $163 Million in CDOs

A Wells Fargo & Co. unit was sued by Loreley Financing for allegedly conspiring to defraud it in the sale of $163.3 million of collateralized debt obligations.

Wells Fargo Securities LLC created the CDOs, made material misrepresentations and was unjustly enriched by the investments Loreley purchased, Loreley said in a summons filed yesterday in New York State Supreme Court in Manhattan. The document didn’t contain specifics about the allegations. Loreley wants its money back and unspecified punitive damages.

Loreley is a group of special-purpose entities based in Jersey, the largest of the Channel Islands, a dependency of the U.K. with its own legislative assembly and known as a tax haven. The entities were formed for long-term investing in CDOs, pools of assets such as mortgage bonds packaged into new securities, Loreley said in an Oct. 5 lawsuit it filed against Deutsche Bank AG over $440 million in CDO purchases.

Elise Wilkinson, a spokeswoman for San Francisco-based Wells Fargo, didn’t return a voice-mail seeking comment on the lawsuit.

The case is Loreley Financing v. Wells Fargo Securities, 653037/2011, New York State Supreme Court (Manhattan).

Allied Home Mortgage Sued by U.S. Over Lending Practices

Allied Home Mortgage Capital Corp., which last year claimed to be the biggest closely held mortgage broker in the U.S., was sued by federal authorities for alleged fraudulent lending practices.

The U.S. sued Allied, founder and Chief Executive Officer Jim Hodge and Jeanne Stell, Allied’s chief compliance officer. The government claims one-third of the 112,324 loans originated by Allied from 2001 to through 2010 defaulted, forcing the U.S. Department of Housing and Urban Development to pay $834 million in insurance claims, according to a complaint filed in federal court in Manhattan yesterday.

“Allied has profited for years as one of the nation’s largest FHA lenders by engaging in reckless mortgage lending, flouting the requirements of the FHA mortgage insurance program, and repeatedly lying about its compliance,” the U.S. said in the complaint. “In the past decade, Allied has originated loans out of hundreds of branches it never disclosed to HUD.”

The government, represented by the office of U.S. Attorney Preet Bharara in Manhattan, claims Hodge created a “culture of corruption” and used offshore compliance employees who didn’t even know what mortgages were. The U.S. is seeking triple damages from Allied under the federal False Claims Act.

The case is U.S. v. Allied Home Mortgage Corp., 11-cv-5443, U.S. District Court, Southern District of New York (Manhattan).

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FirstPlus Financial Hit by Mob Takeover, Prosecutors Say

FirstPlus Financial Group Inc., a Texas mortgage company, was taken over through extortion by reputed associates of the Lucchese organized crime family, U.S. prosecutors charged.

Nicodemo S. Scarfo, Salvatore Pelullo and others seized control of FirstPlus in June 2007 “by threatening its existing management,” federal prosecutors charged in an Oct. 26 indictment unsealed yesterday in Camden, New Jersey. Scarfo is the son of Nicodemo “Little Nicky” Scarfo, the imprisoned boss of the Philadelphia-area mob, prosecutors say.

Scarfo and Pelullo forced the new management to approve the acquisition of companies they owned that had little, if any, value, according to the indictment. Scarfo and Pelullo looted FirstPlus of hundreds of thousands of dollars through phony consulting agreements and used the stolen money to finance lavish lifestyles that included “a luxury home for Scarfo, expensive automobiles, a yacht and jewelry,” the indictment said.

“The defendants gave new meaning to ‘corporate takeover’,” U.S. Attorney Paul Fishman said in a statement. “Investors should be free to invest in public companies without fear that violent criminal organizations are their puppetmasters.”

Prosecutors charged 13 people, including attorneys, a certified public accountant and two former FirstPlus executives. Little Nicky and Vittorio Amuso, the imprisoned boss of the Lucchese family, allegedly participated in the scheme from behind bars.

The case is U.S. v. Nicodemo S. Scarfo, 11-cr-740, U.S. District Court, District of New Jersey (Camden).

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Cattles Claims ‘Gross Misstatement’ of Bad Debt in PwC Audits

Cattles Plc, the U.K. subprime lender sold this year to creditors including Royal Bank of Scotland Group Plc, accused PricewaterhouseCoopers Plc of accounting failures before its shares were suspended in 2009.

Cattles has claims against PwC tied to the firm’s audits of its finances from 2005 through 2007 that could result in “substantial damages,” according to an outline of the case by Judge Henry Bernard Eder in London, who ruled yesterday on preliminary issues. The company said PwC’s audit led to a “gross misstatement” of the company’s bad debt.

