Willie Gault, the former NFL wide receiver and Olympic sprinter, was accused by U.S. regulators of taking part in a scheme to artificially inflate the stock of a medical-device company that he managed.
Studio City, California-based Heart Tronics repeatedly announced millions of dollars in fake sales orders for its heart-monitoring devices between 2006 and 2008, the Securities and Exchange Commission said in a complaint filed yesterday in the U.S. District Court in California.
The SEC also sued attorney Mitchell Stein, who controlled most of the company’s business activities and hired promoters to tout Heart Tronics stock on the Internet. Stein was named by the Justice Department in a parallel criminal case, the SEC said.
Stein’s handyman and chauffeur Martin Carter, as well as Gault’s co-chief executive officer J. Rowland Perkins, a founder of Creative Artists Agency LLC, one of the largest U.S. talent agencies, were also named in the SEC complaint.
Gault, 51, was installed as Heart Tronics’ president and co-CEO in October 2008 to generate publicity for the company and foster investor confidence, the SEC said. The defendants reaped nearly $8 million by trading the stock, according to the complaint.
“Stein took advantage of Gault’s celebrity to further prop up the image of Heart Tronics as a successful enterprise,” Stephen L. Cohen, an associate director in the SEC’s enforcement division, said in a statement. “Stein secretly sold millions of dollars in stock while peddling false claims of Heart Tronics’ lucrative sales orders, and has been living the high life off his illicit proceeds with multiple homes, exotic cars, and private jets.”
Jared Scharf, an attorney who represents Gault, Perkins and Heart Tronics, said his clients denied accounts of falsified sales. “The company intends to defend the lawsuit vigorously,” Scharf said.
A phone call to Stein’s Woodland Hills, California, law firm wasn’t immediately returned.
The case is Securities and Exchange Commission v. Heart Tronics, Inc., U.S. District Court, Central District of California (Los Angeles).
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Sam Zell Sues Shareholders Over Tribune Buyout He Engineered
Billionaire Sam Zell sued former shareholders of the bankrupt publisher Tribune Co., claiming he should be paid along with other creditors should a court rule the 2007 buyout he engineered was a fraud.
The suit, filed by the Zell-controlled company EGI-TRB LLC, defends the buyout as legitimate while also attempting to preserve Zell’s ability to collect money should a court disagree.
“If it is determined that the selling shareholder payments represent fraudulent conveyances, EGI-TRB is entitled to recover from such transfers or conveyances in an amount in excess of $225 million,” Zell’s attorneys said in court papers filed in state court in Chicago on Dec. 19.
Tribune, owner of the Los Angeles Times, the Chicago Tribune, television stations and cable channels, filed bankruptcy one year after Zell used borrowed money to buyout shareholders for $8.3 billion.
Abigayle Pfeiffer, a spokeswoman for shareholder Robert R. McCormick Foundation, didn’t immediately respond to a voicemail message seeking comment about the lawsuit.
Pre-buyout creditors including hedge fund Aurelius Capital Management LP claim the buyout was a so-called fraudulent conveyance because it put so much debt on Tribune the company couldn’t survive. Aurelius helped devise a strategy to file dozens of lawsuits against shareholders in state court.
The case filed by Zell is EGI-TRB LLC V. ABN Amro Clearing Chicago LLC et al. The bankruptcy case is In re Tribune Co., 08-bk-13141, U.S. Bankruptcy Court, District of Delaware (Wilmington).
NFL Sued by Retired Players for Brain-Injury Monitoring
The National Football League was sued by three retired players seeking to establish a medical monitoring program for brain injuries on behalf of all former players in the league.
Harry Jacobs, 74, Jerome Barkum, 61, and Tommy Mason, 72, said in a complaint filed in Manhattan federal court yesterday that they suffer from brain injuries as a result of repeated blows to the head during their playing days. Jacobs’s and Mason’s wives are also named as plaintiffs.
