Galleon, Madoff, UBS, Bank of America in Court News
Raj Rajaratnam wants jurors at his insider-trading trial told that he was a professional stock analyst who broke no laws by speaking to corporate insiders as he worked to “ferret out” information.
With jury selection three weeks away, John Dowd, the lead defense lawyer for the Galleon Group LLC hedge fund co-founder, gave the judge a proposal for instructing jurors on the law, offering the most detailed insight yet into his defense strategy.
“As the steward of his investors’ money, Mr. Rajaratnam had a fiduciary duty to trade in securities that he thought had attractive investment potential,” Dowd said in a Feb. 2 court filing on the proposed language. “The law permits analysts and investment advisers to speak with corporate insiders” and it’s common “for analysts to ferret out and analyze information.”
Rajaratnam, 53, goes on trial Feb. 28 in Manhattan federal court in what prosecutors said is the biggest U.S. crackdown on insider trading by hedge funds. The Sri Lanka native is accused of making more than $40 million in illegal trades dating back to 2003 at his New York-based fund and faces as many as 20 years in prison if convicted of the most serious charges. He denies wrongdoing.
At least a half-dozen traders are cooperating with the government, and more than 30 people have been accused in alleged conspiracies tied to the case, the first to make extensive use of phone taps to detect Wall Street insider-trading.
Rajaratnam is accused of using secret tips from hedge fund executives, corporate officials and other insiders to trade in more than a dozen stocks, including Intel Corp. (INTC), International Business Machines Corp. (IBM), Akamai Technologies Inc. (AKAM), Google Inc. (GOOG) and Advanced Micro Devices Inc. (AMD)
His defense remains something of a mystery, the government has said. Jessie Erwin, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined to comment.
“The defendant has gone to great lengths to keep from the government the witnesses he intends to call and the defense theories he intends to present,” Assistant U.S. Attorney Jonathan Streeter wrote in court papers Jan. 26.
Dowd has chided prosecutors for trying to “smoke out” details before the trial begins.
Also Feb. 4, Rajaratnam asked the judge to exclude evidence of trades in the stocks of Procter & Gamble Co. and three other companies that he says the government seeks to introduce at trial. Prosecutors “attempt to add four entirely new stocks to the case,” including Nvidia Corp. (NVDA), Intersil Corp. and Vishay Intertechnology Inc., in letters dated Dec. 2, 2010, and Jan. 20, according to the filing.
Rajaratnam’s lawyers may be planning to argue that their client tried hard to stay within the confines of the law.
“The law is not violated if the defendant acted in good faith and held an honest belief that his actions were proper,” reads one of the proposed jury instructions.
The case is U.S. v. Rajaratnam, 09-cr-01184, U.S. District Court for the Southern District of New York (Manhattan).
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Mets Owners’ Bayou Accord May Be Model for a Madoff Deal
The owners of the New York Mets baseball team, should they resume talks with the trustee for Bernard Madoff’s defunct firm, might model any settlement on an earlier deal involving Bayou Group LLC’s Ponzi scheme.
In the Bayou settlement, the Mets owners gave up all fake profits they made in that $400 million fraud plus 44 percent of their principal after a judge ruled their initial investment could be pursued because of “red flags” they saw about the possibility of a fraud.
Trustee Irving Picard wants to recover about $300 million in alleged phony profits from Madoff’s scheme made by Sterling Equities Inc., which owns the Mets baseball team, Mets Chairman Fred Wilpon, Mets President Saul Katz and Chief Operating Officer Jeff Wilpon, and other related parties. Picard also demanded an unspecified amount of principal back from the Sterling defendants.
The Wilpons said they are exploring the possibility of selling as much as 25 percent of the Mets to deal with any “uncertainty” generated by Picard’s suit. Such a sale might produce no more than $215 million, based on estimated valuations of the team. The amount of principal Picard recovers through settlement or trial might require selling more assets.
Picard didn’t specify how much principal he wants, saying that would be determined at trial or before. The Wilpons and their lawyers didn’t say how much the owners had invested with Madoff. Picard said Madoff took in $20 billion in principal from clients who thought they had $68 billion in their accounts.
