BofA, Goldman, Bear Stearns, Deutsche Bank in Court News

Bank of America Corp. will pay a record $335 million to compensate Countrywide Financial Corp. borrowers who were charged more for home loans based on race and national origin.

Countrywide, acquired by Bank of America in 2008, assessed higher fees and interest rates to more than 200,000 black and Hispanic borrowers, the U.S. Department of Justice said yesterday in a statement. The lender also steered minorities into higher-cost subprime mortgages from 2004 to 2007, even when they qualified for prime loans, the agency said.

The penalty for Bank of America, the second-largest U.S. lender by deposits, dwarfs the $30 million total for all previous fair-lending settlements extracted by the agency, including $6.1 million paid last year by American International Group Inc. The Obama administration has boosted scrutiny of banks to discourage loan discrimination after the housing bust led to record defaults.

“This is huge,” said Warren W. Traiger, a lawyer at New York-based BuckleySandler LLP who advises financial firms on fair lending. “While lenders need to be concerned about the activities of the civil-rights division of the Justice Department, the magnitude of this flows from a unique set of facts. Countrywide was a driver of the subprime debacle and helped create the Great Recession.”

The review covered 2.5 million loans, including data on terms and creditworthiness of borrowers, according to the Justice Department. The agency said Calabasas, California-based Countrywide allowed loan officers and brokers to vary interest rates and fees, and knew it was discriminating against minorities. Whites with similar credit profiles received prime loans, according to the statement.

Bank of America Chief Executive Officer Brian T. Moynihan, 52, is cleaning up liabilities inherited with the takeover of Countrywide that was engineered by his predecessor, Kenneth D. Lewis. The Charlotte, North Carolina-based bank has committed about $40 billion for mortgage refunds, lawsuits and foreclosures since 2007.

“We will not hesitate to hold financial institutions accountable, including one of the nation’s largest,” Attorney General Eric Holder said in the statement. “These institutions should make judgments based on applicants’ creditworthiness, not on the color of their skin.”

The “alleged historic practices” of Countrywide predate its purchase by Bank of America, and the firm discontinued Countrywide products and practices it didn’t agree with, said Dan Frahm, a company spokesman, in an e-mail. “We are committed to fair and equal treatment of all our customers.”

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Heungkuk Life Suit Against Goldman Sachs Is Withdrawn

Heungkuk Life Insurance Co.’s lawsuit against Goldman Sachs Group Inc. over a collateralized debt obligation was withdrawn in New York state court after the two sides agreed to seek a resolution out of court.

Heungkuk sued New York-based Goldman Sachs in federal court in Manhattan in March over a $1 billion collateralized debt obligation known as Timberwolf, accusing the company of fraud and seeking more than $47.3 million in damages. The Seoul-based insurer filed a similar state-court suit in April.

The federal case was voluntarily dismissed in May, according to court records. The two sides have agreed to “pursue the extrajudicial resolution” of the case in state court, according to court documents filed yesterday. The state case was withdrawn “without prejudice,” meaning the claims can be re-filed.

Timberwolf was called “one shi**y deal” by a bank executive in a 2007 internal e-mail written eight days after the Heungkuk investment, according to the lawsuits. The e-mail was released publicly by U.S. Senate lawmakers last year.

Peter E. Calamari, an attorney representing Heungkuk, and Richard H. Klapper, a lawyer for Goldman Sachs, didn’t reply to phone messages seeking comment on the withdrawal of the suit.

The cases are Heungkuk Life Insurance Co. v. Goldman Sachs Group Inc., 650978/2011, New York State Supreme Court, New York County (Manhattan); and Heungkuk Life Insurance Co. v. Goldman Sachs Group Inc., 11-cv-1856, U.S. District Court, Southern District of New York (Manhattan).

Ex-Bear Stearns Fund Managers Seek Narrowing of SEC Suit

Former Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin, acquitted in 2009 of criminal charges they misled investors who lost $1.6 billion, asked a federal judge to toss out part of a related civil case brought by the U.S. Securities and Exchange Commission.

Cioffi and Tannin, in their request to U.S. District Judge Frederic Block in Brooklyn, New York, said they can’t be sued for statements they didn’t make and over so-called scheme liability. The request, made in October, was made public Dec. 20.

In November 2009, a federal jury found Cioffi and Tannin not guilty of conspiracy and securities and wire fraud in the first criminal trial stemming from a federal probe of the collapse of the subprime-mortgage market. Cioffi, 55, was portfolio manager for the hedge funds. Tannin, 50, was their chief operating officer.

“Despite the complete acquittal of Mr. Cioffi and Mr. Tannin, the SEC has persisted in pursuing this action based on the same underlying facts,” lawyers for the men wrote in the filing.

