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Galleon, JPMorgan, Gupta, Apple, Merrill, UBS in Court News

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Ex-Galleon Group LLC trader David Slaine, who helped lead U.S. authorities to investigate the hedge fund firm’s co-founder, Raj Rajaratnam, was sentenced to three years of probation for securities fraud.

Slaine wore a wire to record dozens of conversations with suspects including ex-Galleon trader Zvi Goffer who were later charged with insider trading. He provided help that prosecutors from the office of Manhattan U.S. Attorney Preet Bharara called “nothing short of extraordinary.”

U.S. District Judge Richard Sullivan, who sentenced Slaine Jan. 20 in Manhattan federal court, also ordered him to perform 300 hours of community service and pay a $500,000 fine. Sullivan praised Slaine’s cooperation, which began in 2007.

“Mr. Slaine, you have your life back,” Sullivan said at the end of the sentencing hearing. “I think you’ve earned it, by virtue of the work you’ve done over the last five years.”

Slaine’s evidence helped spur what became the biggest probe of insider trading at hedge funds, prosecutors said in a letter to Sullivan this month. His lawyer, Stephen Kaufman, said Slaine already has paid $836,000 in criminal forfeitures and to the U.S. Securities and Exchange Commission.

Slaine is now an investor at Spot, a Manhattan-based chain that provides training, grooming and daycare for dogs, according to Kaufman. Slaine also works there, Kaufman said.

“These last four years have been humbling and humiliating,” Slaine told Sullivan at his sentencing hearing. “I am ashamed of the bad decisions that I made back in 2002, which haunt me to this day.”

Slaine, who pleaded guilty to conspiracy and securities fraud in December 2009, testified at the trial of Goffer, his brother Emanuel Goffer and Michael Kimelman, that he cooperated with federal agents for about 2 1/2 years to try to avoid prison. He faced a sentence of as long as 25 years in prison.

Slaine testified that he became friends in the late 1980s or early 1990s with Craig Drimal, another former trader who pleaded guilty.

The case is U.S. v. Goffer, 10-cr-00056, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

New Suits

Dexia Sues JPMorgan Over $1.7 Billion in Mortgage Securities

JPMorgan Chase & Co., the biggest U.S. bank by assets, was sued over mortgage-backed securities sold to Dexia SA because the loans underlying the securities were allegedly riskier than promised.

Dexia accused JPMorgan and companies it acquired -- Bear Stearns Cos. and Washington Mutual -- of “egregious fraud,” saying they created and sold mortgage bonds backed by loans that they knew to be “exceptionally bad.”

Dexia, the Brussels-based French-Belgian lender, said the complaint, filed Jan. 19 in New York State Supreme Court, involves about $1.7 billion of mortgage securities. Dexia suffered “substantial losses” because mortgages were of poorer quality and the risks of default and losses were much higher than represented, according to the complaint.

Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, didn’t respond to an e-mail seeking comment.

The case is Dexia SA v. Bear Stearns & Co. Inc., 650180-2012, New York State Supreme Court (Manhattan).

Corzine Sued for RICO Violation by MF Global Customers

Jon Corzine, MF Global Holdings Ltd.’s former chief executive officer, was sued under U.S. racketeering law by commodity customers alleging he and other executives “unlawfully” took money from their accounts and failed to segregate their money as the law requires.

The suit alleges that hundreds of millions of dollars were transferred from customers’ accounts to other MF Global units, at a time when the company was short of cash and faced calls for collateral as its risky Eurobond and other investments fell in value.

Named in the suit, JPMorgan Chase & Co., the company’s banker, should have noticed the “depletion” of customer money, and should have investigated, according to the complaint. The customers are seeking unspecified restitution and damages.

The suit, filed in federal court in Manhattan on Jan. 20 on behalf of Robert Marcin and other MF Global segregated account holders by Grant & Eisenhofer PA, is one of at least 10 against Corzine and other MF Global executives. Plaintiffs including the Virginia Retirement System have been competing to lead a consolidated lawsuit seeking so-called class-action status.