The retired players, who seek to represent all former NFL players in the U.S., asked the court for a declaration that the league knew or should have known that repeated head impacts and concussions put the players at risk of developing degenerative brain diseases later in life.
The players are seeking medical monitoring and unspecified personal-injury damages. Suits making similar claims were filed earlier this year in federal court in Philadelphia and state court in Los Angeles.
“The NFL has long made player safety a priority and continues to do so,” Greg Aiello, a spokesman for the league, said in an e-mailed statement. “Any allegation that the NFL intentionally sought to mislead players has no merit.”
Jacobs played linebacker-defensive end for 11 seasons with the Boston Patriots, Buffalo Bills and New Orleans Saints, according to Pro-Football-Reference.com.
Mason played 11 years with the Minnesota Vikings, Los Angeles Rams and Washington Redskins. A kick-returner and running back, Mason played in three Pro Bowls and was an All-Pro pick in 1963, according to Pro-Football-Reference.
Barkum, a first-round draft choice of the New York Jets in 1972, played his entire 12-year career with the team as a wide receiver and tight end, according to Pro-Football-Reference. He made the Pro Bowl in 1973.
The case is Jacobs v. National Football League, 11-CV-9345, U.S. District Court, Southern District of New York (Manhattan).
Lyondell Creditor Trustee Weisfelner Sues Over Transfers
Lyondell Chemical Co.’s trustee sued investors in New York state court, claiming that assets of the previously bankrupt company were fraudulently transferred in the 2007 buyout led by financier Leonard Blavatnik.
Lyondell shareholders realized an unfair premium in the sale, according to a complaint filed Dec. 19 in New York State Supreme Court by Edward S. Weisfelner on behalf of the LB Creditor Trust. Weisfelner said about $12.5 billion went to shareholders in the buyout, which was financed with “debt leveraged against the assets of Lyondell,” leading to the chemical maker’s 2009 bankruptcy.
“The $48 per share price paid to Lyondell shareholders pursuant to the merger was a ‘blowout price’ that resulted in a windfall to Lyondell shareholders and management,” according to the complaint. “Prior to being put into play by Blavatnik, Lyondell’s stock price had languished for years, struggling to occasionally rise above $30 per share.”
Lyondell reorganized in 2010 by resolving most of its disputes with creditors. Blavatnik and his company Access Industries Holdings Inc. didn’t take part in a settlement that included some of the other investors in the $22 billion buyout in 2007.
Weisfelner filed a similar, second amended complaint in a 2010 case on Dec. 19 in U.S. Bankruptcy Court in Manhattan against a series of investment funds.
Both lawsuits seek restitution for creditors.
The state case is Weisfelner v. Reichman, 653522-2011, Supreme Court of New York (New York County). The bankruptcy adversary proceeding is Weisfelner v. Fund 1, 10-4609, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
MetLife Must Defend Lawsuit Over Retained Asset Checkbook
MetLife Inc., the largest U.S. life insurer, must defend a lawsuit by the beneficiary of a policy who claimed the insurer paid $302,000 to the wrong person.
The suit was filed by Jose Herrera, who lived with his wife, Maria Diaz, until she died in 2006. Diaz had been covered by a U.S. program under which MetLife provided insurance to federal employees. When Diaz died, MetLife paid proceeds of her policy into a so-called retained asset account, in which MetLife kept custody of funds while issuing a checkbook to the beneficiary.
Herrera sued MetLife after learning that Diaz’s daughter by a prior marriage had allegedly forged his signature to a claim form and told MetLife to send the checkbook to the daughter’s home. MetLife wouldn’t make payments to Herrera, the beneficiary of Diaz’s policy, after the daughter allegedly forged Herrera’s name to $302,820 in checks, according to the complaint.
U.S. District Judge Lewis Kaplan in New York Dec. 19 rejected MetLife’s bid to dismiss the suit by Herrera, who said MetLife failed to exercise “reasonable caution” before issuing the checkbook. “Herrera simply claims monies allegedly due to him by virtue of the contract between the government and MetLife of which Diaz availed herself,” Kaplan said in an opinion.
