Lehman, Goldman, Galleon, Deutsche Bank in Court News
Lehman Brothers Holdings Inc. was sued for an “abuse” of repurchase agreements that effectively “looted” $450 million from a Bermuda reinsurance unit when the assets were pledged to the unit’s biggest lender.
Lehman took the cash in 2008 when it was increasingly short of funds, according to the complaint by Pulsar Re Ltd., which is claiming the money from defunct Lehman Re in Bermuda. Lehman saddled the unit with illiquid assets “worth far less than the inflated market values assigned to them by Lehman personnel,” Pulsar said in the complaint, filed Jan. 26 in U.S. Bankruptcy Court in New York.
“Lehman’s abuse of repurchase agreements throughout 2008 to create the false appearance of financial health was rampant,” Pulsar said, citing a report on Lehman’s bankruptcy by examiner Anton Valukas. Under orders from former Chief Executive Officer Richard Fuld, Lehman tried to disguise its leverage by resorting to short term repos secured by “inflated” or improperly valued collateral, it said.
Pulsar’s lawsuit is one of several that make use of the Valukas report and other investigations into the largest bankruptcy in U.S. history. Most of the lawsuits seek money from former Lehman executives rather than bankrupt Lehman.
James Sprayregen, a lawyer for Pulsar at Kirkland & Ellis LLP, said his client has been negotiating with Lehman over the money as part of the liquidation of Lehman Re.
“We are still hopeful of resolving things consensually,” Sprayregen said a phone interview yesterday. “Pulsar as creditor is interested in a significant chunk of the cash in Lehman Re that Lehman seized.”
The lawsuit is Pulsar Re Ltd. v. Lehman Brothers Holdings Inc., 11-01283, U.S. Bankruptcy Court, Southern District of New York (Manhattan). Lehman’s bankruptcy case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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U.S. Sues Boston Scientific Over Faulty Defibrillators
Guidant, which Boston Scientific bought in 2006 for $27.5 billion, hid problems with its defibrillators from patients, doctors and the Food and Drug Administration, according to the lawsuit filed yesterday in Minnesota federal court. In February 2010, Guidant pleaded guilty to misleading the FDA about the problems. It paid a total of $296 million.
Guidant knew as early as 2002 that implantable cardiac devices known as Prizm 2 had a potentially life-threatening defect, yet it still sold them, the U.S. claimed. The company also knew as early as 2003 that its implantable cardiac device known as the Renewal had a similar life-threatening defect, and it sold them anyway, according to the complaint.
“Patients with serious heart conditions who depend on these devices should not have to second-guess whether they are safe and effective,” Tony West, assistant attorney general in the Justice Department’s civil division, said in a statement. Concealing the problems wasted taxpayer money and put lives at risk, he said.
Paul Donovan, a spokesman for Natick, Massachusetts-based Boston Scientific, said in an e-mail: “We have been aware of the government’s interest in this civil matter, and we have previously disclosed it in our regulatory filings. Guidant plans to respond to the government’s allegations and claims for damages in the appropriate fashion.”
Boston Scientific, the world’s second-largest heart-device maker, agreed in 2007 to pay $240 million to settle more than 8,000 lawsuits claiming Guidant hid defibrillator defects.
Guidant LLC pleaded guilty to misdemeanor charges of submitting false and misleading reports to the FDA and failing and refusing to report a medical device correction. The company was fined $253.9 million and forfeited $42 million. U.S. District Judge Donovan W. Frank accepted the plea on Jan. 12 in Minnesota.
The case is U.S. ex rel. Allen v. Guidant LLC, 11-cv-00022, U.S. District Court, District of Minnesota (St. Paul).
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U.K. Arrests Five Over WikiLeaks-Related Cyber Attacks
London police arrested five males, including three teenagers, in connection with an investigation of a group that has performed cyber attacks on companies deemed hostile to the anti-secrecy website WikiLeaks.
Hours later in the U.S., agents of the Federal Bureau of Investigation executed 40 search warrants in a similar probe of the attacks and a group known as Anonymous that took credit for them, the agency said in a statement.
The British suspects, between the ages of 15 and 26, were arrested yesterday in connection with online assaults on corporate websites by the loose-knit group, which enlisted the computers of volunteers worldwide, the Metropolitan Police Service said yesterday in a statement.
While the police didn’t name the five or specifically link their arrests to WikiLeaks, people affiliated with Anonymous previously targeted EBay Inc.’s PayPal unit, MasterCard Inc., Visa Inc. (V) and Moneybookers.com.
The investigation of so-called denial of service attacks is being carried out in cooperation with law enforcement in Europe and the U.S., according to the London police statement. The attacks require “minimal knowledge” and consist of “exhausting the resources of a computer,” the London police said.
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XO Holdings Sued Over 70 Cents-a-Share Icahn Offer
XO Holdings Inc. was sued by a shareholder who contends a 70 cents-a-share takeover offer from an affiliate of Chairman Carl Icahn undervalues the telecommunications company.