Mary Sedarat, a JPMorgan spokeswoman, declined to comment on the suit. Andrew Levander, a lawyer for Corzine, didn’t respond to an e-mail seeking comment.

The case is Marcin v. Corzine, 12-cv-0499, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

For the latest new suits news, click here. For copies of recent civil complaints, click here.


CFTC Position Limits Rule Lawsuit Dismissed by Appeals Court

Two Wall Street groups’ challenge to a U.S. Commodity Futures Trading Commission rule on position limits must first be considered in a trial court, a federal appeals court ruled, dismissing the case.

A three-judge panel of the U.S. Court of Appeals in Washington said Jan. 20 that it doesn’t have jurisdiction to consider the case because the Commodity Exchange Act and last year’s Dodd-Frank law “are silent” on whether the rule can be directly challenged to the appeals court.

“Initial review occurs at the appellate level only when a direct-review statute specifically gives the court of appeals subject-matter jurisdiction to directly review agency action,” Judges Judith Rogers, Merrick Garland and Janice Rogers Brown said, citing circuit precedent. “There is no express congressional authorization of direct appellate review applicable to the petition for review in this case.”

The International Swaps and Derivatives Association Inc. and Securities Industry and Financial Markets Association filed an emergency request Jan. 9 urging the appeals court to put the rule on hold while the court considers their legal challenge. The groups asked the court to issue a ruling by Jan. 27.

By dismissing the case, the judges also rejected that request.

The groups, in one of the financial industry’s highest-profile efforts to weaken last year’s Dodd-Frank law, filed lawsuits challenging the rule in two federal courts in Washington last month. The district court lawsuit had been put on hold while the appeals court considered the case.

They argue that the CFTC used a flawed analysis of Dodd-Frank when it decided to impose the restrictions. The associations also said the CFTC failed to properly weigh the rule’s costs and benefits.

Steven Adamske, a CFTC spokesman, declined to comment on the ruling.

Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association, said the association “will move forward quickly in the district court.”

“The court’s ruling is entirely procedural, and was not a decision about the merits of our challenge or of our request for a stay,” Hammerman said.

Steve Kennedy, a spokesman for the International Swaps and Derivatives Association Inc., didn’t immediately respond to a phone message seeking comment after business hours.

The two associations represent JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, among other banks and asset managers.

The case is International Swaps and Derivatives Association v. CFTC, 11-01491, U.S. Court of Appeals for the District of Columbia (Washington).

U.S. Defends Use of Wiretap Evidence in Rajat Gupta Prosecution

U.S. prosecutors opposed a bid by former Goldman Sachs Group Inc. director Rajat Gupta to block use in his criminal case of wiretap evidence obtained from the mobile phone of convicted inside trader Raj Rajaratnam.

Six different judges authorized the wiretaps because they are particularly appropriate in investigating insider trading, which requires communication and is often difficult to detect and prove beyond a reasonable doubt, the government said Jan. 19 in a filing opposing Gupta’s request to suppress the evidence.

“In an effort to suppress incriminating wiretap evidence against him, Gupta has mimicked Rajaratnam’s arguments in Rajaratnam’s failed attempt to suppress the wiretap evidence,” prosecutors said in the filing in federal court in Manhattan.

Gupta, who also sat on the board of Procter & Gamble Co. and led McKinsey & Co., was indicted by a federal grand jury in October on five counts of securities fraud and one count of conspiracy to commit securities fraud for passing inside information to Rajaratnam. Gupta also faces a lawsuit filed by the U.S. Securities and Exchange Commission.

Rajaratnam, the former Galleon Group LLC hedge fund manager, was convicted last year of directing the biggest insider-trading ring in a generation. It was one of the first insider-trading cases in which the government made extensive use of wiretaps.