The SEC opposed the motion in a November filing, also made public Dec. 20. The regulator’s case requires a lower standard of proof than a criminal conviction. Block has set a Feb. 13 trial date for the SEC suit.

The civil case is Securities and Exchange Commission v. Cioffi, 08-cv-2457, and the criminal case is U.S. v. Cioffi, 08-CR-00415, U.S. District Court, Eastern District of New York (Brooklyn).

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J&J Must Defend Securities-Fraud Lawsuit Over Drug Recalls

Johnson & Johnson, the world’s largest health products company, must defend a lawsuit claiming it misled investors about quality control-failures at manufacturing plants that led to recalls, a judge ruled.

U.S. District Judge Freda Wolfson in Trenton, New Jersey, ruled Dec. 19 that the securities fraud suit against J&J, Colleen Goggins, the former head of its consumer group, and another executive may go forward. She dismissed claims against Chief Executive Officer William Weldon and Peter Luther, president of the McNeil Consumer Healthcare division. The judge didn’t rule on the merits of the class-action, or group, lawsuit.

The case focuses on recalls of over-the-counter drugs made at McNeil plants in Las Piedras, Puerto Rico, and Fort Washington, Pennsylvania. Investor Ronald Monk said that J&J and its executives made misleading statements about details of the recalls and that he suffered stock losses after the true reasons for the recalls became public. As part of a so-called phantom recall, J&J even hid its recall of a batch of Motrin tablets, Monk said.

“Plaintiff’s assertion that Goggins attended the Feb. 19, 2010, meeting where the phantom recall was discussed sufficiently alleges that she had knowledge of the recall when she testified” at a Congressional hearing “that she did not have such knowledge,” Wolfson said in a 55-page opinion.

William Price, a J&J spokesman, declined to comment on the ruling. William Phillips, a lawyer for J&J, Weldon, Goggins and Luther, didn’t return a call.

The case is Monk v. J&J, 10-cv-4841, U.S. District Court, District of New Jersey (Trenton).

Fortress CEO Mudd Takes Leave Amid SEC’s Fannie Mae Lawsuit

Daniel Mudd will take a leave of absence as chief executive officer of Fortress Investment Group LLC after he was sued by the U.S. Securities and Exchange Commission over his role as former CEO of Fannie Mae.

Fortress co-founder Randal A. Nardone will take over as interim CEO effective immediately, the New York-based manager of buyout and hedge funds said daestery in a statement.

“I have requested a leave of absence from my position as chief executive officer to ensure that any time or attention I need to focus on matters outside of Fortress will not affect the business or operations of the company,” Mudd said in the statement.

Mudd and former Freddie Mac CEO Richard Syron were sued Dec. 16 for understating by hundreds of billions of dollars the subprime loans held by the firms. Fannie Mae, the government-sponsored enterprise that issues almost half of all mortgage-backed securities, and Freddie Mac, the McLean, Virginia-based mortgage company, had “agreed to accept responsibility” for their conduct, the SEC said.

In a statement the day the lawsuit was filed in Manhattan federal court, Mudd denied the charge, saying the U.S. government and its investors were aware of “every piece of material data about loans held by Fannie Mae.”

Fortress said in a Dec. 16 statement that the complaint against Mudd “does not relate to Fortress, and this matter has not impacted our company or our business operations.”

In the suit, the SEC said it wants financial penalties and disgorgement, and an order barring Mudd from serving as an officer or director of another company.

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New Suits

Fannie Mae, Freddie Mac Sued by California in Foreclosure Probe

Fannie Mae and Freddie Mac were accused in a lawsuit by California Attorney General Kamala Harris of hindering her probe into mortgage lending and foreclosure practices.

Harris wants to know if drug dealing and prostitution occur in foreclosed homes owned by the companies, whether taxes are being paid on those houses, and whether military families have been illegally evicted by loan servicers, according to the two lawsuits filed Dec. 20 in state court in San Francisco.

Fannie Mae, the government-sponsored enterprise which issues almost half of all mortgage-backed securities, and Freddie Mac, the McLean, Virginia-based mortgage-finance company, haven’t responded to those and other questions Harris sent Nov. 15, according to the complaints.

From January 2007 through June of this year, more than 768,000 mortgages have been foreclosed in California, with Freddie Mac and Fannie Mae together owning more than 60 percent of mortgages in the state, according to the complaints.

California has withdrawn from settlement negotiations in which state attorneys general across the U.S. have been trying to reach an agreement with JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Ally Financial Inc. The states seek to resolve their probe into foreclosure practices of the five biggest mortgage servicers.

