Rajaratnam, JPMorgan, BofA, KKR, Madoff in Court News
Galleon Group LLC co-founder Raj Rajaratnam said the punishment sought by the government for his insider-trading convictions is “grotesquely severe” and should be rejected by the court. The U.S. said a long prison sentence is warranted.
Rajaratnam, 54, on Sept. 9 asked U.S. District Judge Richard Holwell in Manhattan for a sentence “substantially below” what is called for by federal guidelines. The government’s requested sentence of 19 1/2 to 24 1/2 years “would guarantee Mr. Rajaratnam’s death in prison,” he said in a court filing.
“This court’s role is not to validate a prosecutorial public relations effort, nor is it to single out one man to serve as the whipping boy for Wall Street misdeeds,” Rajaratnam argued.
Rajaratnam was convicted in May of all 14 criminal counts of conspiracy and securities fraud he was charged with. He’s scheduled to be sentenced Sept. 27. Rajaratnam argued that the government’s requested sentence is more than the average sentence imposed for kidnapping and hostage-taking, sexual abuse, robbery, arson and child pornography.
Assistant U.S. Attorneys Reed Brodsky and Jonathan Streeter, who prosecuted the case, asked Holwell in a filing Sept. 9 to reject Rajaratnam’s pleas for leniency based on his poor health and charitable contributions.
“In arguing for leniency because of his health, Rajaratnam overlooks that he committed his crimes for years after he knew about his medical problems and thus he is in no position to seek leniency now based on them,” they said.
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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AT&T Fights U.S. Suit, Calls T-Mobile Deal Good for Public
AT&T Inc. (T) said its proposed $39 billion acquisition of T- Mobile USA Inc. is good for mobile-phone customers and that the U.S. lawsuit seeking to block the deal “fails to come to grips” with its benefits.
AT&T filed its response Sept. 9 to the U.S. Justice Department’s complaint in federal court in Washington. The company said the merger would lead to better service, fewer dropped calls and lower prices for consumers. AT&T cited fierce competition from Verizon Communications Inc. (VZ), Sprint Nextel Corp. (S), MetroPCS Communications Inc., Leap Wireless International Inc., U.S. Cellular Corp. and Cellular South Inc.
“The Department does not and cannot explain how, in the face of all these aggressive rivals, the combined AT&T/T-Mobile will have any ability or incentive to restrict output, raise prices, or slow innovation,” AT&T said in the filing.
AT&T described T-Mobile as “the only major carrier to have actually lost subscribers in a robustly growing market” with a business model that has it trapped between large providers and lower-priced competitors.
The Justice Department sued Dallas-based AT&T and Bonn- based Deutsche Telekom AG (DTE)’s T-Mobile unit on Aug. 31, saying a combination of the two companies, which would make AT&T the biggest U.S. wireless carrier, would “substantially” reduce competition.
Mike Balmoris, an AT&T spokesman in Washington, said in an e-mail that the company remains “interested in a solution that addresses the DOJ’s issues with the T-Mobile merger.”
Hernan Daguerre, a T-Mobile spokesman, declined to comment on the filing.
“This transaction as currently proposed is anticompetitive and harmful to consumers,” Gina Talamona, a spokeswoman for the antitrust division of the Justice Department, said in an interview. “We will respond further in our court filings.”
Sprint, which has filed its own lawsuit opposing the merger, said AT&T’s filing doesn’t change its position on the deal.
“The proposed takeover would create a clear wireless duopoly that could raise prices, stifle innovation and cost American jobs,” Sprint spokesman John Taylor said in an e-mail.
U.S. District Judge Ellen Segal Huvelle has set a hearing for Sept. 21 and told the parties to be prepared to discuss settlement options.
The case is U.S. v. AT&T Inc., 11-cv-01560, U.S. District Court, District of Columbia (Washington).
Banks May Fight Banks as Investors Pursue Class Status
Banks including JPMorgan Chase & Co. and Bank of America Corp. (BAC) may pay more to resolve claims over their alleged roles in the collapse of a $2.3 trillion mortgage-backed securities market if sophisticated investors are allowed to sue as a group along with less savvy ones, Thom Weidlich of Bloomberg News reports.
Class-action status allows investors to pool financial and legal resources, giving them greater leverage to win larger settlements or verdicts. The banks, however, have a court ruling on their side that may help fend off such blockbuster cases. It says class status is barred because some investors are too sophisticated -- in fact, because some of them are other banks, including JPMorgan.