Gary Naftalis, a lawyer for Gupta, didn’t return a call seeking comment on the government’s filing.

The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).

Apple, Microsoft Patent Lawyers Spend Fridays in Mannheim

If you were searching for Apple Inc.’s European patent lawyers on a Friday, you would have better luck looking in the German city of Mannheim than on the golf course or in a pub, Bloomberg News’ Karin Matussek reports.

Judges in the southwest German city hold most patent hearings on the last day of the week and will issue rulings in smartphone disputes involving Apple, Samsung Electronics Co. and Motorola Mobility Holdings Inc. over four of the five Fridays that began Jan. 20. The city, along with Dusseldorf and Munich, has become the center of European patent litigation as companies seek quick rulings from German judges that influence courts throughout the continent.

“If you have a big multinational corporation setting up a patent litigation strategy for Europe, they will almost always sue in Germany,” said Rowan Freeland, a litigator at Simmons & Simmons LLP in London. “Maybe you add other countries as well, but if you have to choose, it’s almost certainly Germany.”

Mobile device makers filed dozens of cases in the three cities last year. Samsung lost Jan. 20 a patent-infringement suit filed against Apple in the Mannheim court. The judges also heard another suit between the two rivals.

Samsung said it was disappointed by the Jan. 20 ruling and added that the decision isn’t indicative for other pending cases.

Germany’s role in the European economy is just as important as the speed of the rulings, issued by specialist judges, said Peter-Michael Weisse, an attorney at intellectual-property litigation firm Wildanger in Dusseldorf.

“If you want to conquer the European market and you’re being stopped in Germany, most of the time that’s enough to throw in the towel,” Weisse said. “Many companies say if they cannot sell in Germany, it’s no use to go ahead with a product somewhere else.”

London and The Hague, Netherlands, compete with Germany as venues for European patent litigation. The Netherlands’ disadvantage is a smaller economy, while the U.K. is hindered by high legal costs, Freeland said. While there is no pan-European patent, courts often look for similar rulings in other countries.

For more, click here.

U.K. Tabloid Publisher Loses Ruling Over Secret Evidence

The publisher of the Daily Mail tabloid in Britain lost a lawsuit to ban the use of anonymous evidence by journalists at a judge-led inquiry into media ethics, set up after News Corp.’s phone-hacking scandal.

The ruling Jan. 20 in London allows unnamed reporters and editors to allege illegal practices at newspapers other than News Corp.’s now-shuttered News of the World tabloid. Associated Newspapers Ltd., a unit of Daily Mail and General Trust Plc, sued the inquiry over claims that anonymous statements would be unfair and risk hurting other tabloids’ reputations.

Associated Newspapers also publishes the Mail on Sunday and Metro in the U.K. The Daily Mail’s editor, Paul Dacre, has been a critic of the inquiry, saying in October that phone hacking at the News of the World exposed police failures in past investigations rather than a need for more industry regulation.

The public interest in the inquiry’s chairman “being able to pursue his terms of reference as widely and deeply as he considers necessary is of the utmost importance,” Judge Roger Toulson said in the judgment.

Lawyers for victims of phone hacking say journalists who wish to expose wrongdoing at their newspapers should be free to do so without fear of a backlash. The names of the newspapers will also be left out of the statements.

The inquiry, led by Judge Brian Leveson, was announced in July by U.K. Prime Minister David Cameron after revelations that the News of the World hacked into the voice mail of a murdered school girl in 2002, when she was missing. The probe extends beyond News Corp.’s five-year-old scandal, covering the ethics of the press and its relationship with politicians and police.

For the latest lawsuits news, click here.


Stanford Investors Endure ‘Living Hell’ on Eve of Trial

R. Allen Stanford’s investors, after waiting three years to see the Texas financier go to trial on charges of leading a $7 billion fraud, must hold on even longer before learning when they will get some of their money back, Bloomberg News’ Andrew Harris and Laurel Brubaker Calkins report.