MetLife is among more than 100 insurance carriers that earn investment income on billions of dollars owed to life insurance beneficiaries, Bloomberg Markets magazine reported last year.
John Calagna, a spokesman for the New York-based insurer, declined to comment on the ruling.
“I’m pleased with the judge’s decision,” Eric Wertheim, a lawyer for Herrera, said in a statement.
The case is Herrera v. MetLife, 11-cv-1901, U.S. District Court, Southern District of New York (Manhattan). The appellate case was Faber v. MetLife, 09-4901, 2nd U.S. Circuit Court of Appeals (New York).
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Trials and Appeals
De Beers’s $295 Million Antitrust Settlement Affirmed by Court
The U.S. Court of Appeals in Philadelphia yesterday upheld a $295 million settlement of a class-action, or group, lawsuit involving De Beers SA, the world’s largest diamond producer.
The plaintiffs include U.S. jewelry makers, retailers and consumers who bought De Beers diamonds from 1994. De Beers was originally sued in 2001 for allegedly controlling distribution and pricing for the diamond market in violation of both federal and state antitrust laws.
The appeal centered on the certification of the plaintiff class and the fairness of the settlement. A three-judge appeals panel originally found certification inappropriate and rejected the settlement approved by a district court judge.
The panel held in part that some of the indirect purchasers -- retailers and consumers -- didn’t have valid state-law claims because not all states allow indirect purchasers to bring antitrust actions.
After a rehearing, the full appeals court yesterday ruled that the class members had common injuries and raised similar legal issues based on De Beers’s alleged actions. The judge who wrote the original panel’s decision, Kent Jordan, dissented.
“It is very unusual to succeed in getting a class action settled on that magnitude and then have the court throw out the settlement,” Howard Langer, a class-action lawyer and an adjunct professor at the University of Pennsylvania Law School in Philadelphia, said in a phone interview.
Howard Bashman, an attorney representing the objectors to the class, said in a phone interview that there were “strong grounds” to appeal the decision to the U.S. Supreme Court.
“We are evaluating whether to follow that course,” he said.
De Beers -- while submitting a brief in the appeal didn’t argue the case before the full appellate court -- was represented by Skadden, Arps, Slate, Meagher & Flom LLP. Steven Sunshine of Skadden didn’t return a call seeking comment.
In November, Anglo American Plc bought the Oppenheimer family’s 40 percent stake in De Beers for $5.1 billion in cash. The deal increased Anglo’s stake in De Beers to as much as 85 percent, the London-based company said in a statement at the time of the deal.
The case is Arrigotti Fine Jewelry v. De Beers SA, 08-02881, U.S. Court of Appeals for the Third Circuit (Philadelphia).
JPMorgan Must Face Assured Guaranty Unit’s Suit, Court Says
A JPMorgan Chase & Co. asset-management business must face a lawsuit by a unit of Assured Guaranty Ltd., New York state’s highest court ruled, upholding an appeals court’s ruling allowing the suit to proceed.
J.P. Morgan Investment Management was sued in 2008 and accused of mismanaging the investment portfolio of a special purpose entity named Orkney Re II Plc whose obligations were guaranteed by Assured Guaranty.
The Court of Appeals in Albany yesterday upheld a ruling by an appellate court in Manhattan that common-law causes of action for breach of fiduciary duty and gross negligence brought by Assured Guaranty were not preempted by state securities laws. A lower court had dismissed the complaint at the request of the defendants.
“The purpose of the Martin Act is not impaired by private common-law actions that have a legal basis independent of the statute because proceedings by the attorney general and private actions further the same goal -- combating fraud and deception in securities transactions,” Judge Victoria Graffeo wrote in the ruling.
JPMorgan will continue to defend itself against the claims in the suit, Doug Morris, a spokesman for the New York-based bank, said in an e-mail.
“We believe that we acted appropriately at all times with respect to the management of the client’s accounts,” Morris said. “This is a decision related to the adequacy of the pleadings and not to the merits of the claims.”
