Insider Trading, Deutsche Bank, Rajaratnam in Court News
Trader Garrett Bauer had good reason to be nervous, Bloomberg News’s David Voreacos and Ann Woolner report. Federal agents had just searched the home of his friend, a go-between in an alleged insider-trading scheme based on secret tips passed from a well-placed lawyer. The scam earned $32 million in profits for the three men, prosecutors said.
Bauer, 43, believed he had hidden their crimes by talking on disposable cell phones and using cash to reward the attorney and the middleman for the tips, prosecutors charged. What Bauer didn’t know was the go-between had secretly recorded their conversations for the government, according to court papers.
“There is no way they could ever be recorded,” Bauer said to the middleman about the telephone calls, according to a criminal complaint filed yesterday in federal court in Newark, New Jersey.
Bauer, arrested in New York, is accused of trading on tips from attorney Matthew Kluger, 50, who was picked up in Virginia. The case is the latest in a nationwide crackdown on insider trading that began with Galleon Group LLC co-founder Raj Rajaratnam, a billionaire hedge fund manager now on trial in New York. U.S. prosecutors rested their case against Rajaratnam yesterday, and a jury may begin deliberations by next week.
Like Bauer, Rajaratnam was secretly recorded by U.S. agents. Since 2009, probes of insider trading by U.S. Attorney Preet Bharara in Manhattan have led to about four dozen arrests and focused on hedge funds, corporate executives and so-called expert networking firms.
In announcing the case yesterday in Newark, U.S. Attorney Paul Fishman said Bauer and Kluger were charged for a “massive insider-trading scheme involving leading law firms, major corporate transactions, and millions of dollars in cash.”
The scheme, he said, began with Kluger passing tips about deals he worked on as an associate at Cravath Swaine & Moore LLP from 1994 to 1997 and at Skadden Arps Slate Meagher & Flom LLP from 1998 to 2001.
After a five-year hiatus, the scheme resumed in December 2005 and continued until March 2011, when Kluger worked in the Washington office of Wilson Sonsini Goodrich & Rosati PC, authorities said. Kluger passed on tips about deals he culled from the law firm’s computer system, according to a Federal Bureau of Investigation arrest complaint filed in court.
After the hearing, Bauer attorney Donald Derfner said, “There is still a presumption of innocence.”
Kluger appeared without a lawyer yesterday in federal court in Alexandria, Virginia, where a magistrate judge ordered him held without bail. The judge set a preliminary hearing for April 8. Kluger asked the judge to appoint a lawyer for him.
The criminal case is U.S. v. Garrett Bauer, 11-mj-3536, U.S. District Court, District of New Jersey (Newark). The SEC case is Securities and Exchange Commission v. Matthew H. Kluger and Garrett D. Bauer, U.S. District Court, District of New Jersey (Newark).
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Encore Energy Partners Sued Over Proposed Vanguard Buyout
Encore Energy Partners LP, owner of natural-gas and oil properties in Montana and Wyoming, was sued by a shareholder over claims its proposed buyout by majority owner Vanguard Natural Resources LLC (VNR) is unfair.
The proposed deal doesn’t adequately reflect Encore’s true value, shareholder Stephen Bushansky said in the complaint filed April 4 in Delaware Chancery Court. Bushansky is seeking to represent all Encore shareholders in his request for a court order barring the transaction.
Vanguard Natural announced plans to buy the 54 percent of Encore it doesn’t own on March 25 at a price that values the Houston-based company at about $1.05 billion. Vanguard, which controls Encore through ownership of its general partner, offered 0.72 shares for the partnership units it doesn’t own. Encore said last month that a committee of independent directors is reviewing the offer.
Lisa Godfrey, a spokeswoman for Encore Energy, didn’t immediately return voice and e-mail messages seeking comment on the lawsuit.
The case is Bushansky v. Encore Energy Partners LP (ENP), CA6347, Delaware Chancery Court (Wilmington).
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Stanford Bank Records Fight Belongs Under Hague, Judge Says
R. Allen Stanford’s court-appointed receiver should pursue Swiss banking records he says are held by a unit of Paris-based Societe Generale through the Hague Convention and not U.S. courts, a federal judge ruled.
U.S. District Judge David Godbey in Dallas yesterday rejected court-appointed receiver Ralph Janvey’s request for an order compelling a Lausanne, Switzerland-based unit of the Paris bank to produce its records of any accounts held by Stanford personally or through one of his businesses since Jan. 1, 2000.
