Rajaratnam, S&P, Google, GM, JPMorgan, Madoff in Court News
Galleon Group LLC’s Raj Rajaratnam, potentially facing almost two decades in prison, will have an “uphill struggle” in seeking to overturn his conviction in the biggest insider-trading trial since the 1980s, a former prosecutor said.
The hedge fund co-founder will appeal yesterday’s verdict to the U.S. Court of Appeals in Manhattan, according to his attorney, John Dowd. Dowd failed to persuade the judge last year that prosecutors had intentionally misled the court in their request to wiretap Rajaratnam’s calls.
“It’s an uphill struggle, there’s no question about it,” Stephen Miller, a former federal prosecutor, said. “It’s always hard, once you have a judge making credibility findings of any sort for the appellate court to review it, especially in a case of this magnitude.”
Rajaratnam, 53, was found guilty of five counts of conspiracy and nine counts of securities fraud on the jury’s 12th day of deliberations. The jurors returned the verdict after hearing evidence that Rajaratnam engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies including Goldman Sachs Group Inc. (GS) He gained $63.8 million, prosecutors said.
Prosecutors said Rajaratnam faces a prison term of 15 1/2 years to 19 1/2 years when he is sentenced July 29. Rajaratnam remains under home detention and electronic monitoring at his Sutton Place residence in Manhattan pending sentencing. Assistant U.S. Attorney Jonathan Streeter argued unsuccessfully to have Rajaratnam, who is free on a $100 million bond, taken into custody after the verdict.
Dowd said he would appeal the use of wiretaps, telling U.S. District Judge Richard Holwell that the matter was “very substantial.”
Holwell, after holding a week-long hearing in October, ruled that the wiretaps were admissible at trial. He concluded prosecutors “made a glaring omission” by failing to disclose to the judge who approved the government’s wiretap application that civil regulators had been probing Rajaratnam for years. At the same time, Holwell rejected a defense claim that prosecutors had intentionally deceived that judge.
That finding regarding the government’s credibility “cuts against success on appeal,” said Miller, the former prosecutor who is now a partner at the law firm Cozen O’Connor LLP. Appeals courts are more likely to reverse a judge’s decision based on a legal argument than a factual finding based on the judge’s conclusions, he said.
“You have a district court judge who made a finding and made a credibility determination,” Miller said, saying an appellate court doesn’t have that same luxury. “They know it and they tend to defer to the trial judge.”
Dowd and representatives of Manhattan U.S. Attorney Preet Bharara didn’t immediately return calls after regular business hours seeking comment on an appeal.
John Coffee, a Columbia University law professor, said the government’s use of wiretap evidence against Rajaratnam makes the risks of sharing illegal stock tips clear to traders.
“This is the first major case in a generation.” Coffee said. “And quite frankly, professionals learn what is legal and illegal based not on the law but on who goes to prison for what.”
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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Karunatilaka Pleads Guilty in Expert-Networking Insider Case
Manosha Karunatilaka, a former account manager at Taiwan Semiconductor Manufacturing Co. (2330), pleaded guilty to his role in an alleged insider-trading scheme involving expert-networking firm Primary Global Research LLC.
Primary Global “offered to pay me $200 per conversation” with it and its clients, Karunatilaka, 37, told U.S. District Judge Jed Rakoff in Manhattan yesterday. “I knew that some of the information I was sharing was nonpublic and confidential to TSMC.” He said he made a total of $35,000 from Primary Global and didn’t tell Taiwan Semiconductor about his arrangement.
The guideline range for Karunatilaka’s sentence is 37 to 46 months, according to the plea agreement. The judge set sentencing for Sept. 15.
“I’m here to take full responsibility for my actions,” Karunatilaka, of Marlborough, Massachusetts, told Rakoff.
The biggest U.S. insider-trading probe became public in 2009 with the arrest of Galleon Group LLC hedge fund co-founder Raj Rajaratnam, who was found guilty yesterday day by a jury in the same courthouse where Karunatilaka entered his plea.
Karunatilaka, a U.S. citizen born in Sri Lanka, was arrested Dec. 16. He pleaded guilty to one count of conspiracy to commit wire and securities fraud.