XO directors have a duty to get the best price for the shares, which recently have been trading above the offer, said Cindy Henzel, an investor in the Herndon, Virginia-based company, in a Delaware Chancery Court complaint filed Jan. 26.
Henzel said the consideration “is indeed a discount to the company’s shareholders,” and “is unfair and grossly inadequate” for XO, which reported $1.52 billion in sales for 2009.
Icahn, with 91.5 percent of the stock, said Jan. 21 he would buy 100 percent of the company through his ACF Industries Holding Corp., according to the complaint.
XO said Jan. 21 it had formed a special board committee to evaluate the offer. Icahn didn’t immediately return a call to his New York office seeking comment on the lawsuit.
XO rose 2 cents, or 2.7 percent, to 76 cents in over-the-counter trading in New York. The stock has climbed 23 percent in the past year.
The case is Henzel v. XO Holdings, CA6150, Delaware Chancery Court (Wilmington).
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Goldman’s Tourre Seeks to Halt February Depositions
Fabrice Tourre, the Goldman Sachs Group Inc. (GS) trader accused by U.S. regulators of misleading investors in a product linked to subprime mortgages, asked a judge to halt depositions scheduled to begin on Feb. 1.
Tourre can’t “effectively participate” in the depositions until he gets documents from Dusseldorf, Germany-based IKB Deutsche Industriebank AG (IKB), a “purported ‘victim’ of the alleged fraud,” his lawyer said yesterday in a court filing. Tourre also is awaiting other material and must review about 300,000 documents he has already received, according to the filing.
“If Mr. Tourre is compelled to proceed with depositions beginning on Feb. 1, 2011, it will be without the benefit of anything like adequate document discovery,” Pamela Chepiga, Tourre’s lawyer, wrote in the filing in federal court in Manhattan.
The U.S. Securities and Exchange Commission sued Goldman Sachs and Tourre on April 16, accusing them of failing to tell investors that hedge fund Paulson & Co. helped pick underlying securities for a collateralized debt obligation and planned to bet against them. The SEC reached a $550 million settlement with New York-based Goldman Sachs in July.
Florence Harmon, a spokeswoman for the SEC, didn’t have an immediate comment.
Tourre is awaiting a judge’s ruling on his request to dismiss the lawsuit because, he said, the transactions involving the collateralized debt obligations called Abacus 2007-AC1 occurred outside the U.S. Tourre can’t be held liable under U.S. securities law, his lawyers have argued.
The SEC opposes the request, saying in court papers that “unlawful securities transactions” occurred in the U.S. Tourre worked at the Goldman Sachs “headquarters in New York during the relevant period” and did business in New York, the agency said.
The court filing provides insight into the course of the litigation. Tourre’s lawyers have hired 25 attorneys to review 1 million documents with about 10.5 million pages. Attorneys for the SEC say they plan to depose about 25 witnesses, including representatives of Goldman Sachs and IKB.
The case is SEC v. Goldman Sachs, 10-CV-3229, U.S. District Court, Southern District of New York (Manhattan).
Rajaratnam Prosecutors Seek to Offer Pay Evidence
U.S. prosecutors asked a judge for permission to tell jurors at an insider-trading trial next month about the pay of Galleon Group LLC co-founder Raj Rajaratnam.
In a filing Jan. 26 in Manhattan federal court, Assistant U.S. Attorney Jonathan Streeter also asked a judge to block Rajaratnam from challenging the government’s motives for prosecuting him. Streeter cited a similar ruling in the 2004 trial of Martha Stewart, who was convicted of obstructing justice.
“Evidence linking a defendant’s financial compensation to his possible motives for participating in an alleged fraud is relevant,” Streeter wrote in the filing. “Rajaratnam should be precluded from attacking the government’s motives, conduct and investigative methods,” he added.
Rajaratnam, who denies wrongdoing, will go on trial on Feb. 28 on charges that he led an insider-trading conspiracy which earned his fund about $45 million. Prosecutors say they will offer wiretaps of his phone conversations and testimony from his alleged accomplices, while Rajaratnam says there were innocent reasons for his stock trades.
Dowd wants to block prosecutors from telling jurors about statements from Rajaratnam stock tippers who didn’t tell him the source of their tips, who passed along “general and non-specific” comments about companies or who fabricated information about companies. Dowd also wants to exclude evidence where there were no trades in a stock.
U.S. District Judge Richard Holwell, who is presiding over the case, will make the final determination.
The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
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Renault Told Spying Suspect to ‘Keep the Money,’ Lawyer Says
Renault SA (RNO) told one of three executives accused of selling company secrets to go quietly and “keep the money,” his lawyer said. The French carmaker denied making the offer.
Christian Husson, Renault’s legal director, said Matthieu Tenenbaum could resign and escape punishment during a meeting on Jan. 3, according to attorney Thibault de Montbrial. “He didn’t even understand what the proposal meant,” De Montbrial said by telephone yesterday.
Renault spokeswoman Caroline de Gezelle said Husson had made no such suggestion. Tenenbaum “had the choice to resign but not to keep the money,” she said by phone.