“It is possible to be both an alleged perpetrator and victim at the same time,” said Jacob S. Frenkel, a former U.S. Securities and Exchange Commission lawyer now in private practice in Potomac, Maryland. “It’s unprecedented that you have the most sophisticated institutions as victims, to be in a position where their losses are so great that they have sued.”
The ruling by U.S. District Judge Harold Baer Jr. in Manhattan, favoring defendants Royal Bank of Scotland Group Plc (RBS) and Ally Financial Inc., held that investors may not sue as a class in part because some of them are being sued over the same claims. Last month, that ruling was countered by two judges in Baer’s courthouse, both of whom ruled that investors in home- loan backed securities may sue as a class.
Pools of home loans securitized into bonds were a central part of the housing bubble that, once burst, helped push the U.S. into the biggest recession since the 1930s. Investors have filed class-action, or group, lawsuits against at least 16 private issuers of securities backed by mortgages.
The cases are New Jersey Carpenters Health Fund v. Residential Capital LLC, 08-08781, New Jersey Carpenters Vacation Fund v. The Royal Bank of Scotland Group Plc., 08- 05093, Public Employees’ Retirement System of Mississippi v. Merrill Lynch & Co., 08-010841, New Jersey Carpenters Health Fund v. DLJ Mortgage Capital Inc., 08-05653, Public Employees’ Retirement System of Mississippi v. Goldman Sachs Group Inc. (GS), 09-01110, In re Morgan Stanley (MS) Pass-Through Certificates Litigation, 09-02137, and In re IndyMac Mortgage-Backed Securities Litigation, 09-04583, U.S. District Court, Southern District of New York (Manhattan); Plumbers’ & Pipefitters’ Local #562 Supplemental Plan & Trust v. J.P. Morgan Acceptance Corp., 08-01713, U.S. District Court, Eastern District of New York (Brooklyn); In re Wells Fargo Mortgage-Backed Certificates Litigation, 09-01376, U.S. District Court, Northern District of California (San Jose); and In re Washington Mutual Mortgage- Backed Securities Litigation, 09-cv-00037, U.S. District Court, Western District of Washington (Seattle).
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KKR, Blackstone Deal-Rigging Antitrust Suit Expanded by Judge
Plaintiffs in a case accusing 11 firms, including KKR & Co. and Blackstone Group LP (BX), of conspiring to rig the market for leveraged buyout deals can expand their investigation, a federal judge ruled.
The plaintiffs, including a Detroit police and fire pension fund, can seek information on 10 additional deals, U.S. District Judge Edward F. Harrington said in a ruling Sept. 7. He didn’t identify the transactions, which are described in a fifth amended complaint filed under seal. The firms argued that adding the deals would be “unduly burdensome and prejudicial,” according to court papers.
The lawsuit, initially filed in 2007, claims the firms conspired to drive down prices in the largest leveraged buyout deals in violation of federal antitrust laws. The case previously was limited to 17 transactions. Harrington gave the plaintiffs until April 17 to seek the information.
Among the deals in question is Neiman Marcus Group Inc.’s $5.1 billion buyout by Warburg Pincus LLC and TPG Capital Inc., SunGard Data Systems Inc.’s $11.3 billion takeover by seven private-equity firms and Aramark Corp.’s roughly $8.3 billion purchase in January 2007. Three plaintiffs are also shareholders of Freescale Semiconductor Inc., which was taken private by a group including Blackstone and Carlyle Group. TPG and Carlyle are also defendants in the suit.
The firms allegedly formed “bidding clubs,” referred to in the private-equity industry as “consortia” or “teams” to rig the bidding, according to a redacted fourth amended complaint made public Sept 9. Use of the clubs limited the number of bidders, depressing prices at target companies, the plaintiffs said.
“We’re not going to have any comment on that,” Owen Blicksilver, a spokesman for Fort Worth, Texas-based TPG, said in a telephone interview Sept. 9.
Kristi Huller, a spokeswoman for New York-based KKR, said the company doesn’t comment on pending litigation. Blackstone spokeswoman Christine Anderson and Chris Ullman of Carlyle Group didn’t return phone messages seeking comment on the ruling.
The case is Dahl v. Bain Capital Partners LLC, 07-12388, U.S. District Court, District of Massachusetts (Boston).
Madoff Trustee Sets $272 Million Payout, Sept. 15 Record Date
The liquidator of Bernard Madoff’s firm is planning an initial distribution of $272 million to investors holding allowed claims as of Sept. 15, according to a court filing.
The trustee, Irving Picard, intends to issue payments by the end of the third quarter, after reviewing allowed claims against the jailed confidence man, he said in July. The average check, arriving almost three years after the Ponzi scheme collapsed, will be $222,551, he said.