“My client is eager to put this behind him,” Karunatilaka’s lawyer Brad Bailey said after the hearing. “He came in with a willingness to admit his guilt and spare the government the cost and expense of having a trial.” Bailey declined to say whether Karunatilaka is cooperating with prosecutors.
The case is U.S. v. Shimoon, 10-mj-2823, U.S. District Court, Southern District of New York (Manhattan).
Standard & Poor’s, Moody’s Suit Dismissals Upheld on Appeal
Standard & Poor’s Financial Services LLC and Moody’s Corp. (MCO) won a federal appeals court ruling upholding their dismissals from lawsuits seeking to hold them liable in the marketing of mortgage-backed securities.
A three-judge panel of the New York-based court rejected investor arguments that the ratings services effectively acted as underwriters and “control persons” responsible for misstatements and omissions in securities offerings.
“We reject these arguments as without merit,” the judges said yesterday in a 42-page ruling.
The panel upheld decisions by U.S. District Judge Lewis Kaplan in New York to dismiss the lawsuits in February 2010. Kaplan held that the companies didn’t fit a statutory definition of “underwriter” by participating in the creation of the securities. Nor did they have the “practical ability” to direct the sellers’ actions, making them control persons, the judge said.
From 2005 to 2007, the plaintiffs and others in similar circumstances bought about $155 billion worth of mortgage pass-through certificates registered with the U.S. Securities and Exchange Commission, the appeals court said.
The ratings services allegedly exceeded their roles as risk evaluators “by actively aiding in the structuring and securitization process,” helping to determine certificate structure and loan pool composition, the appeals court said.
The certificates’ AAA or investment-grade ratings allegedly didn’t disclose their risk, it said.
Plaintiffs’ attorney Joel Laitman of Washington-based Cohen Milstein Sellers & Toll Pllc didn’t immediately reply to a voice-mail request for comment on the decision.
“Moody’s is pleased that the court has affirmed the dismissal of these cases,” Michael Adler, a spokesman for the New York-based ratings company, said in a telephone interview. Ed Sweeney, a spokesman for S&P, a unit of New York-based McGraw-Hill Cos., said the ruling concluded that rating companies “offer forward-looking opinions about credit risk and cannot be sued as underwriters.” S&P is pleased with the decision, he said.
The case is In re Lehman Brothers Mortgage-Backed Securities Litigation, 10-0712, 10-0898 and 10-1288, 2nd U.S. Circuit Court of Appeals (New York).
Mosaic Settles Shareholder Lawsuits Over Cargill Stake
Mosaic Co. (MOS), North America’s second-largest fertilizer producer, agreed to settle four shareholder lawsuits filed in Delaware over Cargill Inc.’s plan to divest its $24 billion stake in the company.
One of two Cargill directors must resign from Mosaic’s board under the settlement, which resolves proposed class-action lawsuits filed in February and March. Either Sergio Rial or Emery Koenig will step down by Mosaic’s next annual meeting, according to court papers. Mosaic, based in Plymouth, Minnesota, and Cargill deny any wrongdoing.
The companies “are settling the action solely to avoid the risk, burden and expense of further litigation,” they said in papers filed May 9 in Delaware Chancery Court.
Cargill also will increase its reimbursement of Mosaic’s expenses tied to the deal to $18 million from $15 million and make additional disclosures, according to court papers.
A majority of Mosaic shareholders yesterday approved Cargill’s plan to shed its 64 percent stake in the world’s largest maker of phosphate fertilizer. The investors who sued accused Minneapolis-based Cargill, the largest closely held U.S. company, of gaining more valuable stock and increasing its voting power through the sale.
The Mosaic split-off is intended to allow the estate of Margaret A. Cargill, the late granddaughter of company founder William Cargill, to sell its Cargill shares. Cargill will exchange 179 million Mosaic shares for Cargill stock held by Cargill investors. Another 107 million Mosaic shares will be swapped for Cargill debt held by third parties.
The case is In Re The Mosaic Company Stockholder Litigation, CA6228, Delaware Chancery Court (Wilmington).