While an official complaint hasn’t yet been filed, Cattles was awarded some legal costs against PwC yesterday in an evidentiary dispute. Cattles claims groups of loans that were “ostensibly” set aside for debt collection were in reality just buckets for bad debt, Eder said in the ruling, which didn’t address the merits of the case. “Once the misstatements became clear, the group could not continue trading and became worthless.”

The company, based in Batley, England, lent to customers with poor credit histories and is winding down its loan book after recording an extra 700 million pounds ($1.12 billion) of writedowns following the audit irregularities. Britain’s accounting regulator has been probing PwC’s handling of the disputed audits since 2009 and the U.K. Financial Services Authority started an investigation of Cattles the same year, a person familiar with the situation said at the time.

Cattles alleges PwC rewrote or deferred loans that were in long-term arrears instead of listing them as impaired, Eder said. When the problem was discovered, Cattles said it was forced to report a loss in 2008 of 745 million pounds and restate its earnings from the previous year to a loss of 98.5 million pounds, from a profit of 165.3 million pounds.

PwC spokesman David Jetuah PwC said the firm wasn’t aware of a claim against it and will vigorously defend its work.

Paul Marriott, a spokesman for Cattles, declined to say how much the company may seek in damages.

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BNY Seeks to Reverse Venue Ruling on BofA Mortgage-Bond Deal

Bank of New York Mellon Corp. is seeking to overturn a court decision that keeps Bank of America Corp.’s proposed $8.5 billion mortgage-bond settlement before a federal judge for review.

A federal judge in October denied BNY Mellon’s request to send the case back to the New York state court where it was first filed. BNY Mellon filed a petition to appeal with the U.S. Court of Appeals in Manhattan, bank spokesman Kevin Heine said yesterday. The filing, which asks the court to accept the appeal, couldn’t be immediately confirmed in court records.

“The district court’s decision is unquestionably important, consequential, and (at a minimum) fairly debatable,” the New York-based bank said in a copy of the filing provided by Heine.

BNY Mellon is the trustee for the mortgage-securitization trusts covered by the proposed $8.5 billion settlement, which resolves claims from investors in Countrywide Financial Corp. mortgage bonds. Bank of America, based in Charlotte, North Carolina, acquired Countrywide in 2008.

BNY Mellon filed the settlement in state court and had planned to seek approval of the deal this month before the case was removed to federal court.

In his decision keeping the case in federal court, U.S. District Judge William Pauley wrote that the settlement “implicates core federal interests in the integrity of nationally chartered banks and the vitality of the national securities markets.”

The case is Bank of New York Mellon v. Walnut Place LLC, 11-cv-5988, U.S. District Court, Southern District of New York (Manhattan).

Rajaratnam Says He Shouldn’t Have to Pay SEC More Penalties

Galleon Group LLC co-founder Raj Rajaratnam, convicted in May of insider trading and sentenced to 11 years in prison, shouldn’t have to pay the Securities and Exchange Commission additional penalties, his lawyers said.

Rajaratnam, 54, was ordered to pay a $10 million fine and forfeit $53.8 million at his Oct. 13 criminal sentencing, his lawyers noted yesterday in a filing in the lawsuit the SEC brought against him and Galleon in federal court in Manhattan.

The former hedge fund manager has “already suffered enormous financial consequences” and his penalty is “sufficient,” his lawyers told U.S. District Judge Jed Rakoff, who is presiding over the SEC case.

The lawyers said that Rakoff called Rajaratnam a “bad guy” during a previous hearing and described him as “someone who committed his wrongdoing to make a lot of money.” The lawyers asked the judge to review a pre-sentencing report prepared by court authorities to better understand him.

“Mr. Rajaratnam cares deeply about leaving behind a better world than the one to which he was born,” the lawyers quote the report as saying. “He truly cares about the causes he champions.”

Rajaratnam and Galleon should disgorge $31.6 million in illegal gains and the losses they avoided, plus prejudgment interest of $9.7 million, the SEC argued in court papers. They should also be fined three times the gains, or $94.7 million, the SEC said.

Rajaratnam’s lawyers disputed the government’s calculation of how much money he earned as a result of the securities fraud and insider tips he received from friends.

The case is SEC v. Rajaratnam, 09-CV-8811, U.S. District Court, Southern District of New York (Manhattan).

Dallas Seeks Texas Class Action in MERS Filing-Fee Suit

Dallas County, Texas, amended its lawsuit against Bank of America Corp. and Mortgage Electronic Registration Systems Inc. over unpaid filing fees, seeking to represent all counties in the state.

