Jan. 25 (Bloomberg) -- R. Allen Stanford engaged in a long-term scheme to defraud people who bought certificates of deposit from his Antigua bank, a U.S. prosecutor told jurors at the opening of the financier’s criminal trial in Houston.
Stanford, 61, was the ringleader of a $7 billion investment fraud, the U.S. said in a 14-count indictment accusing him of mail fraud and wire fraud, crimes that carry maximum sentences of 20 years in prison. He’s also charged with conspiracy to commit mail fraud and wire fraud and to obstruct a U.S. Securities and Exchange Commission probe.
“I plead not guilty to every count,” Stanford, wearing a light gray plaid suit and a white dress shirt and no necktie, told the jury yesterday.
Stanford has been in federal custody since being indicted in June 2009. His trial was postponed three times because of changes to his legal defense team, the after-effects of a jailhouse beating and a subsequent prescription-drug addiction.
Stanford stole from investors “so that he could live the lifestyle of a billionaire,” Assistant U.S. Attorney Gregg Costa said in his opening statement. “He told them lie after lie after lie.”
The scheme stretched over 20 years of “lying, cheating and bribing,” Costa told the jury of 10 men and five women, including three alternates.
“Mr. Stanford’s financial empire was real and did make a lot of money and did pay every penny of what was owed to depositors for 22 years,” Robert Scardino, one of Stanford’s court-appointed lawyers, told the jury in his own opening remarks.
Scardino and defense lawyer Ali Fazel have previously said they will use the records of Houston-based Stanford Group Co. and Stanford International Bank Ltd. to prove their client never intended to defraud anyone.
No investor lost money until the SEC sued Stanford and obtained a court order to take control of his businesses in February 2009, the defense has said.
Jury selection began Jan. 23 at Houston’s Bob Casey Federal Courthouse with U.S. District Judge David Hittner’s interview of 80 prospective panelists, many of whom said they had read or heard reports about the case and some of whom told the judge they didn’t know if they could be impartial.
Of the 15 men and women selected yesterday, nine are white, three are black and three are Hispanic.
Among them are a retail optician, an environmental engineer, two accountants, a kindergarten teacher, a chef, a land surveyor, a pawn broker and a retired hairdresser.
The trial may last about six weeks, Hittner said.
The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston). The civil case is Securities and Exchange Commission v. Stanford International Bank Ltd., 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas).
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RBS Seeks to Block $100 Million Highland Suit on Failed CDO
Royal Bank of Scotland Group Plc asked a U.K. judge to block a $100 million lawsuit filed by Highland Capital Management LP in Texas that accuses the lender of fraud and unjust enrichment over a failed collateralized-debt obligation.
“What we have here are English proceedings” that have been running “for nearly three years,” John Nicholls, the attorney for the lender majority-owned by the British government, said in a London court yesterday. The bank wants the court to block Highland from suing in Texas.
The hedge-fund firm claims that at the height of the credit market freeze that resulted from the bankruptcy of Lehman Brothers Holdings Inc., RBS used an accounting provision to terminate the Highland CDO and seize its underlying loans, according to court papers related to the Texas claim. In November 2008, Edinburgh-based RBS held a “sham auction” to ensure it could get the loans at “bargain basement prices” and make a profit, the fund claimed.
Judge Michael Burton, who is overseeing the London trial, earlier ruled the bank’s termination of the deal was lawful because “the autumn 2008 financial crash ended any chance of public interest in such securities,” he said in his judgment.
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Perelman’s MacAndrews & Forbes Faces Drapkin Back-Pay Claim
Donald Drapkin, the longtime associate of billionaire Ronald Perelman, told a jury that he never thought his colleagues at Perelman’s MacAndrews & Forbes Holdings Inc. would try to cheat him out of $16 million.
Drapkin took the witness stand yesterday as his trial against MacAndrews & Forbes got under way in Manhattan federal court. Drapkin is suing for compensation that he says the firm failed to pay him after he left in 2007.
“I never expected to be at odds with Mr. Perelman,” Drapkin, the firm’s former vice chairman, testified. “I never thought they would try to screw me. They were my friends for 20 years.”
Drapkin, a dealmaker at the firm, says he was hired by Perelman in the 1980s to serve as vice chairman and to act as in-house investment banker. By 2006, the relationship between the two men had deteriorated so sharply that Drapkin’s salary had been slashed and his responsibilities cut, according to court papers.
In court yesterday, Drapkin’s lawyer, Elkan Abramowitz, told jurors in his opening statement that Drapkin agreed to leave the firm in return for millions of dollars in severance and from the sale of his stock. Drapkin has yet to be paid $16 million, Abramowitz said.