“If the Swiss authorities agree with this court that the receiver is simply seeking production of his own banking records, then the receiver may easily obtain what he needs,” Godbey said in the ruling.
Stanford is civilly and criminally accused by the U.S. of leading a $7 billion investment-fraud scheme through the sale of certificates of deposit by Antigua-based Stanford International Bank Ltd. He has denied any wrongdoing.
The financier allegedly routed more than $100 million in investor funds through the Swiss bank accounts, Janvey told the judge in Feb. 22 court papers. The judge heard arguments on the issue Feb. 28.
Responding to the receiver’s demand, Societe Generale (GLE) lawyers told the court their client is bound by Swiss banking secrecy laws, the violation of which could result in their being prosecuted.
“The threat of criminal punishment is real, including the possibility of imprisonment,” SocGen lawyer Noelle Reed, an attorney with New York’s Skadden Arps Slate Meagher & Flom LLP, said in a Feb. 28 court filing.
“Swiss residents cannot avoid these laws simply by turning information over to their American counterparts to be ‘produced’ in this country,” Reed said.
Reed didn’t immediately return an e-mail seeking comment yesterday.
Janvey’s subpoena had been served on a Societe Generale office in Miami last year. The receiver was appointed after the U.S. Securities and Exchange Commission filed a civil enforcement action against Stanford in February 2009.
If Janvey doesn’t get the records, he “may renew his request” in federal court in Dallas, Godbey said.
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).
Banks Get Edge on Foreclosure Penalties as Feds Settle
Bank of America Corp. (BAC), Wells Fargo & Co. (WFC) and fellow mortgage servicers are more likely to dodge a threatened $20 billion in penalties for faulty foreclosures after U.S. agencies cut ahead of the states by signing deals without fines, Bloomberg News’ Dakin Campbell reports.
A task force of 50 state attorneys general already was arguing internally over proposed sanctions when people familiar with the talks said the Federal Reserve, Office of the Comptroller of the Currency, Office of Thrift Supervision and Federal Deposit Insurance Corp. began making the deals. While the U.S. watchdogs may yet seek fines, the pacts ease pressure on the banks and erode states’ leverage, said Gilbert Schwartz, a former Fed attorney.
“This puts the attorneys general in an uncomfortable position,” because it reduces the list of outstanding demands and helps firms show progress in fixing lapses, said Schwartz, a partner at law firm Schwartz & Ballen LLP in Washington who is not involved in negotiations. “By settling with the banking agencies, it sets the upper limit on what the banks would be willing to do. This seems to have drawn a line in the sand.”
The first of as many as 14 mortgage servicers signed accords this week agreeing to improve internal controls, communications with borrowers and other processes, said two people familiar with the matter. They are the first sanctions to arise from last year’s probe into so-called robo-signing, in which mortgage firms and their contractors vouched for thousands of foreclosure documents without verifying their accuracy.
The U.S. agreements proceeded without the backing of the attorneys general, led by Iowa’s Thomas J. Miller, who undertook joint probe last year and have sought to change servicers’ behavior and extract financial penalties. In early March, the group circulated a 27-page settlement “term sheet” outlining future rules on mortgage servicing and conditions for possible mortgage modifications.
Geoff Greenwood, a spokesman for Miller, said yesterday that the actions of U.S. regulators won’t affect the efforts of the attorneys general.
“We see any settlement they may reach as a floor, not a ceiling,” Greenwood said. “We still don’t know what their agreement would say because we haven’t been notified.”
Spokesmen for the FDIC, Fed, OCC and OTS declined to comment, as did representatives of San Francisco-based Wells Fargo and Bank of America, based in Charlotte, North Carolina.
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Deutsche Bank Likely to Lose Cologne Swaps Case, Judge Says
Deutsche Bank AG (DBK) will likely lose an interest-rate swap case over 414,000 euros ($592,000) in losses, a judge said, saying his hands may be tied by a recent ruling from the country’s top court.
Judge Freimut Gundlach said at a Cologne Higher Regional Court hearing yesterday that he’s likely to follow a two-week- old top court ruling that said the lender is liable for such swap-related losses. The court will give the parties the chance to read the full text of that ruling as soon as it is published and provide comments before it issues a decision on June 29, said Gundlach, the presiding judge on the case.