Renault said on Jan. 5 it suspended three executives without pay after an ethics probe. Tenenbaum and the two other managers, upstream development chief Michel Balthazard and his deputy Bertrand Rochette, have denied selling electric-car secrets, contested their subsequent dismissals and filed criminal defamation claims.
Renault kept the government in the dark about the alleged leaks until they were reported by the French media, Industry Minister Eric Besson said Jan. 13. The carmaker filed espionage charges against persons unknown with Paris prosecutors the same day.
Renault’s internal probe found that offshore accounts in their names had received payments traced to Chinese companies, a French official said Jan. 12. China rejected the allegations as “baseless and irresponsible.”
Lawyers for Balthazard and Rochette said they had no immediate comment on whether they received similar offers during disciplinary interviews.
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Milan Used Swap Dealers as Advisers in Past, Witness Says
The city of Milan, which says four banks defrauded it in a 2005 derivatives agreement, hired banks as both advisers and swap dealers in previous deals, a former city finance official told a court.
Angela Casiraghi, 44, a prosecution witness who helped arrange the city’s disputed sale of bonds and swaps in 2005, said at the Jan. 26 hearing in Milan that the roles had been assumed by a single lender in at least one previous deal. She said in testimony last week the city typically sought to split the roles of advisers and arrangers, and as a result she trusted the banks on trial were acting in the city’s best interest.
Prosecutor Alfredo Robledo says the banks set out to mislead the city by treating it as a so-called market counterparty in the swap and stripping it of protection against the banks’ potential conflicts of interest.
Deutsche Bank AG (DBK), Depfa Bank Plc, JPMorgan Chase & Co. (JPM) and UBS AG (UBSN) are accused of misleading Milan officials into thinking they could save the city about 55 million euros ($74 million) by selling the bonds and related derivatives, while they earned 101 million euros in hidden fees.
The banks, which deny the charges, first sold interest-rate swaps to the city in 2005 on 1.7 billion euros of 30-year bonds. Officials for the banks declined to comment on the Jan. 26 cross-examination by defense lawyer Giuseppe Iannaccone.
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OMV Chief Ruttenstorfer Acquitted in Insider-Trading Trial
OMV AG (OMV) Chief Executive Officer Wolfgang Ruttenstorfer was acquitted by a Vienna court of charges he used inside information to buy shares of the company a week before a major divestment.
The acquisition of 26,500 OMV shares on March 23 by Ruttenstorfer, 60, was not in conflict with the company’s sale of a 21.2 percent stake in Mol Nyrt a week later, Judge Claudia Moravec-Loidolt said at the Criminal Court of Vienna yesterday. The offense would have been punishable by as long as three years in prison under Austrian law.
Ruttenstorfer has been CEO of central Europe’s biggest energy company since 2002 and is due to retire at the end of March.
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New York to Pursue Corporate Tax Fraud With New Unit
New York Attorney General Eric Schneiderman said he’s creating a taxpayer-protection unit to target multistate corporate tax-fraud schemes, corrupt contractors and firms that rip off public pension funds.
The unit, which also will encourage whistleblowers to expose corruption, will be empowered by the state’s newly strengthened False Claims Act, which Schneiderman called “the strongest anti-fraud statute in the United States.” The revised act makes New York the only state that can bring false claims accusations against those who commit tax fraud, Schneiderman said yesterday at a press conference in Manhattan.
Schneiderman also will bolster his office’s Medicaid Fraud Control unit, taking advantage of a federal program that matches state investment three-to-one. The money to expand the unit will come from recoveries, he said.
The enhanced False Claims Act, sponsored by Schneiderman when he was a state senator and approved by the Legislature last year, has a provision aimed at illegal off-shore tax shelters, he said in a statement when it passed. The provision is a first-in-the-nation state program to allow whistleblowers to go after what he called “millionaire tax cheats” that defraud the state of more than $350,000, he said last year.
Schneiderman said yesterday that the new unit also will pursue off-shore tax cheats.
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On The Docket
K1 Hedge Fund Founder Kiener’s Fraud Trial to Start in March
Helmut Kiener, founder of the K1 Group hedge fund, was ordered to stand trial over an alleged Ponzi scheme that saddled investors and banks, including Barclays Plc (BARC) and BNP Paribas SA (BNP), with 345 million euros ($473 million) in losses.
A German court allowed the charges to go to trial, Dietrich Geuder, spokesman for the Prosecutors’ Office in Wurzburg, Germany, said in an interview yesterday. The trial is scheduled to start March 2 at the Wurzburg Regional Court.
Kiener was charged in November with tax evasion, 35 counts of aggravated fraud and 86 counts of forgery. Almost 5,000 private investors in the K1 Global Ltd. and K1 Invest Ltd. funds lost money, according to prosecutors.
Lutz Libbertz, Kiener’s lawyer, declined to comment, a spokeswoman for the attorney said yesterday. Kiener has denied the allegations.
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