“It’s a case about fairness, about whether a company, MacAndrews, which Donald Drapkin helped run for 20 years, can renege on its promise for the flimsiest of excuses,” Abramowitz said.
Steven Kobre, a lawyer for MacAndrews & Forbes, told jurors in his opening statement that the firm paid Drapkin millions of dollars when he left in 2007. It also agreed to pay him millions more if he promised not to induce other employees to quit and to return all company documents.
“Mr. Drapkin willfully disregarded his obligations,” Kobre said.
According to Kobre, Drapkin tried to encourage Eric Rose, a surgeon who was executive vice president of life sciences, to leave MacAndrews & Forbes. Drapkin and his personal assistant also kept thousands of documents on a company computer given to them when they left.
The cases are Drapkin v. Mafco Consolidated Group, 09-cv-1285, and MacAndrews & Forbes LLC v. Drapkin, 09-cv-4513, U.S. District Court, Southern District of New York (Manhattan).
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Eurohypo to Lose Second Profit Certificates Appeals Case
Commerzbank AG’s Eurohypo unit is likely to lose a second case over so-called profit certificates filed by a U.S. hedge fund, a judge said at a hearing yesterday.
The Frankfurt appeals court will probably rule in favor of QVT Financial LP, which brought the case, Associate Judge Klaus Maier said in a preliminary assessment. QVT won in a lower court over certificates originally issued by Hypothekenbank in Essen AG and is also likely to win on those issued by Rheinische Hypothekenbank AG, Maier said.
Commerzbank acquired Eurohypo in 2007 and agreed to cover any losses by its unit under the terms of a so-called profit-transfer and domination accord. After being bailed out following the financial crisis, Commerzbank stopped the payments in 2009.
Eurohypo attorney Manfred Hechtl argued the certificate owners profited from the fact that Commerzbank took over Eurohypo. Had Eurohypo remained on its own, it would have suffered from the sovereign debt crisis, leaving investors with losses, he said.
QVT attorney Josef Broich rejected the argument, saying it turned the situation upside down.
“The real fortune hunter here is Commerzbank,” Broich said, adding that by illegally withholding payments on the securities, the lender pushed their trading price down and at the same time took advantage by buying them back cheaply.
The court scheduled a ruling for Feb. 7.
Yesterday’s case is OLG Frankfurt am Main, 5 U 92/11.
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J&J Unit Didn’t Hide Levaquin Risks, Company Lawyer Says
Johnson & Johnson properly warned of the risks of its antibiotic Levaquin and shouldn’t be held liable for tendon injuries sustained by a 78-year-old man, a company lawyer said at the end of a trial in Minneapolis.
Clifford Straka, who blew out two Achilles tendons after taking the drug for pneumonia, sued J&J and its Ortho-McNeil Pharmaceutical unit in 2008. Straka said his doctor wasn’t aware when she prescribed the drug that Levaquin was linked to an increased risk of tendon damage in elderly patients.
Johnson & Johnson, based in New Brunswick, New Jersey, has denied any failure to warn and contended that Straka needed Levaquin to treat the pneumonia.
“The label from day one in 1996 was adequate,” James Irwin, J&J’s lawyer, said in closing arguments yesterday. “The information was out there and available to the doctors and everyone else.”
The lawsuit is the third federal case to go to trial in Minnesota alleging J&J and its unit, now known as Janssen Pharmaceuticals, downplayed the risks of the antibiotic to boost sales. J&J lost the first, a jury verdict for $1.8 million in 2010, and won the second last year. The company also won the first state case in October, when a New Jersey jury rejected the claims of two plaintiffs.
J&J is facing more than 3,700 claims involving Levaquin in state and federal courts, Bill Foster, a company spokesman, said in an e-mail. The lone trial loss has been appealed and 43 cases have been dismissed, he said.
The case is Straka v. Johnson & Johnson, 08-05742, combined for trial in In re Levaquin Products Liability Litigation, 08-md-01943, U.S. District Court, District of Minnesota (Minneapolis).
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Citigroup Sued Over $1 Billion Sub-Prime CDO Investment
Citigroup Global Markets Inc. was sued by Loreley Financing over almost $1 billion in collateralized debt obligations backed by residential mortgages.
Loreley, a group of nine Jersey-based investment companies formed to invest in CDOs, claimed in a complaint filed in state court in Manhattan yesterday that Citigroup lied about the riskiness of the residential mortgage-backed securities, or RMBS, underlying the investments. The CDOs are now worthless, Loreley said.
Loreley claimed that from September 2006 to July 2007 Citigroup sold it $965 million of notes in 11 CDOs and profited by charging fees and unloading loans likely to lose money. Loreley seeks an order rescinding its purchase of the notes and the return of its $965 billion investment.