Stanford’s customers have received nothing since the U.S. Securities and Exchange Commission closed his businesses in February 2009.

Stanford, accused of misleading people who bought certificates of deposit from his Antigua-based bank, spent their money on bad investments, sports sponsorships and a lavish lifestyle that included yachts, a fleet of jets, mansions and a private Caribbean island, U.S. prosecutors said. Jury selection in his criminal trial is scheduled to start Jan. 23 in federal court in Houston. Stanford, who denies any wrongdoing, faces as long as 20 years in prison if convicted.

“It’s not fair that we have to be put through this living hell,” said Blaine Smith of Louisiana, who claims to have lost $1 million in life savings invested with Stanford.

A court-appointed receiver for Stanford Group Co. has spent at least $103 million on litigation, wind-down costs and other expenses, while collecting less than $212 million in cash and material assets since the SEC sued Stanford in February 2009.

The expenditures include professional fees and expenses of $52.1 million through October, with $1.3 million of this going to receiver Ralph Janvey’s firm, Dallas-based Krage & Janvey LLP, according to a Bloomberg review of court records. That sum covers the $21.3 million Janvey asked court permission to pay his primary outside law firm, Houston-based Baker Botts LLP, for work done from Feb. 17, 2009, to Sept. 30, 2011.

Unlike Stanford, repayment processes have moved forward for claimants in the Bernard L. Madoff fraud case and the bankruptcy of MF Global Holdings Ltd., the parent of commodities broker MF Global Inc.

An attorney for Janvey said that it’s too soon to say when investors may see some of the money.

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

For more, click here.

U.K. Judge Tells Merrill, UBS to Seek Lombardy Swaps Settlement

Bank of America Corp.’s Merrill Lynch unit and UBS AG must try to reach an out-of-court resolution to their dispute with the Italian Region of Lombardy over interest-rate transactions, a London judge ruled.

Judge Nigel Teare granted an order for alternative dispute resolution at a hearing Jan. 20.

Merrill and UBS sued Lombardy in the U.K. in 2010 to uphold derivatives contracts sold to the region. Lombardy, the northern Italian region where Milan is located, accused the banks of fraud and hidden fees, according to court papers.

Italian local governments including Tuscany, Lazio, Piedmont and Florence have challenged investment banks in the courts over derivatives contracts which turned out to cost more than expected.

UBS lawyer Sonia Tolaney said at the Jan. 20 hearing the Zurich-based bank had restarted informal negotiations with Lombardy in December. Richard Handyside, an attorney for New York-based Merrill, said the bank wasn’t currently in talks with the region.

The Merrill case is Merrill Lynch International Bank Ltd. v. The Region of Lombardy, 10-828, High Court of Justice, Queen’s Bench Division, Commercial Court.

For the latest trial and appeals news, click here.


Ex-UBS Client Heller Gets 45-Day Jail Term for Tax Evasion

Kenneth Heller, a disbarred New York maritime lawyer, was sentenced to 45 days in jail for using an offshore UBS AG account to hide income from U.S. tax authorities.

Heller, 82, who pleaded guilty in June to three counts of tax evasion for the years 2006, 2007 and 2008, was sentenced Jan. 20 by U.S. District Judge Kevin Castel in Manhattan. The parties agreed that the amount of taxes Heller avoided was between $400,000 and $1 million. He also paid a $9.8 million penalty to the Internal Revenue Service.

Heller, who faced as long as 15 years in prison, has cancer, memory loss and other physical and mental problems, according to a defense filing in which his lawyers asked that he not be imprisoned.

Heller is “an elderly man at the end of his life who is in almost constant pain and is faced with ever-mounting physical disability,” defense lawyers said.

Citing Heller’s health, prosecutors recommended a sentence shorter than the 30 to 37 months that both sides agreed would be called for under federal sentencing guidelines, which are nonbinding.

Heller was one of seven ex-clients of Zurich-based UBS arrested on the same day in 2010 and charged with hiding more than $100 million from the IRS.