The case is Assured Guaranty Ltd. v J.P. Morgan Investment Management Inc., 603755/2008, New York state Supreme Court (Manhattan).
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Verdicts, Settlements, Pleas and Sentences
Aon Will Pay $16.3 Million to Resolve U.S. Bribery Probes
Aon Corp., the largest insurance broker, agreed to pay $16.3 million to resolve criminal and civil probes of possible bribes paid overseas to get business.
Aon settled a civil enforcement action by the U.S. Securities and Exchange Commission, agreeing to pay $14.5 million and denying wrongdoing. Chicago-based Aon also will pay a $1.76 million criminal fine and signed a Justice Department non-prosecution agreement that requires anti-bribery controls.
Aon subsidiaries made more than $3.6 million in improper payments between 1983 and 2007 related to business in countries including Costa Rica, Egypt, Vietnam, Indonesia, United Arab Emirates, Myanmar and Bangladesh, the SEC alleged. The payments led to $11.4 million in illicit profits, the agency claimed.
“Aon’s liability is not premised on an isolated instance of misconduct,” Kara Brockmeyer, chief of the SEC Enforcement Division’s Foreign Corrupt Practices Act unit, said in a statement. “Rather, for years, Aon’s subsidiaries repeatedly engaged in misconduct around the world.”
In 2009, Aon paid a 5.25-million pound ($7.9 million) fine to Britain’s Financial Services Authority for not having sufficient anti-bribery controls.
The Justice Department agreed to not prosecute Aon for violating the FCPA. It cited Aon’s “extraordinary cooperation” with the Justice Department and SEC, its “timely and complete disclosure” of facts about improper payments in eight nations, its “early and extensive remedial measures,” and the fine it paid to the FSA.
“Acting with integrity is Aon’s core value and we embody this in our commitment to the highest professional standards,” said Greg Case, chief executive officer and president, in a statement. “Aon has invested a significant amount of time and resources in anti-corruption compliance and transparency to greatly enhance our controls and processes.”
Amaranth’s $77.1 Million Manipulation Settlement Approved
A federal judge approved a $77.1 million settlement by Amaranth Advisors LLC, the hedge fund that collapsed in 2006 after losing $6.6 billion on natural gas trades, of a lawsuit brought by traders who accused it of market manipulation.
U.S. District Judge Shira Scheindlin, in an order Dec. 15, approved the agreement, which was filed two days earlier in Manhattan federal court by plaintiff’s attorney Christopher Lovell of Lovell Stewart Halebian Jacobson LLP. The parties had reached a tentative agreement in October. A hearing on final approval of the class-action, or group, accord is scheduled for March 27, according to court filings.
In August 2009, the Commodity Futures Trading Commission announced that Greenwich, Connecticut-based Amaranth paid $7.5 million to settle allegations that the hedge fund tried to manipulate natural gas futures three years earlier. In their suit, the traders presented an expert who estimated damages at $3.5 billion, court records show.
“The plaintiffs compromised to a tiny fraction of their overall claim,” Stephen Senderowitz of Winston & Strawn LLP in Chicago, a lawyer for Amaranth, said yesterday in a phone interview. The settlement avoided the cost and risk of a trial, and paves the way for investors to receive any remaining funds, he said.
In April, the Federal Energy Regulatory Commission issued a $30 million civil penalty against Brian Hunter, an Amaranth trader accused of manipulating the natural gas market in 2006.
Lovell didn’t return calls seeking comment on the settlement.
The case is In Re Amaranth Natural Gas Commodities Litigation, 07-06377, U.S. District Court, Southern District of New York (Manhattan.)
Columbia Student Jose Perez Pleads Guilty in Drug Case
Jose Stephan Perez, one of five Columbia University students arrested a year ago and accused of selling drugs on campus, pleaded guilty to a felony count of drug possession.