Kevin McCue, a spokesman for Picard, didn’t immediately respond to an e-mail asking how much he wants of what the Mets defendants put into Madoff, or whether Picard will use the Bayou formula in taking back principal.
In the Bayou hedge-fund case, the bankruptcy judge said investors who saw “red flags” indicating a fraud can be forced to give back principal as well as profits. Picard’s 373-page complaint cites “many red flags” that should have warned the Sterling partners that Madoff was a fraud.
Merrill Lynch & Co., which was a 50 percent partner with an entity affiliated with Mets owners, had “a long-standing prohibition” against investing with Madoff, and told Saul Katz in 2007 that Madoff wouldn’t pass Merrill Lynch’s “due diligence protocols,” according to Picard’s complaint.
Howard Wohl, co-founder of Ivy Asset Management LLC, warned Saul and David Katz and Arthur Friedman about Madoff at a meeting in early 2002 to discuss the formation of the Merrill-owned entity, Sterling Stamos, a hedge fund partnership of Sterling and Peter Stamos, Picard said.
The case is Picard v. Katz, 10-05287, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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Primary Global Consultant Passed Tips to Hedge Funds, SEC Says
A Primary Global Research LLC consultant facing federal insider-trading charges spoke with at least 11 hedge funds over 14 months and leaked stock tips to some of them, regulators said.
Walter Shimoon, a former Flextronics International Ltd. (FLEX) manager who worked as a consultant for Primary Global, was among six people sued Feb. 3 by the U.S. Securities and Exchange Commission. All six were previously arrested and two have pleaded guilty.
The SEC complaint sheds new details on the alleged insider-trading scheme at Primary Global, highlighting the scope of Shimoon’s hedge fund contacts.
“From December 2008 to January 2010, Shimoon spoke with representatives of at least 11 different hedge funds,” the SEC said in its complaint filed in federal court in New York. “Brokerage records show that the hedge funds used the inside information that Shimoon provided during these calls to trade the securities of at least Flextronics and Omnivision,” a reference to Omnivision Technologies Inc.
Others sued by the SEC include two former Primary Global employees -- James Fleishman, a former sales manager, and Bob Nguyen, an ex-technology analyst -- and three Primary Global consultants, Mark. A. Longoria, Daniel L. DeVore and Winifred Jiau. Nguyen, 32, and DeVore, 46, pleaded guilty and are cooperating with prosecutors.
The case is Securities and Exchange Commission v. Longoria, U.S. District Court, Southern District of New York (Manhattan).
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EU Weighs Group Lawsuits for Antitrust, Consumer Complaints
The European Union is seeking views on introducing EU rules to allow more group lawsuits for antitrust violations and consumer complaints.
European countries have no common system for combining individual lawsuits into a group claim and this “gives rise to uneven enforcement” of consumer and business rights to seek damages from price-fixers and others, the European Commission said in a document published on its website Feb. 4.
Any European rules to encourage group lawsuits “should not give any economic incentive to bring abusive claims,” the document said. It suggested that the losing party could pay legal fees for both sides of a case to limit abusive litigation.
Neelie Kroes, the former EU competition commissioner, championed group lawsuits as a way to compensate victims of illegal monopolies and cartels. Such lawsuits, in addition to fines that can reach millions of euros, might help victims recover losses and deter antitrust violations, she argued.
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BP’s Pursuit of Cost-Cutting Led to Gulf Spill, Lawyers Say
Officers and directors of BP Plc (BP/), pursuing cost-cutting over safety, ignored “red flags” that could have prevented the explosion of the Deepwater Horizon drilling rig in the Gulf of Mexico, lawyers for investors said.
The Louisiana Municipal Police Employees’ Retirement System and other investors claim BP executives and directors breached their fiduciary duties to the company by ignoring safety and maintenance for years before BP’s Macondo well exploded April 20. The investors seek reforms in BP management and damages from the executives and board members to be paid to the company.
“Despite repeated guilty pleas, warnings, employee deaths and injuries, and criminal and civil penalties imposed on the company by numerous federal and state regulators, the defendants continued to systematically cut budgets,” the investors’ lawyers said in a court filing on Feb. 4. “The defendants’ decisions and deliberate inaction caused one of the largest environmental disasters in the history of the U.S.”