“Citigroup devised and implemented several fraudulent schemes through which it was able to mitigate its exposure to the impending collapse of the subprime market even as it continued to earn lucrative fees securitizing subprime RMBS and arranging and marketing CDOs stocked with these increasingly toxic assets to unsuspecting investors such as plaintiff,” Loreley claimed.
Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, said, “We believe the suit is without merit.”
The case is Loreley Financing (Jersey) No. 3 Ltd. v. Citigroup Global Markets Inc., 650202/2012, New York State Supreme Court (New York County).
MetLife, Prudential Accused of Fraud in Illinois Suit
MetLife Inc. and Prudential Financial Inc. were accused of “massive fraud” in a whistle-blower lawsuit filed in Illinois alleging they failed to turn over unclaimed life insurance funds to the state.
Total Asset Recovery Services LLC, an Auburn Hills, Michigan-based company that researches unclaimed funds held by state treasurers on behalf of individuals, said in a complaint that the insurers didn’t turn over money from 4,766 unclaimed life insurance policies held by people that they knew or should have known were deceased.
Life insurance funds not claimed for more than five years after they are payable under the terms of the policy are deemed abandoned and become state property under Illinois law, lawyers for the company said in a complaint filed in state court in Chicago yesterday. When MetLife and Prudential converted from mutual life insurers to public companies in 1999 and 2000, they mailed policyholders a share of profits they had accumulated, though some were undeliverable and returned, the lawyers said.
Using various databases, the company found that unclaimed funds from policyholders who died between 1982 and 2004 weren’t turned over to the state, the lawyers said. They estimated that the amount of the funds may exceed $524 million.
The lawsuit says the insurers could be liable for as much as $26 million in penalties to Illinois and damages worth treble the amount of funds that were withheld. Total Asset Recovery seeks between 15 percent and 30 percent of the damages or settlement amount. The lawsuit claims violations of Illinois’ False Claims Whistleblower Reward and Protection Act, which allows people who disclose fraud against the state to share in the proceeds from the lawsuit.
John Calagna, a spokesman for New York-based MetLife, and Bob DeFillippo, a spokesman for Newark, New Jersey-based Prudential, didn’t return voice-mail messages seeking comment about the lawsuit.
The case is Total Asset Recovery Services Inc. v Metlife Inc. 2011L001225.
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Ackman to Indemnify Rail CEO Pick as Rival Goes to Court
Investor William Ackman said he will shield his choice to run Canadian Pacific Railway Ltd. against a possible loss of benefits after the retired executive’s former employer suspended pension and other payments.
Canadian National Railway Co. said Jan. 23 that ex-Chief Executive Officer Hunter Harrison, Ackman’s pick to lead rival Canadian Pacific, had breached or planned to breach his contractual obligations. Ackman said Canadian National’s litigation over Harrison’s benefits was “frivolous.”
Harrison, 67, is at the center of a three-way struggle. As Ackman’s Pershing Square Capital Management LP prods Canadian Pacific to hire him, Canadian National is moving to halt an annual pension of $1.5 million and additional payments for a total of $40 million if Harrison joins the smaller carrier.
“We’re going to indemnify him from any lawsuits he suffers as a result of this,” Ackman said in an interview. “And we have done our homework. He has not breached his agreements, and therefore we don’t expect there will be exposure to us on the indemnity.”
Canadian National has “reasonable grounds” to believe that Harrison “breached and intends to breach his contractual undertakings,” according to an e-mailed statement. The Montreal-based railroad asked a federal judge in Chicago to declare its actions “reasonable and lawful,” and determine whether the facts support its assertion that Harrison breached his agreement.
“We don’t just throw around $40 million,” Ackman said in the interview. We don’t expect to have to make any payments under this indemnity because the lawsuit’s completely frivolous.’’
Canadian Pacific already has rebuffed Ackman’s quest to install Harrison, and its board has reiterated support for incumbent CEO Fred Green. Ackman is planning a proxy fight to elect new directors.
“This suit is only about money,” said Gregory Joseph, a New York lawyer for Harrison. Joseph said Harrison “scrupulously” honored a two-year non-compete agreement with Canadian National after retiring in December 2009. “Canadian National is not seeking to prevent Mr. Harrison from accepting a position at Canadian Pacific, should one someday be offered,” Joseph said.
The case is Canadian National Railway Co. v. Harrison, 12-00493, U.S. District Court, Northern District of Illinois (Chicago).
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Roche Denies Settling Raptiva Claims; First Trial Set for June
Roche Holdings AG denied settling lawsuits that say its Raptiva psoriasis drug caused lethal infections and said it’s proceeding to the first trial of the claims in June.
Mark Lanier, a lawyer for the plaintiffs, earlier said Roche’s Genentech unit had settled. He later called that statement “in error and wishful thinking.”