The 21-year-old Atlanta resident pleaded guilty yesterday in Manhattan before Justice Michael Sonberg of state Supreme Court, who in October rejected a request to allow Perez into a pretrial diversion program. Perez will be able to withdraw his plea and plead to a misdemeanor charge if he completes 300 hours of community service in a year and stays out of trouble, the judge said.
Prosecutors said undercover officers, in a five-month investigation nicknamed “Operation Ivy League,” spent $11,000 buying drugs including cocaine, marijuana, ecstasy and LSD-laced candy, with most sales taking place in common areas and bedrooms of three fraternities. Perez was accused of selling Adderall, a drug used to treat attention deficit hyperactivity disorder.
“We’ve very pleased,” Perez’s attorney, Peter Frankel, told reporters yesterday. “But we also think that’s the appropriate outcome. He is the only defendant who was charged with selling his lawful prescription, not illicit drugs like cocaine or ecstasy.”
Perez is the third of the five arrested students to plead guilty in the case.
The case is People v. David, 00038N/2011, New York state Supreme Court, New York County (Manhattan).
Boston-Area Pharmacy Graduate Guilty of Supporting Al-Qaeda
Tarek Mehanna, a pharmacy-school graduate, was convicted by a federal jury in Boston of aiding al-Qaeda and lying to U.S. authorities about his involvement with the group.
Mehanna, 29, who earned a doctorate from the Massachusetts College of Pharmacy & Health Science, was found guilty on all counts against him, including making false statements, conspiracy to provide material support to a terrorist organization and conspiracy to kill in a foreign country.
He became an operative for al-Qaeda after traveling to Yemen in 2004 for terrorist training, prosecutors told the jury at the beginning of the trial before U.S. District Judge George O’Toole in October. O’Toole set sentencing for April 12, and defense attorneys said he could be imprisoned for life.
The defendant translated materials for terrorists from Arabic to English, including an al-Qaeda manual called “39 Ways to Serve and Participate in Jihad,” or holy war, according to prosecutors. They also said he lied to government agents about his reasons for going to Yemen. He wasn’t charged with planning or trying to carry out any terrorist attacks.
Defense lawyers told the jury that the prosecution by U.S. Attorney Carmen Ortiz violated their client’s right to free speech under the First Amendment to the U.S. Constitution.
“We do not prosecute people for expressing their beliefs,” Ortiz said in comments to the press after the verdict. “Mr. Mehanna had plans; his intent was to cause harm.” She added, “It is vitally important to prevent incidents of terrorism.”
J.W. Carney, a defense attorney, said he will appeal the verdict on the ground that the judge allowed the prosecutors to show the jurors photos of the Sept. 11 attacks and images of Osama bin Laden.
“What an appeals court will have to decide is whether the real motivation for putting that before a jury is to scare them and prejudice them,” Carney said in an interview. “I think our jury was affected very negatively by that.”
The case is U.S. v. Mehanna, 09-10017, U.S. District Court, District of Massachusetts (Boston).
White Supremacist Gets 32 Years for Placing Bomb Near Parade
Kevin William Harpham, a 37-year-old white supremacist, was sentenced to 32 years in prison for placing an explosive device near the site of a Martin Luther King Jr. Day parade in Spokane, Washington.
Harpham was arrested in March with planting the bomb near a unity march held on Jan. 17, the U.S. Justice Department said yesterday in an e-mailed statement. The device didn’t explode and no one was hurt.
In September, Harpham, who admitted to being a white supremacist, pleaded guilty to attempting to use a weapon of mass destruction and attempted injury with an explosive, according to the statement.
“Acts of hate like this one have no place in our country in the year 2011, but yet, unfortunately, we continue to see attempted violence in our communities due to racial animus,” said Thomas Perez, assistant attorney general for the Justice Department’s Civil Rights Division.
Harpham’s lawyer, Kailey Moran of the Federal Defenders of Eastern Washington, didn’t immediately return a call seeking comment on the sentence.
The case is U.S. v. Harpham, 11-cr-42, U.S. District Court, Eastern District of Washington (Spokane).
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