Bloomberg News

BofA, Galleon, Deutsche Telekom, Massey in Court News

June 01, 2011

(Adds BofA in top section, UniCredit and Lehman in Lawsuits, Fracking in New Suits and Wells Fargo in Verdicts. Updates Massey in Lawsuits.)

June 1 (Bloomberg) -- New York’s highest court was asked by Bank of America Corp., UBS AG and other institutions to reinstate their lawsuit claiming that bond insurer MBIA Inc.’s 2009 restructuring was intended to defraud policyholders.

A lower-court decision throwing out the lawsuit improperly blocked claims the banks could bring as creditors, their lawyer told the New York State Court of Appeals at oral arguments yesterday in Albany.

Eric Dinallo, the state’s former insurance superintendent, approved the split in 2009, allowing Armonk, New York-based MBIA to move its guarantees on state and municipal bonds out of the unit that insured some of Wall Street’s riskiest mortgage debt. Robert Giuffra Jr., lead counsel for the banks, called the action unprecedented.

“They did one of the biggest transactions in history in secret,” Giuffra, a partner at Sullivan & Cromwell LLP, said. “There was no notice, no opportunity to be heard.”

Chief Judge Jonathan Lippman asked why the banks, which are MBIA policyholders, shouldn’t be allowed to pursue their claims under debtor-creditor law and whether it was fair that they weren’t given notice of the approval of the restructuring by the superintendent.

Judge Robert S. Smith also questioned the lack of notice to policyholders.

“Here we have people who never got to talk to the agency,” he said. “They learned about this the same day everybody else did, when the superintendent issued his approval.”

MBIA argued that the only recourse the banks have is under New York’s Article 78 statute, which allows court review of state administrative decisions. A separate lawsuit under that provision is pending.

“There are no money damages until there are no payments on claims,” Marc Kasowitz, a lawyer for MBIA said yesterday. “For the past two years, this insurer has paid all claims as they’ve come due.”

The case is ABN Amro Bank NV v. MBIA Inc., 601475-2009, New York state Supreme Court (Manhattan).

Trials/Appeals

Goffer Prosecutors, Defense Team Rest as Case Nears Closing

Prosecutors rested their insider-trading case against ex- Galleon Group LLC trader Zvi Goffer, who offered no evidence on his own behalf, while a lawyer for one of Goffer’s accused accomplices, Michael Kimelman, tried to show his client didn’t trade on illegal tips.

Less than two weeks after opening its case against Goffer, his brother Emanuel and Kimelman, federal prosecutors yesterday told the judge and jury in Manhattan federal court that they had no other evidence to present. A lawyer for Zvi Goffer then rested his case without presenting evidence, while Kimelman’s lawyer, Michael Sommer, recalled a government witness for further testimony.

The witness, Federal Bureau of Investigation agent Jan Trigg, testified under questioning from Sommer that Kimelman didn’t use a prepaid cell phone, as others in the scheme had done, and that Kimelman worked at a different firm than Zvi Goffer in 2007. She testified that the FBI never recorded the two sharing illegal information and that Zvi Goffer didn’t telephone Kimelman after he got a tip from another trader.

“Did he ever call Mr. Kimelman at all for the balance of that day?” Sommer asked, referring to Zvi Goffer.

“He does not appear to call him,” Trigg testified as she reviewed records.

The three men are accused of trading on illegal tips that came from attorneys then working at the Ropes & Gray LLP law firm. The tips were about transactions involving 3Com Corp. and other stocks, according to prosecutors.

Goffer’s ex-boss, Raj Rajaratnam, was found guilty May 11 of insider trading. He faces as long as 19 1/2 years in prison when he’s sentenced on July 29. Prosecutors previously said that Goffer passed inside information to another Galleon trader to impress the hedge fund’s managers.

The case is U.S. v. Goffer, 10-cr-00056, U.S. District Court, Southern District of New York (Manhattan).