Holders of claims against Madoff that were sold or transferred will only receive distributions from Picard if the 21-day notice-and-objection period on the transfer has expired by Sept. 15, according to the filing.
Picard, who has filed more than 1,000 lawsuits seeking money for Madoff investors, in May allotted $2.6 billion to a fund for victims of the Ponzi scheme. Because of court challenges, most of the $8.6 billion he has raised isn’t currently available to put in the customer fund or distribute to claimholders who lost an estimated $17.3 billion in principal, he has said.
Madoff, 73, is in a federal prison in North Carolina, serving a 150-year sentence for the fraud. Picard and his law firm, Baker & Hostetler LLP, have made about $179 million in fees since Madoff’s 2008 arrest.
The main case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-ap-1789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Dow Chemical, Sasol Win Dismissal of Greenpeace Lawsuit
Dow Chemical Co. (DOW) and Sasol North America Inc. won the dismissal of a lawsuit alleging the chemical companies illegally spied on an affiliate of Greenpeace International, the environmental advocacy group.
Greenpeace Inc. sued under the federal Racketeer Influenced and Corrupt Organizations Act. A federal judge in Washington ruled Sept. 9 that the nonprofit organization failed to establish a direct connection between corporate espionage and civil racketeering allegations and any injury the group suffered.
“The direct victim of this alleged wire fraud was not Greenpeace, but a third party, and, therefore, the link between Greenpeace’s injuries and defendants’ alleged racketeering activity is too attenuated to be actionable under RICO,” U.S. District Judge Rosemary M. Collyer wrote in her ruling.
Greenpeace claimed that Dow, closely held Sasol and two public relations firms from 1998 to 2000 conspired to infiltrate and steal confidential information to thwart its environmental campaigns.
Greenpeace said the spying included breaking into locked trash bins outside its Washington headquarters and infiltrating meetings and electronic communications.
The injured third party the judge referred to was Calcasieu League for Environmental Action Now, described in the ruling as an ally of Greenpeace.
Molly Dorozenski, a Greenpeace spokeswoman, declined to comment immediately, saying the group’s lawyers were reviewing the ruling.
“As we have said from the beginning, the case totally lacked merit and should have never been filed by Greenpeace,” said Gregory Baldwin, a spokesman for Midland, Michigan-based Dow, the largest U.S. chemical maker, in an e-mail. “No Dow employee did anything improper.”
Matthew Kirtland, a Washington lawyer representing Houston- based Sasol North America Inc., said his client is pleased with the court’s decision.
The case is Greenpeace Inc. v. Dow Chemical Co., 10-cv- 02037, U.S. District Court, District of Columbia (Washington).
Lorillard Label Challenge Should Be Rejected, U.S. Says
The U.S. asked a judge to reject a bid by Lorillard Inc. (LO), the maker of Newport cigarettes, and three other tobacco companies to stop the government from putting new warnings on cigarette packs.
The U.S. Justice Department, in a filing Sept. 9 in federal court in Washington, said the Food and Drug Administration has the authority to require labels warning of the health risks of smoking. The companies are seeking a preliminary injunction delaying the rule, scheduled to take effect Sept. 22, 2012.
The FDA regulation mandates that cigarette packs, cartons and advertising display graphic warning labels. The warnings will be accompanied by pictures of rotting teeth or damaged lungs to deter smokers.
“The public interest strongly mitigates against delaying health warnings that more effectively convey the extraordinary, undisputed health risks created by the use of plaintiffs’ products,” the Justice Department said.
Lorillard, R.J. Reynolds Tobacco Co. Commonwealth Brands Inc. and Liggett Group LLC sued last month saying the regulation violates the First Amendment.
Ronald Milstein, Greensboro, North Carolina-based Lorillard’s senior vice president and general counsel, didn’t return a telephone message after normal business hours seeking comment on the filing.
Representatives in the public relations department of Reynolds American Inc. (RAI), R.J. Reynolds’s parent, didn’t reply to a phone message seeking comment.
The case is R.J. Reynolds Tobacco Co. v. U.S. Food and Drug Administration, 11-cv-1482, U.S. District Court, District of Columbia (Washington).
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Ford Asks Court to Reverse $2 Billion Award to Truck Dealers
Ford Motor Co. (F) asked an Ohio appeals court to reverse a $2 billion judgment awarded in June to a class of commercial truck dealers who claimed the company overcharged them for 11 years.
The dealers sued Ford in 2002, claiming the company broke an agreement to sell trucks at published prices, which forced them to pay more from 1987 through 1998 and cut into profits. Cuyahoga County Judge Peter J. Corrigan in June upheld a $4.5 million verdict awarded to one Ohio dealer in February by a Cleveland jury. The Cleveland judge also said Ford had to pay similar damages and interest to a class of about 3,000 other dealers.