Michael Cosgrove, a spokesman for Freddie Mac, declined to comment on the California lawsuit.

Keosha Burns, a spokeswoman at Fannie Mae, referred questions about the lawsuit to the Federal Housing Finance Agency, the regulator of mortgage financiers. FHFA spokeswoman Stefanie Johnson declined to comment on the complaint.

The case is California v. Federal National Mortgage Association, CPF-11-511771, and California v. Federal Home Loan Mortgage Corp., CPF-11-511772, California Superior Court (San Francisco).

Deutsche Bank Sued by Kingate Fund Over Madoff Settlement

Deutsche Bank AG was sued by Kingate Global Fund Ltd. over claims the German bank refused to honor an agreement to buy bankruptcy claims on the estate of convicted con man Bernard Madoff.

Kingate Global Fund and Kingate Euro Fund, two so-called Madoff “feeder funds” based in the British Virgin Islands, filed their complaint in federal court in New York yesterday, asking a judge to force Deutsche Bank to follow through on its commitment to buy the claims.

Deutsche Bank agreed to buy $1.62 billion in claims from the funds in August, and has refused to complete the purchase because a proposed settlement between Kingate and Madoff estate trustee Irving Picard doesn’t provide “sufficient protection” for the Frankfurt-based bank, according to the complaint.

“The Kingate funds will suffer real and concrete damages if Deutsche Bank continues its bad faith attempt to either renegotiate or terminate what everyone understood to be -- and what plainly states that it is -- a done deal,” lawyers for Kingate said in the complaint. “The Kingate Funds’ settlement with the Madoff trustee, which is the result of years of negotiations, will fall apart.”

Picard in June sued the Kingate funds, which are being liquidated in the British Virgin Islands, seeking $975 million in funds they took out of Madoff’s scheme. The funds have been unable to complete a settlement with Picard because of Deutsche Bank’s refusal to honor the agreement, lawyers for Kingate said in the lawsuit.

“Deutsche Bank will purchase Kingate’s claim if both parties can finalize mutually acceptable documentation,” Renee Calabro, a New York-based spokeswoman for the bank, said in a phone interview.

The case is Kingate Global Fund Ltd. v. Deutsche Bank Securities Inc., 11-cv-9364, U.S. District Court, Southern District of New York (Manhattan).

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Stanford Receivers Vie in U.S. Court for Control of Assets

U.S.- and Antiguan-appointed receivers for R. Allen Stanford’s holdings vied in court for control of his assets as investors await payment for losses in his alleged $7 billion fraud scheme.

U.S. District Judge David Godbey in Dallas yesterday heard evidence and arguments from attorneys for Ralph Janvey -- whom he appointed almost three years ago to marshal and liquidate Stanford’s business and personal holdings -- and from lawyers for executives of the global auditing firm Grant Thornton chosen by an Antiguan court for the same task.

At the heart of Stanford’s alleged fraud are certificates of deposit sold by his Antigua-based Stanford International Bank Ltd. to about 28,000 investors. That makes the island nation the legal center of interest, the two Grant Thornton receivers contend. Janvey’s lawyer, Kevin Sadler, disagreed.

“The last thing this receivership needs, the last thing that investors need, is two liquidators of the bank here in the U.S.,” Sadler told Godbey. “It duplicates work that has already been done.”

The claims and distributions could be coordinated between the U.S. and Antiguan receivers, said Gregory Grossman, lawyer for the Grant Thornton liquidators. “For reasons that have been mystifying to me, we have been unable to reach a joint protocol.”

The U.S. Securities and Exchange Commission in February 2009 sued Stanford, alleging that he and his employees lied about the CDs, telling investors the proceeds were invested in safe, liquid assets.

Stanford, who maintains his innocence, is scheduled to be tried on Jan. 23. At a hearing this week in Houston, defense lawyers and U.S. prosecutors are asking a judge to determine his mental fitness to stand trial. Stanford says he suffered severe memory loss in a jailhouse beating. Prosecutors say he’s faking.

The liquidation proceeding is In re Stanford International Bank Ltd., 3:09-cv-00721, U.S. District Court, Northern District of Texas (Dallas). The criminal case is U.S. v. Stanford, 4:09-cr-00342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 3:09-cv-00298, U.S. District Court, Northern District of Texas (Dallas).

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SEC’s Court Troubles in Citigroup Settlement Echo in Wisconsin

The U.S. Securities and Exchange Commission, facing growing judicial scrutiny over how it resolves enforcement matters, was asked by a federal judge in Milwaukee to provide a “factual predicate” for a proposed settlement with a company accused of accounting fraud.