Genentech was sued in state court in California over allegations that Raptiva caused Stephen Johnson’s death. The 46-year-old Louisiana businessman took the drug to treat a skin condition. The Johnson family is seeking $15 million in compensatory damages along with “several hundred million dollars” in punitive damages, according to plaintiffs’ lawyers.
“Genentech has not settled the Stephen Johnson lawsuit,” Nadine Pinell, a spokeswoman for the South San Francisco, California-based company, said yesterday in an e-mailed statement. “The trial in this matter is set to begin on June 4, 2012.”
Genentech began taking Raptiva off the U.S. and European markets in April 2009 after three psoriasis patients were diagnosed with progressive multifocal leukoencephalopathy, or PML, a rare, incurable brain infection. The month before the withdrawal, Basel, Switzerland-based Roche completed a $46.8 billion buyout of the biotech company.
“I was premature and the case is now on the docket for June,” Lanier said. “They have indicated we are going to trial.”
The case is Johnson v. Genentech Inc., RG 10-494957, California Superior Court, Alameda County (Oakland).
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General Electric Loses IRS Appeal on Dutch Bank Tax Benefits
General Electric Co. lost a U.S. challenge of its 2009 victory in a battle with the U.S. Internal Revenue Service over tax benefits from a partnership structure with Dutch banks.
The U.S. Court of Appeals in New York yesterday reversed an October 2009 ruling by a federal judge in Connecticut that concluded GE’s arrangement with a group of Dutch banks in the 1990s was legitimate. In its ruling yesterday, the court said that the IRS properly imposed a monetary penalty against a General Electric subsidiary for substantially understating its income taxes for 1997 and 1998.
GE, the world’s largest lessor of aircraft, set up the Castle Harbour partnership in 1993 with Dutch banks including ING Bank NV and Rabo Merchant Bank NV. Under the terms of the transaction, the GE subsidiary received most of the actual leasing income. For tax purposes, 98 percent of the taxable income was allocated to the banks and wasn’t subject to U.S. income taxes.
The arrangement shifted about $310 million in income from leases on old airplanes to the banks and saved GE about $62 million over a five-year period.
The IRS subsequently determined that the arrangement was a “sham,” and Fairfield, Connecticut-based GE paid the government the $62 million, according to a 2009 ruling. The partnership then sued to challenge the IRS claim that the partnership structure had no business purpose other than reducing tax expenses.
“This decision shows that our courts will not allow large corporations to use complex disguises to get improper tax breaks,” John DiCicco, acting assistant attorney general for the Justice Department’s Tax Division, said in a statement. “In fact, companies that avoid paying their fair share of the tax burden by engaging in these types of games are setting themselves up for substantial penalties in addition to the taxes they should have paid in the first place.”
“We are disappointed that the Court of Appeals overturned the trial court’s most recent favorable decision,” GE said in an e-mailed statement. “This new ruling has no impact on GE’s current operations, nor will it have any adverse financial impact. We continue to analyze the court’s opinion and our options.”
The case is TIFD II-D Inc. v. United States of America, 10-70, U.S. Court of Appeals for the Second Circuit (New York).
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On The Docket
BP’s McKay to Be First Witness at Gulf Oil Spill Trial
BP America Inc.’s chairman and president, Lamar McKay, will be the first witness at the February trial to determine liability for the 2010 Gulf of Mexico oil spill, plaintiffs’ lawyers said.
“Mr. McKay should be instructed to be present and ready to testify immediately upon completion of the opening statements,” lawyers for businesses and property owners said in a Jan. 20 letter to the company’s attorney Andrew Langan. The letter was filed yesterday in federal court in New Orleans.
McKay, the highest-ranking U.S. executive of BP Plc, “will be on the stand for the first two days that trial testimony is taken,” attorneys James Roy and Stephen Herman said in the letter. Mark Bly, a BP safety official, will also be on the witness stand in the first week of trial or by the beginning of the second week, Roy and Herman said.
The April 2010 Macondo well blowout and explosion killed 11 workers and caused the worst offshore oil spill in U.S. history.
The accident sparked hundreds of lawsuits from businesses and coastal property owners against BP, its partners and contractors, including Transocean Ltd., the Switzerland-based owner and operator of the Deepwater Horizon drilling rig that exploded, and Halliburton Co., which provided cementing services to the project.
The U.S. also sued BP, Transocean and Anadarko Petroleum Corp., which owned 25 percent of the well, in December 2010, alleging violations of federal pollution laws.
The lawsuits are consolidated for pretrial processing by U.S. District Judge Carl Barbier in New Orleans. Barbier scheduled a nonjury trial to begin Feb. 27 to determine which companies share blame for the explosion.
Scott Dean, a BP spokesman, didn’t respond to an e-mail and call for comment.
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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