Deutsche Telekom Wins Retrial of $162 Million Suit

Deutsche Telekom AG won a top court ruling in a 112 million-euro ($162 million) lawsuit against a shareholder and the German government over claims stemming from a U.S. class- action case.

The Federal Court of Justice in Karlsruhe ruled yesterday that KfW Group, the shareholder, must indemnify Deutsche Telekom for the amount paid to U.S. shareholders to settle the suit. The top judges remanded the case to a lower court, which must now determine the amount owed and rule on whether Germany is also liable.

The case centers on Deutsche Telekom’s sale of 200 million shares in 2000. U.S. buyers later filed a class-action lawsuit claiming the sales prospectus was flawed. Germany’s biggest phone company settled for $120 million and now seeks to get the money and legal fees back from KfW and Germany.

“The public offer in the U.S. entailed that Deutsche Telekom assumed the responsibility from KfW for the prospectus,” the court said. That step was like “a repaying of the capital to its shareholder KfW because it wasn’t linked to a full compensation.”

A lower court had rejected Deutsche Telekom’s suit in 2009.

Yesterday’s case is BGH, II ZR 141/09.

BAT Wins Australia Court Hearing on Plain Cigarette Packaging

British American Tobacco Plc’s Australian unit won an appeals court hearing in a bid to force the government to turn over documents relating to a plan to restrict cigarette sales to plain packages.

The Full Federal Court of Australia agreed to hear the request, according to a letter from Judge Shane Marshall, provided by British American Tobacco. No date has been set for the hearing, the company said.

Parliament is set to vote on the law in the Australian winter to limit cigarette packaging to plain dark-olive coloring with pictorial health warnings instead of company logos, Health Minister Nicola Roxon said last month. British American Tobacco has sought the legal advice the government received on the plan under Australia’s Freedom of Information Act and has been denied, the company said.

British American Tobacco “suspects that Minister Roxon hasn’t released the legal advice because it’s likely to demonstrate her plain packaging laws are flawed,” the company said in yesterday’s statement.

Health Ministry officials didn’t respond to telephone and e-mail requests for comment.

The Australian proposal is the first in the world aimed at banning logos and color variations on cigarette packages. New Zealand, Canada and the U.K. had considered the move but dropped it out of concern it would be illegal, British American Tobacco said. The Australian proposal may infringe international trademark and intellectual property laws, the tobacco company said.

The case is British American Tobacco Australia Ltd. v. Secretary, Department of Health and Aging. VID314/2011. Federal Court of Australia (Melbourne).

For the latest trial and appeals news, click here.

Lawsuits/Pretrial

Madoff Trustee’s Suit Against UniCredit to Be Reviewed

A federal district judge in New York said he will review part of a $58.8 billion lawsuit brought against UniCredit SpA and other defendants by the bankruptcy trustee liquidating Bernard L. Madoff’s firm.

U.S. District Judge Jed Rakoff said yesterday in Manhattan that he will explain in a June 3 order what issues he will consider. UniCredit, based in Milan, asked the judge on May 10 to decide whether the racketeering law invoked by trustee Irving Picard applies outside the U.S.

Picard’s fees are an issue in the UniCredit case, said Rakoff, who yesterday asked the trustee’s lawyers why four of them were in court. Picard personally has been paid $3.6 million in fees since Madoff’s 2008 arrest, while his law firm, Baker & Hostetler LLP, has collected $145.6 million, plus $3.4 million in expenses, according to a May 16 bankruptcy court filing.

Picard named UniCredit 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 recent Supreme Court ruling “upended” historical tests for applying U.S. law in other countries, the Italian bank 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,” UniCredit 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.

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).

Lehman Accuses Goldman of Trying to Delay Bankruptcy Probe

Lehman Brothers Holdings Inc. accused Goldman Sachs Group Inc. of deliberately trying to delay a bankruptcy investigation by moving at a “glacial pace” in turning over documents related to the probe.