Certain provisions of the SEC’s settlement with Milwaukee-based Koss Corp. were “vague,” U.S. District Judge Rudolph T. Randa said in a filing Dec. 20. The settlement also didn’t provide enough information to show that penalties against chief executive officer Michael Koss were fair, the judge wrote.

Randa’s decision comes less than a month after a federal judge in New York rejected the agency’s $285 million settlement with Citigroup Inc., saying he hadn’t been given enough facts to approve the agreement.

The Citigroup ruling by U.S. District Judge Jed Rakoff, which Randa cited in his opinion, challenged settlement practices the SEC has had in place for decades and sparked a debate over whether the agency is reaching expedient agreements that lack tough sanctions. The SEC has appealed Rakoff’s ruling.

“If other judges start to follow Rakoff’s lead that’s a big problem for the SEC because they’ll have to try more cases,” said Adam Pritchard, a securities law professor at the University of Michigan Law School.

The SEC in October accused Koss Corp., a manufacturer of stereo headphones, of making materially inaccurate financial statements for fiscal years 2005 through 2009. The agency said Michael Koss failed in his roles as CEO and earlier as chief financial officer in overseeing accounting and finance at the company.

Randa questioned the adequacy of the Oct. 24 settlement’s provision that the company promise not to make future violations of securities laws, saying the agreement is vague and could pose problems for enforcing it in the future.

Randa also asked the SEC to provide more information to justify the amount Michael Koss will pay to resolve the claims. Under the agreement, Koss would forfeit a total of about $450,000 and 160,000 options, the equivalent of his incentive bonuses for fiscal years 2008 through 2010, according to the court filing.

Randa asked the SEC to respond by Jan. 24.

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BMO Harris Bank to Pay $9.4 Million to Settle Overdraft Suit

Bank of Montreal’s BMO Harris Bank agreed to pay $9.4 million to settle a lawsuit that accused the Chicago lender of illegally charging excessive overdraft fees, according to court papers.

The settlement reached Nov. 30 ends the bank’s role in the litigation, according to a filing Dec. 20 in federal court in Miami. Overdraft suits filed across the U.S. have been consolidated in that court for pretrial proceedings.

Account holder Stephanie Blahut accused the bank of manipulating and reordering debited transactions in accounts from highest to lowest to increase the number of overdraft fees it can charge. Blahut sued seeking to represent all Harris Bank customers.

Suits against more than 30 banks have been consolidated before U.S. District Judge James Lawrence King in Miami in so-called multidistrict litigation. King has been overseeing pretrial exchanges of information in the cases since June 2009. The Harris Bank settlement still requires the judge’s approval.

The consolidated case is In re Checking Account Overdraft Litigation, 09-02036, U.S. District Court, Southern District of Florida (Miami).

Rambus to Pay $10.8 Million to Settle Options Dating Suit

Rambus Inc. said it will pay $10.8 million to settle one of two remaining lawsuits over claims the company backdated stock option grants before 2006.

The settlement resolves a lawsuit brought by investor Stuart Steele in 2008 and related to grants that were incorrectly dated or accounted for prior to 2006. The majority of the grants in dispute occurred between 1998 and 2001, the company said yesterday in a statement. The case was scheduled to go to trial in March, Rambus said.

Former Rambus Chairman Geoff Tate quit the board in 2006 after an internal investigation uncovered option backdating, a practice that can enrich recipients by setting grant dates to times when the stock traded lower, building in extra profit. The practice is illegal unless disclosed and recorded as expenses.

In September 2007, the company paid $18 million to settle a suit brought by shareholders who claimed executives misled them about Rambus’s financial performance and its options backdating.

The case is Steele v. Rambus, 08-cv-113682, Superior Court of California, Santa Clara County (San Jose).

Expert-Networking Executive Gets 2 1/2 Years in Fraud Scheme

Former Primary Global Research LLC executive James Fleishman was sentenced to 2 1/2 years in prison for helping pass confidential information to hedge-fund managers as part of an insider-trading scheme.

U.S. District Judge Jed Rakoff sentenced Fleishman, 42, of Santa Clara, California, yesterday in federal court in Manhattan. A jury convicted him in September of two conspiracy charges for what the U.S. said was a scheme to obtain and pass confidential information from technology-company employees who moonlighted as consultants for Mountain View, California-based Primary Global, a so-called expert-networking firm.

Rakoff said Fleishman must report to prison Feb. 7. Defense attorney Ethan A. Balogh asked the judge to recommend Fleishman serve his time at Taft Correctional Institution in Taft, California. Rakoff denied Fleishman’s request to remain free on bail while he appeals his conviction.