Ex-Credit Agricole Banker Has Discrimination Award Reduced
Credit Agricole SA (ACA), France’s third-biggest lender, won a U.K. court bid to cut the 375,000 pounds ($617,250) in compensation awarded to a London banker who was refused promotion because of his British nationality.
An employment tribunal overestimated the financial loss suffered by Michael Wardle, who worked at the bank’s Calyon unit before taking a job at the U.K.’s Financial Services Authority that paid less than the one he was denied, three judges at the Court of Appeal ruled yesterday.
The former Global Head of Exotic Interest Rate Derivatives Risk Management was awarded the compensation in 2010 after he was fired for complaining that a French national was promoted over him. Wardle, then on a salary of 104,000 pounds, was turned down for a promotion that was set to start in January 2008, according to the ruling. He was dismissed in July 2008 after he alleged racial discrimination. The Employment Tribunal in London found in his favor.
“In my view, it is reasonable to conclude that the claimant would probably have been able to leave the FSA and obtain an equivalent job by the end of June 2011,” Patrick Elias, one of the judges, said in his part of the ruling.
After leaving Calyon, now known as Credit Agricole Corporate and Investment Bank, Wardle found a job at the FSA for 105,000 pounds. The sum was less than what he would have been paid if he had been promoted at Calyon, and had a bonus of 20 percent of salary, rather than 70 percent, according to court documents.
Elias didn’t specify how much Wardle should be awarded. He asked for written arguments from counsel to fix the sum.
Wardle’s law firm, Pritchard Englefield, and Credit Agricole didn’t respond to messages seeking comment.
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Google Sued by French Publishers for $14 Million Over Books
Google Inc. (GOOG) was sued for 9.8 million euros ($14 million) by three French publishers who said the search-engine company scanned books without permission.
Editions Albin Michel SA, Editions Gallimard SA and Flammarion claimed Google has scanned 9,797 copyright-protected works for its digital library. The publishers are seeking compensation of 10,000 euros per book, Google said yesterday.
“We have been working with French publishers for some time to find ways to increase audiences and revenue opportunities for publishers, authors and booksellers,” Google said in an e-mailed statement. Google, based in Mountain View, California, said it believes the Google Books project complies with French law and international copyright rules.
Google reached an agreement six months ago with Lagardere SCA’s (MMB) Hachette Livre unit to allow the scanning of out-of-print French books. A Paris court said in December 2009 that Google’s book project violated French copyrights and ordered the company to stop scanning works without permission. The company has appealed.
Calls to the publishers for comment on the suit weren’t immediately returned.
General Motors Retirees Sue Over Benefits After Bankruptcy
Dozens of General Motors Co. (GM) executive retirees sued the company contending they suffered loss of benefits after the automaker’s bankruptcy.
The pensioners, including former GM Vice President John G. Middlebrook, are asking a judge to rule that the company violated the federal Employee Retirement Income Security Act and order it to pay past-due benefits with interest, plus legal fees and expenses.
“In erroneously administering” the retirement plan, GM “contravenes the plain text” of the contract, lawyers for the executives said May 9 in a complaint filed in federal court in Detroit. Denial of benefits “constitutes an abuse of the discretion provided” in the plan, and is “arbitrary and capricious,” the lawyers said.
GM, based in Detroit, filed the third-largest bankruptcy in history in June 2009. The U.S. Treasury provided billions of dollars in loans that converted into equity.
“Sacrifices were made by every stakeholder, including former executives, to create a foundation upon which the new GM can thrive,” James Cain, a company spokesman, said in a telephone interview. He said the pension plan administrator “properly considered and denied” the claims.
The case is Tate v. General Motors LLC, 2:11-cv-12028, U.S. District Court, Eastern District of Michigan (Detroit).
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JPMorgan Wins Bid to Have $112 Million CDO Case Heard in U.K.
JPMorgan Chase & Co. (JPM), the second-largest U.S. bank by assets, won a challenge at the European Union’s highest court to have a collateralized-debt obligation dispute over $112 million dealt with by the U.K. courts.
Disputes of a contractual nature are mainly about questions on a contract’s validity and this doesn’t justify having such disputes heard in the country where one of the parties challenging the validity of the contract is based, the EU Court of Justice in Luxembourg ruled today.