The judge improperly found Ford liable before trial for breach of franchise agreements and prevented the company from defending itself on damages, the automaker said in a Sept. 2 filing with the Court of Appeals for Cuyahoga County in Cleveland. Ford also said Corrigan shouldn’t have applied his findings on one dispute across hundreds of thousands of transactions involving other dealers.
“The trial court’s grant of summary judgment on liability exemplifies the court’s repeated and erroneous election to take away from the jury key questions on liability and damages,” Ford said in court papers. “The trial court deprived Ford of its rights to due process and a trial by jury.”
The total $2 billion award is five times higher than the amount of the largest-ever jury award against Dearborn, Michigan-based Ford in a lawsuit, according to data compiled by Bloomberg News.
The court’s judgment was the largest of any type in Ohio history, Ford said in its appeal. “That staggering judgment was as unwarranted as it was unprecedented,” the company said. “It resulted from a series of serious errors by the trial court, any one of which compels reversal.”
Ford wasn’t denied any rights, James Lowe, the dealers’ lawyer, said in an interview Sept. 9. Corrigan’s treatment of the suit by awarding damages to the class was “perfectly appropriate,” he said.
The case is Westgate Ford Truck Sales Inc. v. Ford Motor Co., CV 02-483526, Court of Common Pleas, Cuyahoga County, Ohio (Cleveland).
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Health-Care Ruling May Delay Final Answer From U.S. High Court
A federal appeals court decision cast doubt on the prospect that the U.S. Supreme Court will rule on the constitutionality of President Barack Obama’s health-care overhaul before the 2012 elections.
The three-judge panel said Sept 8 that it didn’t yet have the power to consider a challenge to the law’s requirement that Americans, by 2014, either acquire health insurance or pay a penalty. The court ruled that judicial review must wait for the assessment of a fine -- something that wouldn’t occur until the following year.
The health-care law, which has divided courts around the country, was already in line for possible Supreme Court review early next year, with a ruling likely in June. The Sept. 8 ruling adds a new legal wrinkle, raising a procedural issue that might delay the ultimate outcome.
“It’s still the case that we will get some decision from the United States Supreme Court the last week of this coming June,” said Walter Dellinger, the former U.S. solicitor general who filed a brief backing the law on behalf of congressional Democrats. “But it is possible that ruling could be that no one has the right to challenge this law until they’ve declined to pay the penalty or sought a refund.”
Three federal appeals courts have now considered the law, each reaching a different conclusion. A Cincinnati-based appeals court upheld the law in June, calling it a valid use of Congress’s power to regulate interstate commerce. An appeal in that case is now before the Supreme Court.
An Atlanta-based court disagreed, upholding arguments by 26 states that Congress had exceeded its power under the commerce clause. The U.S. Justice Department is scheduled to say by the end of the month whether it will seek Supreme Court review of that ruling or instead ask a larger panel of appellate judges to reconsider.
The latest ruling, from the 4th U.S. Circuit Court of Appeals in Richmond, Virginia, took a third approach. The panel focused on a law, known as the Anti-Injunction Act, barring lawsuits that seek to block the collection of federal taxes. The measure says that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.”
Writing for herself and one other panel member, Judge Diana Gribbon Motz, said the law meant the court couldn’t hear a suit filed by Liberty University, a Christian school in Lynchburg, Virginia, founded by the late Rev. Jerry Falwell.
The cases are Liberty University v. Geithner, 10-02347, and Commonwealth of Virginia v. Sebelius, 11-01057, U.S. Court of Appeals for the Fourth Circuit (Richmond).
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Ex-Industrial Enterprises CEO Gets Up to 21 Years for Fraud
Former Industrial Enterprises of America Inc. (IEAM) Chief Executive Officer James W. Margulies was sentenced to seven to 21 years in prison for his role in a $110 million securities fraud.
New York State Supreme Court Justice Gregory Carro handed down the sentence in Manhattan Sept. 9. Margulies, of Cleveland, was convicted in July of grand larceny, scheming to defraud, conspiracy, violation of general business law and falsifying business records in what prosecutors called a “massive” pump- and-dump scheme.
“This is basically a case of greed,” Carro said. He said he wanted the sentence to serve as “a general deterrent that will scream out from this courtroom that people like you are going to be treated harshly.”
Margulies and another former Industrial Enterprises CEO, John D. Mazzuto, were indicted in May 2010. Mazzuto pleaded guilty and testified against Margulies, a lawyer, at trial. Mazzuto hasn’t been sentenced.