Lehman claimed Goldman Sachs is deliberately moving slowly to run out a deadline for providing information for Lehman’s probe into whether rumors about its condition damaged its business during the 2008 financial crisis, according to a filing yesterday in U.S. Bankruptcy Court in Manhattan. Attorneys for Lehman said the documents are needed to determine whether to make claims against Goldman Sachs.

“Goldman Sachs is deliberately moving at a glacial pace in an effort to run out the statute of limitations without producing the requested documents,” Lehman said in the filing.

Employees of Goldman Sachs “may have been involved in originating or spreading rumors about Lehman,” according to yesterday’s filing.

In March, Lehman sought e-mails and instant messages from Goldman Sachs custodians in New York who were involved in marketing prime brokerage services to hedge funds and proprietary trading of Lehman securities in London, according to the filing. After a series of negotiations, Goldman Sachs said it had begun searching for documents from 11 of 37 custodians and was unable say when that search would be completed, according to yesterday’s filing.

Lehman is asking U.S. Bankruptcy Judge James Peck to order Goldman Sachs to provide the documents within two weeks of his decision.

Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment yesterday.

Lehman filed the largest bankruptcy in U.S. history on Sept. 15, 2008.

The bankruptcy case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Harbinger Says Northern Rock Shares Worth $530 Million

Harbinger Capital Partners, the hedge fund run by billionaire Philip Falcone, said holders of Northern Rock Asset Management Plc’s preferred shares should be paid 322.5 million pounds ($530 million).

The fund owns a “substantial” amount of the shares and asked a London court yesterday to reject the determination from a valuation expert appointed by the British government, which now owns the bank, that the shares are worthless.

Mark Phillips, a lawyer for the New York-based fund, said a “fire sale” of the bank’s assets after the U.K. nationalized the lender depleted its value by 4 billion pounds.

“That destroyed the value that had already been there,” Phillips said. Northern Rock was “asset-rich, but cash-poor.”

Northern Rock shares peaked at 1,251 pence in early 2007, before falling to 90 pence on Feb. 15, 2008, when they were suspended. The bank, based in Newcastle, England, was then nationalized, becoming the first U.K. casualty of the credit crunch. Northern Rock nearly collapsed in 2007 after seeking emergency funding from the Bank of England and suffering a run on its deposits.

Andrew Caldwell of BDO International was appointed in September 2008 to value Northern Rock and determine how much shareholders should get back. He said in court filings posted on his website that he determined the amount payable “is nil.”

Harbinger said in court papers the preferred shares were once worth 400 million pounds and, based on expert reports, a reasonable amount of compensation is 322.5 million pounds.

“Nil is utterly unreasonable,” Phillips said.

Laura Clare, a spokeswoman for BDO, declined to immediately comment. The hearing is scheduled to last five days.

The case is Harbinger Capital and Northern Rock Applicants v. Andrew Caldwell and Her Majesty’s Treasury, 10/01, In the Upper Tribunal (Tax and Chancery Chamber) Financial Services (London).

Massey Investors Can’t Block Alpha Vote, Delaware Judge Rules

Massey Energy Co. investors lost two court challenges to Alpha Natural Resources Inc.’s buyout of the coal producer for more than $7 billion, clearing the way for today’s shareholder vote on the acquisition.

Delaware Chancery Court Judge Leo Strine yesterday rejected a request by some Massey shareholders to put off an approval vote on the deal for 15 days so investors can more thoroughly study Alpha’s cash-and-stock offer. The West Virginia Supreme Court of Appeals rejected a similar request.

“In my judgment, issuance of an injunction threatens more harm to Massey stockholders than its potential benefits to them,” Strine said in a 79-page ruling.

Massey, the largest coal producer in central Appalachia, was sued by investors in West Virginia and Delaware over claims the company’s directors failed to push managers to improve safety conditions after 29 workers died in an April 2010 explosion at the Upper Big Branch mine in West Virginia.