“If the reasoning is close to that provided in the top court’s press statement, it is very likely that we will follow” that ruling, the judge said.
Yesterday’s case, brought by hygienic-products maker Victor Group, is the first to be heard after Germany’s top civil court ruled that Germany’s biggest bank must cover losses caused by swaps it branded a “CMS Spread Ladder Swap,” unless the bank disclosed the product had an initial negative market value. Before that ruling, the lender had won the majority of cases over such swaps in lower courts.
There are eight cases pending at the top court and 17 in lower courts over the same type of derivatives, Deutsche Bank has said. The Frankfurt-based bank consciously structured the swap risk to its own advantage and at the expense of its clients to sell that risk to the market, according to the top court.
Any legal error Deutsche Bank may have committed wasn’t avoidable because the bank didn’t have the information that it was in the wrong in 2005 when it sold the product, said Christian Duve, the lender’s lawyer from law firm Freshfields Bruckhaus Deringer.
The case is OLG Koeln, 13 U 139/09.
RBS Prosecution Deal Extended Over U.S. Compliance Concern
Royal Bank of Scotland Group Plc (RBS), Britain’s biggest government-owned lender, will be subject to a deferred- prosecution agreement with the U.S. on conspiracy and money- laundering allegations for another seven months.
U.S. District Judge Colleen Kollar-Kotelly in Washington ordered the extension at the request of prosecutors, who said they had “additional concerns” about the bank’s compliance program, and with agreement by the bank.
“We want to make sure the compliance program in effect is sufficient to make sure these issues don’t arise again,” said Assistant U.S. Attorney George Varghese.
Royal Bank and the Justice Department reached a deal in May to settle charges that ABN Amro Bank, which was acquired by a group including Royal Bank in 2007, conspired to defraud the U.S. by engaging in transactions with state sponsors of terrorism. From 1996 until 2005, ABN falsified records to illegally move hundreds of millions of dollars through U.S. financial system involving banned countries such as Libya, Iran, Sudan and Cuba, the agreement states.
The agreement, which required a forfeiture of $500 million, was to expire after 12 months. Kollar-Kotelly moved the May 10 expiration date to Dec. 31.
A lawyer for Royal Bank, Nicolas Bourtin, told the judge the bank “may not agree fully” with the Justice Department.
The case is U.S. v. The Royal Bank of Scotland, 10- cr-00124, U.S. District Court, District of Columbia (Washington).
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Rajaratnam Prosecution Finishes Insider Trading Case
U.S. prosecutors finished presenting their case against Raj Rajaratnam after presenting wiretaps and witness testimony in an effort to show his Galleon Group LLC hedge fund made millions of dollars through insider trading.
“The government rests,” Assistant U.S. Attorney Andrew Michaelson told U.S. District Judge Richard Holwell in Manhattan yesterday. The judge dismissed the jury until April 11.
After the jurors left the courtroom, the defense asked Holwell to throw out the case, saying the government has failed to prove its case. Holwell said he wouldn’t issue an immediate ruling.
Barring a dismissal by the judge, the defense will present its case next. Rajaratnam, 53, hasn’t said whether he will take the witness stand. In the U.S., the accused can’t be compelled to testify in his own defense.
In cross-examining government witnesses, Rajaratnam’s lawyers attempted to show that their client traded on a “mosaic” of publicly available information, not insider tips.
“His best chance of being acquitted, or at least getting a hung jury, is to continue presenting his mosaic defense,” said Andrew Stoltmann, a lawyer in Chicago who represents investors in securities litigation and isn’t involved in the Rajaratnam case. “He’ll certainly present more witnesses to establish the information was public.”
Rajaratnam is the central figure in the largest crackdown on hedge-fund insider trading in U.S. history. His trial began March 8. The Sri Lankan-born money manager is accused of making profits and avoiding losses totaling $63.8 million from tips leaked by corporate insiders. Rajaratnam denies wrongdoing, saying he based the trades on research.
He faces five counts of conspiracy and nine counts of securities fraud, each of which carries a maximum sentence of 20 years in prison.
For the past month, prosecutors have presented witnesses and wiretapped recordings showing that Rajaratnam had at least 10 sources of inside information throughout Wall Street and the U.S. business community.