The investors’ suit, a so-called derivative claim brought on behalf of the company, is combined with other shareholder actions in federal court in Houston. The Louisiana pension fund initially filed the derivative lawsuit in May, within weeks of the explosion, and was joined by similar claims by other investors. Lawyers for the investors filed a combined amended complaint, adding details to their claims.
The lawsuit is among hundreds filed in U.S. courts after the well explosion and sinking of the Deepwater Horizon in April, which set off the largest offshore oil spill in U.S. history. Injury, economic loss and environmental claims are combined before a federal judge in New Orleans.
U.S. District Judge Keith P. Ellison in Houston is overseeing three categories of BP investor claims consolidated in his court -- derivative suits brought on behalf of the company, shareholder securities fraud suits claiming diminished share value and claims by BP employees alleging losses from mismanagement of their retirement savings funds.
Daren Beaudo, a BP spokesman, didn’t return e-mail and voice-mail messages after regular business hours on Feb. 4.
The case is In re BP Shareholder Derivative Litigation, 4:10-cv-03447, U.S. District Court, Southern District of Texas (Houston).
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UBS May Be Sued by SEC Over Puerto Rico Closed-End Bond Funds
UBS AG (UBSN) may be sued by the U.S. Securities and Exchange Commission over the sale of mutual funds that bought $1.5 billion in bonds Switzerland’s largest bank had underwritten in Puerto Rico.
The SEC’s Miami office issued a Wells notice to UBS Financial Services Inc. of Puerto Rico and UBS Financial Services Inc. regarding “secondary market trading and associated disclosures” of closed-end funds sold in the Caribbean island in 2008 and 2009, the Zurich-based firm said in a report to investors. The notification typically lets recipients respond to investigators’ claims before the agency approves legal action. The SEC may decide to not pursue a case.
UBS, a former financial adviser to the island’s Employees Retirement System that provides pensions for government workers, led the 2008 sale of $2.9 billion in bonds by the pension fund. The sale produced $27 million in fees for the Swiss bank and its co-underwriters. A UBS manager bought $1.5 billion of the securities and put them into 20 mutual funds, also sold by the bank. The bonds represented about 17 percent of the funds’ $8.9 billion in assets at the time.
“The whole thing from the ground up was riddled with conflicts of interest that could only work to the advantage of UBS and not in the interest of investors,” James Cox, professor of law at Duke University School of Law in Durham, North Carolina, said in an interview. “These Wells notices tend to not go away easily, and there is a lot of pressure on the enforcement side to turn these cases around quickly.”
Hector Mayol, the administrator of the Puerto Rico pension fund, said in an interview that the SEC last year requested documents concerning UBS’s underwriting of the bonds, which he has provided.
John Nester, a spokesman for the SEC in Washington, declined to comment. according to fund reports posted on the bank’s website.
“UBS believes the funds have been excellent long-term investments for investors and has submitted a formal response outlining the reasons why it believes no enforcement action is warranted,” Karina Byrne, a spokeswoman for UBS, said in an e-mailed statement. “The firm also maintains that the negative financial results, if any, to shareholders of the funds who traded their shares through UBS during the relevant periods were less than $5 million in the aggregate.”
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Chameleon Allowed Appeal Hearing in Iron Ore Dispute
Chameleon Mining NL was allowed a hearing in an Australian federal appeals court as it bids to overturn a judge’s ruling that dismissed the company’s claim to Murchison Metals Ltd.’s iron ore project in Western Australia.
The appeals court agreed to a quick hearing, according to statements from Murchison and Chameleon Feb. 4. Sydney-based Chameleon said it expects the appeal to be heard in May.
Murchison, an iron ore producer for the Chinese market, is building an A$4 billion ($4.1 billion) iron ore rail and port project with Mitsubishi Corp. The companies are partners in Crosslands Resources Ltd., which is developing the Jack Hills project in Western Australia.
Chameleon, a gold explorer, said Murchison used its money to help a company called Winterfall make an A$350,000 payment to buy the western Australian property and as a result it was entitled to a stake in the project. Murchison, which had said the transfer was a loan, later bought Winterfall to obtain the mining property.
Australia Federal Court Judge Peter Jacobson ruled in October that Chameleon is entitled to a portion of the profit from the project, not a stake in it nor in Murchison’s shares in Crosslands.