The shareholders seek to hold Massey’s board liable for more than $25 million in sanctions related to the blast that were assessed on the Richmond, Virginia-based company by the U.S. Mine Safety and Health Administration.

Stuart Grant, a lawyer for the New Jersey pension fund that sued in Delaware, said he was disappointed with Strine’s ruling.

“The message sent is that if you violate the law as a director, the simple way out is to sell the company,” Grant said in an e-mailed statement.

Micah Ragland, a Massey spokesman, and Rick Nida, an Alpha spokesman, didn’t respond to phone calls seeking comment.

The consolidated case is In Re Massey Energy Co. Derivative and Class Action Litigation, CA5430, Delaware Chancery Court (Wilmington)

For more, click here.

For the latest lawsuits news, click here.

New Suits

New York Sues U.S. Over Delaware River Basin Gas Drilling

The federal government hasn’t adequately studied how natural gas drilling in the Delaware River Basin would affect 9 million water drinkers in New York, the state said in a lawsuit against the U.S.

A commission that oversees the river basin has proposed regulations that will allow a drilling procedure known as hydraulic fracturing, or fracking, at 15,000 to 18,000 gas wells without a full environmental review, New York Attorney General Eric Schneiderman said in an e-mailed statement. The attorney general filed a complaint yesterday in federal court in Brooklyn, New York, seeking to halt the regulations until the commission complies with the National Environmental Policy Act’s requirement for a full review of all health and safety risks.

“The welfare of those living near the Delaware River Basin, as well as the millions of New Yorkers who rely on its pure drinking water each day, will not be ignored,” Schneiderman said. The U.S. should consider not authorizing development in the part of the river basin that includes New York City’s watershed, he said.

The Delaware River Basin Commission, an authority which oversees activities in the gas-rich area known as the Marcellus Shale, has a pending application from XTO Energy Inc., a unit of Exxon Mobil Corp., to explore in the area, and has refused to produce a full environmental impact assessment, according to Schneiderman’s complaint.

The Delaware River Basin covers 58 percent of the land area of New York City’s watershed west of the Hudson River, according to Schneiderman’s statement. The region targeted for exploration lie within the geographic formation known as the Marcellus Shale, and is protected by a 50-year-old agreement among the federal government and the states of New York, New Jersey and Delaware, according to the complaint.

The lawsuit names as defendants Lisa P. Jackson, administrator of the Environmental Protection Agency, and Kenneth Salazar, secretary of the Interior Department. Other involved federal agencies include the U.S. Army Corps of Engineers, the National Park Service, the U.S. Fish & Wildlife Service and the Environmental Protection Agency.

Kate Kelly, an Interior Department spokeswoman, said the agency had no immediate comment.

Betsaida Alcantara, an EPA spokeswoman, didn’t immediately return a call for comment

A coalition that includes Anadarko Petroleum Corp., Chesapeake Energy Corp. and XTO Energy that supports drilling in the Marcellus Shale said in a statement that the lawsuit isn’t necessary, and will bring no environmental benefit.

Alan Jeffers, an Exxon spokesman, and Thomas Covington, a spokesman for XTO Energy, didn’t immediately return calls for comment.

The case is New York v. U.S. Army Corps of Engineers, 11- cv-2599, U.S District Court, Eastern District of New York (Brooklyn).

For the latest new suits news, click here. For copies of recent civil complaints, click here.

Verdicts/Settlement

Wells Fargo to Pay $16 Million to End Disabilities Claims

Wells Fargo & Co., the biggest U.S. home lender, agreed to pay as much as $16 million to resolve claims that the bank wouldn’t do business with deaf and hearing-impaired people using a telecommunications relay service, the Justice Department said yesterday.