The ruling relates to two cases at the Luxembourg-based EU court over whether disputes between JPMorgan and the city of Berlin’s transportation provider BVG about a 2007 derivatives transaction should be heard in the U.K. or Germany. JPMorgan in 2008 sued BVG in the U.K., arguing the contract said any dispute would be handled in British courts. BVG sued JPMorgan in Berlin in 2009 seeking to annul what it called an invalid deal.
The decision may influence dozens of lawsuits over losses on swap agreements between local governments and community-owned utilities in the U.K., Germany and Italy on one hand, and banks including UBS AG (UBSN), Bank of America Corp. and Depfa Bank Plc on the other. While municipalities are increasingly filing suits at home claiming they weren’t properly advised of risks or that swaps were unlawfully settled, the banks are turning to U.K. courts where they expect to get swifter rulings.
Under the agreement that prompted today’s case, JPMorgan was insured by BVG against default on debt tied to 150 companies, including Lehman Brothers Holdings Inc. In 2008, following Lehman’s collapse and the financial market turmoil it spurred, New York-based JPMorgan enforced the agreement and is seeking $112 million from BVG.
The case is C-144/10, Berliner Verkehrsbetriebe (BVG), Anstalt des oeffentlichen Rechts v JPMorgan Chase Bank N.A., Frankfurt Branch.
U.K. FSA Targeting ‘Bigger Fry’ in Insider-Trade Probes
The U.K.’s Financial Services Authority will focus its insider-trading investigations on senior London financial workers as part of its deterrence strategy, the finance watchdog’s acting enforcement chief said.
The FSA, which was set up in 1997 and prosecuted its first criminal case of insider trading in 2008, is “determined to take insider dealing enforcement right into the heart of the city,” Tracey McDermott, acting head of enforcement at the FSA, said in an interview in London yesterday, hours before Galleon Group LLC co-founder Raj Rajaratnam was convicted in New York of insider trading.
“We recognize the need to go after bigger fry, not because they’re wealthy or high profile -- we want to go after the people we actually think are causing the most damage to the market,” said McDermott, who took over earlier this year from Margaret Cole, who has gone on to lead another agency unit.
The FSA is imposing stricter supervision after being criticized for failing to prevent the U.K.’s worst financial crisis since the Second World War. The regulator in February secured the longest-ever U.K. sentence for insider trading when former Dresdner Kleinwort banker Christian Littlewood was imprisoned for 40 months after admitting illegally trading over a 10-year period, along with his wife and an accomplice.
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Picard’s $59 Billion Suit Uses ‘Novel’ Theory, UniCredit Says
UniCredit SpA (UCG), a defendant in a $58.8 billion lawsuit by the trustee liquidating Bernard L. Madoff’s firm, asked a judge to consider whether the racketeering law invoked by the trustee applies outside the U.S.
Trustee Irving Picard named the Italian bank in a December bankruptcy-court suit against Bank Medici AG, its founder, Sonja Kohn, and dozens of other parties in Austria and Italy. He sought $19.6 billion for the conman’s investors, invoking the Racketeer Influenced and Corrupt Organizations Act to triple the amount. The claim is the largest of more than 1,000 filed by Picard.
A district-court judge must address “the viability of the unprecedented Rico claims asserted here,” Milan-based UniCredit said in a court filing May 9, referring to the case as an “Everest” among molehills. “The exorbitant claims will require significant interpretation of what even the trustee must concede is non-bankruptcy federal law.”
A U.S. District Court judge in Manhattan temporarily took the case, along with one against HSBC Holdings Plc (HSBA), to decide whether Picard can bring common-law claims such as unjust enrichment and can sue on behalf of customers, since his job is to liquidate the Madoff firm. UniCredit urged the judge to focus on Rico as well.
A recent Supreme Court ruling “upended” historical tests for extraterritorial application of U.S. law, UniCredit said. That casts doubt on whether Picard can use Rico to reach “an alleged enterprise existing almost wholly outside of the United States and expressly directing its alleged conduct to persons living abroad,” the bank said in its court filing.