Fleishman didn’t speak at his sentencing and Balogh declined to comment after the hearing.

The case is U.S. v. Nguyen, 11-cr-32, U.S. District Court, Southern District of New York (Manhattan).

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U.S. Settles With Exelon Over Constellation Energy Deal

The U.S. Justice Department settled with Exelon Corp. over its acquisition of Constellation Energy Group Inc., requiring Exelon to sell three electricity generating plants in Maryland.

The department made the announcement yesterday shortly after it filed a lawsuit in U.S. District Court in Washington, alleging the deal would eliminate competition and lead to higher prices for consumers. The agreement must be approved a federal judge.

“Competition in wholesale electricity markets is vital to the economic well-being of consumers and businesses,” said Sharis Pozen, acting assistant attorney general for the antitrust division, in an e-mailed statement. “These divestitures will preserve that critical competition for the benefit of electricity customers throughout the mid-Atlantic.”

Exelon spokeswoman Judith Rader confirmed the settlement. Exelon had already agreed to the terms, divestiture of their Maryland power plants, as part of its merger proposal, she said.

The case is U.S. v. Exelon Corp., 11-cv-02276, U.S. District Court, District of Columbia (Washington).

French Doctor Gets Time Served in Hedge-Fund Tipping Case

Yves Benhamou, a French physician who passed inside information on drug trials to FrontPoint Partners LLC fund manager Joseph F. “Chip” Skowron, was sentenced to the time he already served in custody.

Benhamou pleaded guilty in April to securities fraud, making false statements to the Federal Bureau of Investigation and two counts of conspiracy for passing tips that Human Genome Sciences Inc.’s hepatitis C drug trials were being halted. He was sentenced yesterday by U.S. District Judge George Daniels in Manhattan federal court.

In sentencing Benhamou, 51, to the 24 days he spent in custody after his arrest in November 2010, Daniels cited his cooperation with the government’s investigation and his importance to his patients in France. Benhamou, who was born in Morocco, is a specialist in diseases of the liver.

Assistant U.S. Attorney Pablo Quinones told Daniels that Benhamou’s cooperation “put the nail in the coffin” of the government’s case against Skowron, who pleaded guilty and was sentenced last month to five years in prison.

“I cannot find the words to express how sorry I am and how much regret I feel,” Benhamou told Daniels.

Skowron, a Yale University-educated physician from Greenwich, Connecticut, was sentenced last month to five years in prison. He admitted that after Benhamou passed him the non-public information, FrontPoint sold its stock, avoiding $30 million in losses, according to the U.S.

The case is U.S. v. Benhamou, 11-CR-336, U.S. District Court, Southern District of New York (Manhattan).

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Litigation Departments

News Corp. Must Pay Phone-Hacker’s Legal Fees, Not Coulson’s

Rupert Murdoch’s News Corp. is required to pay the legal fees of Glenn Mulcaire, the British private detective at the center of the phone-hacking scandal at its now-defunct News of the World tabloid, a U.K. judge ruled.

Mulcaire, 41, had a valid contract to have his fees and potential damages paid by the company in exchange for his cooperation in dozens of civil lawsuits, a judge ruled yesterday in London. In a separate judgment yesterday, former News of the World editor Andy Coulson lost a similar suit to have his fees covered by the company as he faces a criminal phone-hacking probe.

Mulcaire “always said he was acting on the instruction” of the company “and he clearly needs legal representation to deal with the numerous cases,” his lawyer, Sarah Webb, said in an e-mailed statement. The ruling will probably result in News Corp.’s News International unit paying another 750,000 pounds ($1.2 million) in legal fees, she said.

News Corp., based in New York, shut the News of the World in July to contain damage from the five-year-old scandal, which triggered a judge-led inquiry into the ethics of the U.K. press. Police probes into phone hacking, computer hacking and police bribery by journalists have led to the arrests of at least 21 people, including Coulson in July, Mulcaire earlier this month and a 52-year-old female police officer detained yesterday.

Coulson, who quit as editor in 2007 after Mulcaire pleaded guilty to phone hacking, may appeal yesterday’s ruling, his lawyer Jo Rickards said in a statement. The decision is inconsistent with the ruling in Mulcaire’s case, she said.

“Mr. Coulson’s severance agreement included an explicit clause specifying that News International would meet the legal costs arising from his defense of proceedings resulting from his role as editor of News of the World,” Rickards said. “The allegations against him clearly relate to that role.”

Daisy Dunlop, a spokeswoman for News Corp.’s U.K. unit, declined to comment. The company had argued the agreement with Mulcaire wasn’t binding and that he had stopped assisting them by refusing to name the journalists involved in hacking.

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