Dallas filed the complaint in September, alleging that Merscorp Inc.’s MERS, which runs an electronic registry of mortgages, cheated the county out of uncollected filing fees. MERS tracks servicing rights and ownership interests in mortgage loans on its registry, allowing banks to buy and sell loans without recording transfers with counties.

Dallas County District Attorney Craig Watkins revised the lawsuit Oct. 31 as a class action, or group case, seeking to represent all other Texas counties in which a deed of trust has been filed identifying MERS as a beneficiary. Dallas claims MERS was established by banks including Bank of America to avoid paying filing fees, as well as to ease transfers of mortgages.

“The MERS system has created massive confusion as to the true owners of the beneficial interests in mortgage loans and mortgages throughout the United States, and the loss of revenues has harmed U.S. counties,” Dallas County lawyers said in court papers.

The Dallas complaint has no merit, said Janis Smith, a spokeswoman for Reston, Virginia-based Merscorp.

“The allegations were false for Dallas County and they’re false statewide,” Smith said in an e-mail. “The MERS system does not violate Texas law.”

MERS has been sued by counties in Kentucky, Michigan, Ohio and Oklahoma, which also claim the MERS system cheated them out of filing fees.

Delaware’s attorney general last week filed an unrelated suit, alleging MERS used deceptive practices that hide information from borrowers.

Cases against MERS include Dallas County v. Merscorp Inc., 11-cv-02733, U.S. District Court, Northern District of Texas (Dallas); and Christian County Clerk v. Mortgage Electronic Registration Systems Inc., 5:11-cv-00072, U.S. District Court, Western District of Kentucky (Louisville).

News Corp. Lawyer Named Three Implicated in Hacking in 2008

News Corp.’s external lawyer told the company the names of three reporters may have been “intimately involved” in phone hacking at the News of the World newspaper in 2008, as James Murdoch discussed how much to offer a victim in an out-of-court settlement.

Correspondence and notes from 2008 between Julian Pike of Farrer & Co. and News Corp. executives in London were published by the U.K. Parliament’s Culture Committee yesterday. The documents show the three discussing how to handle evidence unearthed in a lawsuit brought by Gordon Taylor, chief executive of the Professional Footballers’ Association, whose phone had been hacked three years earlier.

“Our position is very perilous,” Tom Crone, the newspaper’s lawyer, wrote to News of the World editor Colin Myler, as the editor prepared to brief Murdoch on the case. “The damning e-mail is genuine and proves we actively made use of a large number of extremely private voice-mails from Taylor’s telephone.”

Murdoch, News Corp.’s deputy chief operating officer, is scheduled to testify to Parliament again next week about his role in the five-year-old scandal. The affair accelerated in July, prompting News Corp. to close the 168-year-old tabloid and drop its 7.8 billion-pound ($12.4 billion) bid for full control of British Sky Broadcasting Group Plc.

The documents confirm Pike’s evidence to the committee on Oct. 19, when he revealed a previously unknown meeting between Myler and Murdoch over the Taylor case on May 27, 2008. Pike’s notes of a conversation with Myler later that day showed Murdoch seeking a formal legal opinion.

Pike’s formal advice to News Corp. identified two of the reporters implicated as Greg Miskiw and Ross Hindley. The third name was obscured in the copy submitted to the panel of lawmakers. In what may be a reference to the three journalists Pike had identified from the evidence, Myler said, according to Pike’s notes: “James wld (sic) say get rid of them -- cut out cancer.”

Both Miskiw and Hindley have been arrested as part of the police hacking probe.

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Transocean Asks Judge to Force BP to Indemnify Spill Damages

A Transocean Ltd. unit asked a U.S. judge to order BP Plc to honor a blanket indemnity against oil spill damages that the Deepwater Horizon rig owner claims was part of its drilling contract.

Transocean has claimed for more than a year that its drilling contract protects the company from paying any damages caused by more than 4.1 million barrels of crude that spewed from BP’s Macondo well off the Louisiana coast last year.

Transocean, based in Vernier, Switzerland, claims the indemnity provision requires BP to pay virtually all damages and cleanup costs, even if the drilling rig or rig crew was grossly negligent in causing the disaster. The federal Oil Pollution Act allows a contract to override BP’s rights to contribution for spill damages, Transocean said in court papers yesterday.

“There is no genuine dispute as to the terms of the governing drilling contract, which unambiguously require BP to defend, indemnify and hold Transocean harmless for the pollution claims at issue in this litigation,” the rig owner said. “It is settled law that an express indemnity trumps rights of contribution.”

Transocean asked U.S. District Judge Carl Barbier yesterday to rule in favor of the rig owner and to enforce the drilling contract indemnity.