According to Picard’s suit, Kohn ran a scheme centered on Bank Medici, parts of which overlapped with Madoff’s own fraudulent enterprise, delivering $9.1 billion into the Ponzi scheme. The participants funneled $4 billion of the total through feeder funds, he said.
Shortly before Madoff confessed, in December 2008, Kohn withdrew $536 million from Madoff’s firm and took steps to hide her connection to the money manager, according to Picard.
Kohn and UniCredit are fighting the suit.
The case is Picard v. Kohn, 10-5411, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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ESun Appeals Dismissal of $2.39 Billion Claim Over Casino
ESun Holdings Ltd. (571), which planned to build a Macau casino with Oaktree Capital Management LP and other investors, accused directors of its joint venture partner of acting in bad faith and lying, as the company sought to overturn the dismissal of a claim against them.
Oaktree, Silver Point Capital LP, former Las Vegas Sands Corp. (LVS) executive David Friedman and Singapore’s CapitaLand Ltd. (CAPL) are embroiled in a legal battle over the plan to develop Macao Studio City, a $4 billion Macau casino complex, which was to feature a Playboy mansion and a film studio. The dispute took on new urgency after the Macau government said last year it may take back undeveloped land it has granted to investors.
Benjamin Yu, a lawyer representing ESun unit East Asia Satellite Television (Holdings) Ltd., said in Hong Kong’s Court of Appeal today that directors of New Cotai, the investment vehicle representing Friedman and the U.S. private equity firms, made “misrepresentations” about a January 2009 letter from the Macau government asking for more information about the project.
“The primary allegation is that they didn’t act in good faith,” Yu said.
ESun sued Friedman, Oaktree, Silver Point, and six New Cotai directors in 2009 for “systematically hindering” the development of Macao Studio City in order to force a renegotiation of the terms of their agreement, according to court documents.
High Court Judge Anselmo Reyes in July dismissed ESun’s $2.39 billion claim, calling it “untenable.” He allowed a separate $88.6 million claim against the U.S. investors to proceed.
At the first of two scheduled appeal hearing days, Yu said today New Cotai directors “acted tortiously in inducing breach” of their share purchase agreement, which required the parties to cooperate in good faith in obtaining land grants from the Macau government. The hearing continues tomorrow.
The U.S. investors alleged they were prevented from developing and operating a casino on the site in part because CapitaLand wanted to exercise a put option, or a right to sell its stake in the project back to ESun, after the Hong Kong company “misinformed” the developer about how much rent the U.S. investors would be paying, according to a court filing.
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On the Docket
Allen Stanford Faces Sept. 12 Criminal Trial on Fraud Charges
Financier R. Allen Stanford is scheduled to go on trial Sept. 12 in Houston on charges he led a $7 billion investor fraud.
Stanford, 61, was indicted in June 2009 on 21 criminal charges he misled investors about the safety and oversight of certificates of deposit issued by his Antigua-based Stanford International Bank Ltd. Last week, prosecutors re-indicted the financier on narrower charges, dropping seven allegations.
Declaring that the superseding indictment contained “no basic changes in the relevant counts,” U.S. District Judge David Hittner signed an order May 10 setting Stanford’s trial to start with jury selection in about four months.
Stanford, who denies all wrongdoing, has been imprisoned as a flight risk since he was arrested almost two years ago. His trial was to begin Jan. 24, until Hittner postponed the case to allow Stanford to undergo drug rehabilitation in a prison facility.
Hittner found Stanford mentally unfit to assist in his defense as a result of an addiction to prescription anxiety drugs he acquired while in prison. Stanford has been undergoing detox treatment at the hospital unit at the federal prison in Butner, North Carolina, since mid-February.
“Our client has been found incompetent and is currently still in Butner,” Ali Fazel, one of Stanford’s criminal-defense lawyers, said in a phone interview May 10. He declined to comment further, citing the judge’s order not to discuss the case publicly.
Laura Sweeney, a Justice Department spokeswoman, also declined to comment, citing Hittner’s gag order.
The criminal case is U.S. v. Stanford, 09-cr-342, U.S. District Court, Southern District of Texas (Houston).
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