Peabody Seeks to Void EPA’s Carbon Limits as Not Tough Enough
Peabody Energy Corp. (BTU), the largest U.S. coal producer, is trying to block the Environmental Protection Agency from imposing limits on greenhouse-gas emissions by arguing the rules don’t go far enough.
Opponents seeking to halt the EPA’s effort to reduce carbon spewed by power plants and factories contend in lawsuits that the Clean Air Act doesn’t let regulators pick which companies must comply. The agency exempted small businesses such as dry cleaners and bakeries from rules that took effect last month.
Republicans in Congress proposed legislation this week to ban the EPA from acting. Companies such as Peabody, business groups including the U.S. Chamber of Commerce and states led by Texas are seeking to stop the agency through more than 25 lawsuits before the U.S. Court of Appeals for the District of Columbia. Their lawyers say the EPA’s effort to limit businesses affected may provide their best argument against the agency.
“There is an extremely strong argument that the EPA has acted contrary to law,” said Shannon Goessling, executive director and chief legal counsel at the Southeastern Legal Foundation, an Atlanta-based firm that advocates limited government and is suing the EPA on behalf of companies and lawmakers. “They have rewritten the Clean Air Act and completely excluded Congress from the process.”
The EPA argued in an Oct. 28 court filing that the tailoring rule is acceptable under the Clean Air Act and necessary to avoid states being overrun with permit requests.
“In striking down the tailoring rule, the court would have to disagree that it’s absurd to regulate Dunkin’ Donuts and dry cleaners,” Jackson said in an August interview. “If any time an absurd-results argument seems to be evident, this would be one of them.”
The federal appeals court, the venue for challenges to U.S. rules, hasn’t set a date for arguments.
The court could uphold the regulations, declare them unlawful and send them back to the EPA or rule that the agency has to regulate across-the-board rather than selectively, said Kevin Holewinski, an attorney with Jones Day who has represented manufacturers, oil and gas companies and utilities. The case is Coalition for Responsible Regulation Inc. v. U.S. Environmental Protection Agency, 09-1322, U.S. Court of Appeals for the District of Columbia (Washington).
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Bank of America to Pay $410 Million in Overdraft Case
Bank of America Corp., the largest U.S. lender by assets, agreed to pay $410 million to settle lawsuits alleging deceptive practices in the management of customer accounts that led to excessive fees for overdrafts.
The settlement was dated Jan. 27, according to a court filing by Bank of America and lawyers for consumers. Overdraft class actions, unified in 2009 from across the country in Miami federal court, alleged breach of contract, unjust enrichment and usury by more than two dozen banks. Institutions including Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) were named in related lawsuits.
Miami resident Ralph Torres described in his suit against Bank of America how he opened an account in 2000 after seeing advertisements for “free checking.” Torres alleged he was tricked into believing he had more money in his account than was the case, and that Bank of America debited his funds in a way that made it more likely he would incur overdraft fees.
Bruce Rogow, an attorney for the customers, declined to comment. Christopher Tarbell, an attorney for the bank, didn’t return an e-mail seeking comment.
Anne Pace, a spokeswoman for Charlotte, North Carolina-based Bank of America, said the bank has already made changes to its overdraft policies, including the elimination of overdraft fees for debit card transactions and reduced fees for customers who overdraw their accounts.
The case is In Re Checking Account Overdraft Litigation, 09-02036, U.S. District Court for the Southern District of Florida (Miami).
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TPG’s Gowrish Broke Insider-Trading Laws, Jury Says
Vinayak Gowrish, a former associate at private-equity firm TPG Capital LP, violated U.S. insider-trading laws by leaking information about pending acquisitions to a friend, a federal court jury found.
The jury sided with the U.S. Securities and Exchange Commission Feb. 4 against Gowrish in a civil trial in San Francisco, Robert Kaplan, co-chief of the SEC’s asset-management unit, said Feb. 4 in a telephone interview.
The agency sued Gowrish, of San Francisco, in December 2009 claiming that he fed tips on takeover talks involving Sabre Holding Corp. TXU Corp. and Alliance Data Systems Corp. to a friend who was an investment banker at Lazard Freres & Co. Gowrish received cash and other benefits for the tips, the SEC claimed.