Witnesses testified that Rajaratnam got leaks originating with a Goldman Sachs Group Inc. (GS) board member, a consultant at McKinsey & Co., executives of other public companies and several traders.
Three government witnesses described how they shared inside information with Rajaratnam. Each of the three has pleaded guilty and is testifying for the government in exchange for leniency.
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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Enron Ex-Chief Skilling Loses Appeal Bid to Overturn Convictions
Jeffrey Skilling, the imprisoned former Enron Corp. chief executive officer, lost a challenge to his convictions contending that prosecutors relied on a legal theory invalidated by the U.S. Supreme Court.
The U.S. Appeals Court in New Orleans yesterday affirmed all of Skilling’s convictions. The three-judge panel said the trial judge made a harmless error in allowing the jury to convict Skilling for conspiracy on a so-called honest-services fraud theory as well as on a securities-fraud theory.
“Based on our own thorough examination of the considerable record in this case, we find that the jury was presented with overwhelming evidence that Skilling conspired to commit securities fraud, and thus we conclude beyond a reasonable doubt that the verdict would have been the same absent the alternative-theory error,” the appellate panel said.
In addition to conspiracy, Skilling was convicted at a 2006 jury trial for securities fraud, making false statements to auditors and insider trading.
Skilling is serving a 24-year sentence in a federal prison in Colorado after he and former Enron Chairman Kenneth Lay were found guilty of deceiving investors about the company’s true financial condition.
“We disagree with the court’s decision and believe it does not conform with the law,” Skilling’s lawyer, Daniel Petrocelli, said yesterday in an e-mailed statement. “We will continue to fight to overturn the wrongful convictions of Mr. Skilling.”
The case is U.S. v. Skilling, 06-20885, 5th U.S. Circuit Court of Appeals (New Orleans).
Wang Ex-Lover Loses Bid to Appeal Claim to Chinachem Estate
Nina Wang’s former feng shui adviser and lover Tony Chan lost an initial bid to have Hong Kong’s highest court consider his claim to Wang’s $12 billion estate that includes Chinachem Group, one of Hong Kong’s biggest closely held real estate developers.
Chan’s claim that Wang had left him the fortune has been rejected twice by Hong Kong courts, which ruled his version of Wang’s will was forged.
“The intended appeal must have a modicum of merit,” Court of Appeal Judge Doreen Le Pichon wrote yesterday on behalf of a three-judge panel in denying the feng shui master permission to appeal the case to Hong Kong’s Court of Final Appeal. “In the present case, there is none.”
Chan will go, as soon as possible, directly to the Court of Final Appeal to request a hearing, Kenis Liu, a spokeswoman for Chan, said after yesterday’s verdict. Chan has 28 days to file the request, she said.
Chan, 51, was arrested on suspicion of forgery after Hong Kong’s High Court first ruled against his version of the property tycoon’s will last year.
He posted HK$5 million ($643,000) bail, as police investigate the validity of the 2006 will that makes Chan the sole beneficiary of the estate. A Wang-founded charity won its claim to the estate at the earlier hearings.
The case is between Chinachem Charitable Foundation Ltd. and Chan Chun Chuen and the Secretary for Justice, CACV62/2010 in the Hong Kong High Court of Appeal.
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JGC to Pay $218.8 Million to Resolve Foreign Bribery Charges
JGC Corp. (1963), a Tokyo-based construction and engineering company, agreed to pay a $218.8 million criminal penalty to avoid prosecution on charges it bribed Nigerian officials for contracts on natural gas projects.
The U.S. Justice Department yesterday charged JGC in Houston with one count of conspiracy and one count of aiding and abetting violations of the Foreign Corrupt Practices Act in what it called a decade-long bribery scheme. The department agreed to defer prosecution for two years and dismiss the charges if JGC improves its programs to comply with the law.
JGC’s agreement to pay the fine brings to $1.5 billion the total penalties in a case against a joint venture known as TSKJ that included Houston-based Kellogg Brown & Root LLC, Paris- based Technip SA (TEC) and Dutch engineering firm Snamprogetti Netherlands BV, according to a Justice Department statement.
The joint venture’s prosecution represents one of the biggest foreign bribery cases undertaken by the Justice Department since it stepped up pursuit of such cases starting in 2008 when Munich-based Siemens, Germany’s largest engineering company, paid $1.6 billion to settle U.S. and German probes.