UBS admitted in February 2009 that it helped U.S. clients evade taxes. The bank avoided prosecution by paying a $780 million fine and turning over the names of U.S. account holders to investigators.

The case is U.S. v. Heller, 10-mg-742, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Boeing to Pay U.S. $4.4 Million to End Chinook Billing Case

Boeing Co., the second-largest defense contractor, agreed to pay the U.S. $4.4 million to resolve allegations that it overbilled the government for work on Chinook military helicopters.

The settlement requires Boeing to retrain its employees and make improvements to software it uses to track its billing, Philadelphia U.S. Attorney Zane Memeger said Jan. 20 in a statement. A whistle-blower lawsuit alerted the government to the issue, according to the statement.

“Some of the most important cases begin with a citizen who sees something wrong and speaks up,” Memeger said in the statement. “Whistle-blowers who notify the government of possible fraud allow us both to correct that specific problem and to prevent similar misconduct from recurring in the future.”

The U.S. Justice Department awarded Boeing a contract in 2003 to produce and modify new Chinook helicopters as part of the Army’s effort to modernize its fleet. More than 100 Chinooks were ordered.

A government probe revealed that Boeing managers instructed mechanics to perform non-billable work while separately billing the U.S. for their time, resulting in the government being charged for work for which it had already paid, according to the statement.

Damien Mills, a spokesman at Boeing’s Chinook plant in Ridley Park, Pennsylvania, said the company cooperated fully with the government’s investigation.

“As the investigation revealed, this is a matter of inadequate charging discipline in the past, not of any deliberate wrongdoing,” Mills said in an e-mailed statement.

The case is U.S. v. The Boeing Co., 10-cv-00634, U.S. District Court Eastern District of Pennsylvania (Philadelphia)

For the latest verdict and settlement news, click here.

Litigation Departments

Lehman Pays More Than $500 Million to Marsal Firm in 39½Months

Lehman Brothers Holdings Inc. has paid more than $500 million in fees to restructuring firm Alvarez & Marsal LLC in 39 1/2 months, according to a court filing.

The firm, whose co-founder Bryan Marsal runs the defunct investment bank, charged $504.2 million through December for “interim management,” including $8 million last month, according to the filing with the U.S. Securities and Exchange Commission.

Lehman, which has spent almost $1.6 billion on fees since filing the biggest bankruptcy in U.S. history in September 2008, paid $54.1 million to lawyers and managers in December, according to the filing.

Lehman’s bankruptcy became America’s most costly in April 2010, when it surpassed the $757 million cost of Enron Corp.’s three-year liquidation, according to data assembled by bankruptcy professor Lynn LoPucki at the University of California, Los Angeles. The failed energy trader’s investors were paid 53 cents on the dollar, while Lehman’s $65 billion liquidation plan would give the average creditor less than 18 cents, according to court documents.

New York-based Weil, Gotshal & Manges LLP, Lehman’s lead bankruptcy law firm, has earned $375.1 million, including $8.5 million in December.

Marsal, who bills Lehman hourly, has said he will start distributing some cash to the defunct investment bank’s creditors by next year, more than three years after the bankruptcy filing. He has court approval for the $65 billion liquidation plan that intends to raise about $40 billion in the next few years, excluding cash on hand, according to court papers.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Court Filings

Kodak Bankruptcy Filing Most Popular Docket on Bloomberg

Eastman Kodak Co., the photography pioneer that introduced the Brownie Camera more than a century ago and filed for bankruptcy Jan. 19, was the most-read docket on the Bloomberg Law system last week.

The Rochester, New York-based company, which traces its roots to 1880, listed assets of $5.1 billion and debt of $6.8 billion in Chapter 11 documents filed in U.S. Bankruptcy Court in Manhattan.

The bankruptcy case is In re Eastman Kodak Co., 12-10202, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

For more, click here.

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