“Private-equity firms are key players in the capital formation process and routinely possess material nonpublic information,” Kaplan said. “When employees of those firms like Gowrish betray investors for personal profit, the commission stands ready to hold them accountable.”
The government is seeking disgorgement of trading profits, civil penalties and a court order against further violations of insider-trading law.
John Hemann, Gowrish’s attorney, didn’t return a voice-mail message seeking comment.
The case is SEC v. Gowrish, 3:09-05883, U.S. District Court, Northern District of California (San Francisco).
Father-Son Developers Each Get 10 Years in Tax Case
A father and son convicted of hiding a $33 million hotel sale from U.S. tax authorities while living a lavish lifestyle were sentenced to 10 years each in prison.
Mauricio Cohen Assor, 78, and Leon Cohen Levy, 46, were sentenced in federal court in Fort Lauderdale, Florida, where they were convicted Oct. 7 of conspiring to defraud the Internal Revenue Service and filing false tax returns. Both men, who built hotels under the “Flatotel” brand, told jurors that they were innocent. They faced as long as 11 years in prison.
Prosecutors said the Cohens used offshore companies, friends and family posing as owners, and forged documents to cheat the IRS. The Cohens should have declared income for using mansions and cars that they said were owned by corporations, prosecutors said. The Cohens sought home detention.
The Cohens lied on the witness stand, suborned perjury by other witnesses, and went to great lengths to conceal $33 million they received in the 2000 sale of the New York Flatotel, Daly told the judge. He said the men put the money in a Swiss account of HSBC Holdings Plc (HSBA), Europe’s largest bank by market value, and moved it to other offshore accounts.
The men also hid their ownership of a company that invested as much as $45 million, lived in Miami Beach mansions, and drove cars like a Porsche Carrera GT bought for $500,000, Daly said.
“I’m really disappointed in the sentence,” said Susan Bozorgi, an attorney for the father. “Ten years essentially is a death sentence.”
The case is U.S. v. Assor, 10-cr-60159, U.S. District Court, Southern District of Florida (Fort Lauderdale).
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FDIC Appoints Michael Krimminger as Agency’s General Counsel
Federal Deposit Insurance Corp. Chairman Sheila Bair said Michael H. Krimminger will be the agency’s new general counsel effective Feb. 4.
Krimminger has been a policy adviser to Bair and the board since 2006, leading development of policy initiatives such as the agency’s authority for liquidating systemically important companies when they fail, the FDIC said in a statement.
Before joining the FDIC, Krimminger practiced banking law and litigation in Los Angeles and Washington, according to the FDIC. He is a graduate of the University of North Carolina and received a law degree from Duke University School of Law, the agency said.
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TIAA-CREF Suit Against BofA Most Popular Docket on Bloomberg
A lawsuit against Bank of America Corp.’s Countrywide Financial unit, which was accused of “massive fraud” in a lawsuit by investors who claim they were misled about mortgage-backed securities, was the most-read litigation docket on the Bloomberg Law system last week.
TIAA-CREF Life Insurance Co., New York Life Insurance Co. and Dexia Holdings Inc. are among a dozen institutional investors who filed the complaint Jan. 24 in New York state Supreme Court.
The investors claim they bought hundreds of millions of dollars of Countrywide mortgage-backed securities from 2005 to 2007 because they wanted conservative, low-risk investments. They said they relied on term sheets, prospectuses and other materials provided by the firm that were recklessly or knowingly false.
The complaint names more than 20 defendants, including Countrywide Home Loans Inc., Bank of America, Countrywide co-founder and former Chief Executive Officer Angelo Mozilo and other former executives.
“We will review the suit, but on first glance this sounds like a large, sophisticated investor who now wants to blame someone for the fact that the declining economy caused its investment to lose value,” Shirley Norton, a spokeswoman for Charlotte, North Carolina-based Bank of America, said in an e-mail on Jan. 25.
“The lawsuit against Mr. Mozilo has no basis in law or fact,” David Siegel, an attorney for Mozilo, said in an e-mailed statement. “We expect to prevail against these plaintiffs as we have against other disgruntled, sophisticated MBS investors.”
The case is Dexia Holdings v. Countrywide Financial Corp., 650185/2011, New York state Supreme Court (Manhattan).
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