“Each of the four companies in the TSKJ joint venture, the former chairman of the U.S. joint venture partner, and several other individuals have now been held accountable for a massive conspiracy to bribe Nigerian government officials to obtain lucrative construction contracts,” Deputy Assistant Attorney General Mythili Raman said in the statement.
JGC Chairman Keisuke Takeuchi, in a document attached to the company’s deferred prosecution agreement, said the board of directors unanimously approved the deal at a meeting yesterday at the company’s headquarters.
JGC’s lawyer, Manny Abascal of Latham & Watkins in Los Angeles, declined to comment on the deal in an e-mail.
The case is USA v. JGC Corp., 11-cr-00260, U.S. District Court, Southern District of Texas (Houston).
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St. Barbara Had Discretion to Cut Former CEO’s Bonus
St. Barbara Ltd., an Australian gold miner whose shares fell almost 80 percent over six months in 2008, was entitled to cut its then-chief executive officer’s bonus when he was replaced, a Victoria state judge ruled.
Eduard Eshuys, St. Barbara’s chief executive from 2004 to 2009, sued the Melbourne-based company, claiming he was promised A$1 million ($1 million) to stay in the post while a replacement was sought. He ended up getting A$150,000 because the company failed to meet production and cash-flow targets, according to court papers.
Eshuys claimed St. Barbara’s board made an irrational decision, on unreasonable grounds, in reducing his bonus and breached the termination agreement.
“I do not consider that the board acted irrationally,” Judge Stephen Kaye wrote in yesterday’s 69-page ruling. “A different board might have come, reasonably, to a different conclusion. However, that is not the test.”
Eshuys’ lawyer, Robert Strong, declined to comment when reached by telephone.
The case is Eduard Eshuys v. St. Barbara Ltd. SCI 2009/10251; Supreme Court of Victoria (Melbourne).
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Wisconsin Court Race Tied to Union Fight Too Close to Call
A recount appears likely in a Wisconsin Supreme Court race where fewer than 835 votes separate the candidates out of more than 1.47 million cast.
Justice David T. Prosser Jr., a former Republican lawmaker, was leading challenger JoAnne Kloppenburg, an assistant state attorney general, with 99 percent of the precincts counted yesterday, according to an Associated Press tally. The race, fought over curbs on collective-bargaining rights that sparked weeks of protests, became a national cause, with money pouring in from outside the state.
The nonpartisan race drew little attention until lawmakers last month passed Republican Governor Scott Walker’s plan restricting bargaining rights for most government unions. The election became a proxy for the battle because the state’s highest court will probably rule on the legality of the law, which is being challenged in a lower court.
Kloppenburg, 57, has been a litigator in the state Justice Department since 1989, serving under attorneys general from both parties, according to her campaign website. She has donated to Democratic candidates in past years.
Prosser, 68, served as a Republican for 18 years in the state Legislature and on his campaign website says, “I present myself as a judicial conservative, devoted to the constitution and the rule of law.”
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On the Docket
Berlusconi Sex and Abuse-of-Power Trial Adjourned to May 31
Silvio Berlusconi’s Milan trial on charges of underage prostitution and abuse of power was adjourned for more than a month, as the prime minister pledged to attend future proceedings and his allies in parliament maneuvered to have the case transferred to a special tribunal.
The trial will resume May 31, Judge Giulia Turri said at the Milan courthouse. Berlusconi, in a letter read out by his lawyer Giorgio Perroni, said that while the crisis in Libya prevented him from attending yesterday’s opening session, he plans to be present at future hearings.
Berlusconi, 74, was ordered on Feb. 9 to stand trial on charges of abuse of power and paying a minor for sex, sparking calls for his resignation and intensifying a confrontation with the Italian judiciary. The trial will probe his ties, and possible payments, to Karima El Mahroug, a Moroccan woman known as Ruby Heart Stealer. She says she attended at least one party at the prime minister’s mansion near Milan in February 2010, when she was 17.
El Mahroug was not present in the Milan court yesterday, said her lawyer Paola Boccardi.
The abuse-of-power charge stems from Berlusconi’s role in helping secure El Mahroug’s release from police custody in Milan after she was detained last May on unrelated theft charges.
Berlusconi, who denies any wrongdoing, has called the charges in the sex and abuse-of-power case “disgusting” and “groundless.”
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