“My actions were well-intended at the time,” Margulies told Carro Sept. 9. “By the time I recognized the potential harm of my actions, it was too late.”
He asked for probation, telling the judge that he needed to be at home with his family, including a child who has special needs. Carro rejected that request.
“It’s not my sentence that’s going to devastate these children,” the judge said. “It is your actions.”
The case is People v. Margulies, 2503-2010, New York state Supreme Court (Manhattan.)
Former Taiwan Semiconductor Manager Seeks 12-Month Sentence
A former Taiwan Semiconductor Manufacturing Co. manager who pleaded guilty to being part of an insider-trading scheme involving Primary Global Research LLC is seeking a 12-month sentence.
Manosha Karunatilaka, who pleaded guilty in May to taking about $35,000 to pass inside tips about the company’s orders while working as a Primary Global consultant, asked the sentencing judge Sept. 9 to give him a split term of six months in jail and six months of home confinement.
“I am a good person that made a terrible mistake and fell from grace,” Karunatilaka said in a letter to U.S. District Judge Jed Rakoff, which was attached to the sentencing request filed in Manhattan federal court Sept. 9.
Prosecutors argued in a court filing that Karunatilaka should get from 37 to 46 months in prison.
An analyst at an unnamed New York-based hedge fund which used Primary Global’s services spoke to Karunatilaka frequently from 2008 to 2010, prosecutors said in court papers. In May 2009, acting on Karunatilaka’s recommendation to bet that Taiwan Semiconductor shares would fall, the fund made a profit of about $1.7 million, the U.S. said.
The case is U.S. v. Nguyen, 11-CR-32, U.S. District Court, Southern District of New York (Manhattan).
Alliance One, Deltafina Lose EU Appeals of Antitrust Fine
Universal Corp.’s Italian unit Deltafina and Alliance One International Inc. (AOI) lost European Union court appeals against antitrust fines totaling 54 million euros ($75 million) for colluding on prices they paid tobacco growers.
The EU General Court, the 27-nation region’s second-highest tribunal, ruled Sept. 9 that the penalties were valid.
The European Commission, the EU’s antitrust regulator, fined four companies, including two Alliance One units, 56 million euros for unlawfully rigging prices for more than six years in a cartel that ended in 2002. Deltafina was fined 30 million euros while Alliance One was held jointly liable with its two units for a 24 million-euro penalty.
The ruling follows decisions by the court in a similar case concerning the Spanish market last year in which Deltafina won a reduction in an 11.9 million-euro antitrust fine for fixing the prices it paid Spanish growers for tobacco. Alliance One last October lost an appeal over its fine in the cartel.
Representatives of the companies in the U.S. didn’t respond to calls outside normal office hours.
The cases are: T-12/06, Deltafina v. European Commission; T-25/06, Alliance One v. European Commission.
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On The Docket
Ex-Bear Stearns Fund Managers’ SEC Trial Set for February
Former Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin, acquitted in 2009 of criminal charges they misled investors who lost $1.6 billion, are set to face trial in February in a related civil case brought by the U.S. Securities and Exchange Commission.
U.S. District Judge Frederic Block in Brooklyn, New York, set the trial date for Feb. 13 at a conference Sept. 9.
A federal jury in November 2009 found Cioffi and Tannin not guilty of conspiracy and securities and wire fraud in the first criminal trial stemming from a federal probe of the collapse of the subprime-mortgage market. Cioffi, 55, was portfolio manager for the hedge funds and Tannin was their chief operating officer.
“We have had no discussions of substance,” John D. Worland, a lawyer for the SEC, told Block when the judge asked about the possibility of a settlement, which would make a trial unnecessary.
Kevin Callahan, an SEC spokesman, and Marc Weinstein, a lawyer for Cioffi at Hughes Hubbard & Reed LLP in Manhattan, declined to comment on the case. Nina Beattie, a lawyer for Tannin at Brune & Richards LLP in Manhattan, also declined to comment.
Cioffi and Tannin were indicted in June 2008, a year after their hedge funds failed. Bear Stearns collapsed less than a year after the funds failed, and was purchased by New York-based JPMorgan Chase & Co. (JPM)
The SEC claims the two men misled investors about the funds’ deepening financial troubles and their own holdings in the investment pools. The regulator’s case requires a lower standard of proof than a criminal conviction.
The civil case is Securities and Exchange Commission v. Cioffi, 08-cv-2457, and the criminal case is U.S. v. Cioffi, 08- CR-00415, U.S. District Court, Eastern District of New York (Brooklyn).
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