Hearing and speech impaired individuals were referred to a phone line for the deaf that asked them to leave a message that went unanswered, the agency said in an e-mailed statement yesterday. The banking company will pay up to $16 million to people for violations of the American with Disabilities Act, a $55,000 civil penalty and a $1 million charity donation, according to the statement.

The company will accept relay calls and take other steps to assist disabled consumers wishing to do business by phone, by computer, at branches and at automatic teller machines under the settlement. Mary Eshet, a Wells Fargo spokeswoman, didn’t immediately return a voice-mail message after regular business hours.

Some of Wells Fargo’s call centers stopped accepting calls made through relay services because of fraud concerns and referred the calls to a dedicated line for the deaf, the bank said in the agreement. The bank denied violations of the disabilities act.

Wells Fargo worked on a settlement once the department opened an investigation, the agency said. Other major financial institutions are refusing to communicate with disabled people who use relay services to communicate by telephone, which is discrimination, the agency said. The banks should accept relay calls immediately, it said.

Conrad Black Rejected by Supreme Court on Fraud Conviction

Conrad Black lost a bid for a second U.S. Supreme Court hearing on his corporate fraud conviction as the justices left intact a ruling that may send the former Hollinger International Inc. chairman back to prison.

A year after ruling for Black on one issue in his case, the high court yesterday turned away his follow-up appeal, which sought to overturn the remaining two counts of his conviction for fraud and obstruction of justice.

The rebuff leaves Black facing the prospect that he will receive little if any benefit from last year’s ruling. He is scheduled to be resentenced June 24 in Chicago, and federal prosecutors are asking U.S. District Judge Amy J. St. Eve to re- impose the 6 1/2-year sentence he received after his 2007 conviction.

Black, 66, and three other former Hollinger executives were found guilty of illegally taking $6.1 million from the Chicago- based newspaper company as they engineered the sale of its assets.

“A decision by the Supreme Court not to review a case is not a ruling on the merits, and it does not remotely suggest that the decision below was correct,” Miguel Estrada, Black’s attorney, said in an e-mail. A lower court ruling that upheld part of Black’s conviction “was not merely erroneous,” Estrada said. “It was a complete travesty.”

The Supreme Court last year used Black’s case, along with that of former Enron Corp. Chief Executive Officer Jeffrey Skilling, to narrow the scope of a federal law that criminalizes so-called honest-services fraud.

The Supreme Court case is Black v. U.S., 10-1038, U.S. Supreme Court (Washington).

For more, click here.

Sanjay Kumar Rejected by U.S. High Court on 12-Year Sentence

The U.S. Supreme Court refused to second-guess the 12-year prison sentence imposed on former CA Inc. Chief Executive Officer Sanjay Kumar for leading a $2.2 billion fraud at the software company.

The justices yesterday turned away an appeal by Kumar, 49, who pleaded guilty in 2006 to charges of conspiracy, fraud and obstruction of justice. He is serving his sentence at a federal prison in New Jersey.

Kumar argued unsuccessfully that the trial judge used the wrong version of the federal sentencing guidelines in imposing the prison term.

He pleaded guilty in 2006 to inflating revenue by backdating sales contracts. CA, based in Islandia, New York, was known as Computer Associates International Inc. when Kumar ran the company.

Prosecutors said Kumar erased his computer hard drive after being told to preserve evidence for a federal investigation. Kumar also allegedly authorized the payment of $3.7 million to silence a potential witness.

The case is Kumar v. U.S., 10-961, U.S. Supreme Court (Washington).

For the latest verdict and settlement news, click here.

--With assistance from David Glovin, David McLaughlin, Shannon D. Harrington, Chris Dolmetsch, Linda Sandler and Tiffany Kary in New York; Greg Stohr in Washington; Karin Matussek in Berlin; Joe Schneider in Sydney; Jef Feeley and Phil Milford in Wilmington, Delaware; and Lindsay Fortado in London. Editor: Glenn Holdcraft

To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York, at eamon2@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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