More than 350 lawsuits representing thousands of claims by coastal property owners and businesses for oil-spill damages are consolidated before Barbier in New Orleans for pretrial processing. BP and Transocean and other companies involved in the drilling project face billions of dollars in damages claims in these suits.

BP sued Transocean in April to recover a part of more than $40 billion, claiming the drilling contractor shares blame for the disaster. Transocean filed counterclaims against BP accusing the oil company of breaching their contract by failing to defend the rig owner and hold it harmless against all claims.

Two government probes into causes of the Deepwater Horizon explosion found that both BP and Transocean were at fault for causing the blast that led to the worst offshore spill in U.S. history.

London-based BP claims Transocean’s conduct voided the indemnity clause. The oil giant contends the drilling company must pay its own share of any damages, which will be determined by a trial set to begin in February.

The case is In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, MDL-2179, U.S. District Court, Eastern District of Louisiana (New Orleans).

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Ex-Delphi Executives Owe $333,500 for Record-Keeping Breach

Former Delphi Corp. Chief Executive Officer J. T. Battenberg III must pay a $215,000 for violating U.S. securities laws by misrepresenting a $237 million payment to General Motors Corp., a U.S. judge ruled.

U.S. District Judge Avern Cohn in Detroit on Oct. 31 entered that judgment against Battenberg and a $118,500 sanction against former top Delphi accountant Paul Free. A Detroit jury in January found the men misrepresented the GM payment and found Free committed wrongdoing in three other transactions in 2000 and 2001.

The jury cleared the men of claims they committed fraud or helped the Delphi violate securities laws in the transaction. The U.S. Securities and Exchange Commission sued them in 2006.

“The remedies are for the court to decide,” Cohn said in separate memoranda explaining his rationale for each assessment.

Once the biggest U.S. auto-parts supplier, Troy, Michigan-based Delphi filed for bankruptcy protection after failing to win wage cuts and financial assistance from its former corporate parent, GM.

Delphi emerged from bankruptcy court protection in 2009.

Attorneys for Battenberg and Free said during trial there was no attempt to mislead investors and their clients didn’t commit fraud. The jury agreed there had been no fraud.

Battenberg’s lawyer, William Jeffress, and Free’s lawyer, Matthew Lund, didn’t reply to e-mailed requests for comment.

The case is SEC v. Battenberg, 06cv14891, U.S. District Court, Eastern District of Michigan (Detroit).

For the latest verdict and settlement news, click here.

Litigation Departments

Hedge Fund 3 Degrees Sues Ex-Lawyer After Order to Shut Down

3 Degrees Asset Management, ordered by Singapore regulators to shut down over allegations that founder Moe Ibrahim diverted assets, sued former lawyer Ng Wee Chong, claiming breach of duties.

3 Degrees claims Ng, 37, failed in “handling all legal aspects” related to two separate loans of $6.7 million each in November 2007, according to a lawsuit filed with the Singapore High Court on Oct. 28.

The Monetary Authority of Singapore and the finance minister decided to withdraw 3 Degrees’ exempt fund manager status effective Nov. 9 after Indonesian-born Agus Anwar alleged that the loans were “sham” transactions used by Ibrahim to divert funds to himself. The hedge fund, which managed about $215 million as of Oct. 5, has denied the allegations and is seeking to overturn the regulator’s decision.

Ng said Oct. 31 he wasn’t aware of any lawsuit filed against him. He declined to comment on the 3 Degrees allegations.

Ng, who was fired from the hedge fund in March 2009, had said in a statement to the central bank that the two loans were connected, according to court papers.

Some loan negotiations between 3 Degrees and Anwar’s agent were done through Google Inc.’s Gmail accounts instead of through official company e-mail addresses as Ibrahim “didn’t want to create a trail,” Ng said in the October 2010 statement to the authority.

“All transactions were commercial, properly documented and arm’s length in nature,” Ibrahim said. “It’s a false allegation by a disgruntled former employee who’s upset because he was terminated during his honeymoon.”

Ibrahim said the Nov. 9 withdrawal of the exempt status has been put on hold, pending a Nov. 14 court hearing.

Ibrahim claimed in court papers that he had no knowledge of the Gmail correspondence between Ng and Anwar’s agent. Anwar, who was sued by one of 3 Degrees’ funds in 2008 to recover at least $40 million of debt, borrowed $6.7 million from the fund.

Statements by Anwar and Ng “should be treated with utmost caution,” 3 Degrees said in court papers. Ng has “much to lose” by agreeing with the version of events given by Ibrahim and Esther Tan, head of the fund’s operations, according to court filings.

The case is 3 Degrees Asset Management Pte v. Ng Wee Chong S769/2011 in the Singapore High Court.

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