(Updates EBay in Verdicts. Adds BofA in top section; New Castle’s Chiesi, Regions Financial in Lawsuits; Primary Global in Trials.)
June 14 (Bloomberg) -- Bank of America Corp., the largest U.S. lender, “significantly hindered” a federal review of its foreclosures on loans insured by the Federal Housing Administration, the U.S. said.
The bank was slow in providing data and offered incomplete information, according to the U.S. Department of Housing and Urban Development inspector general’s office, which conducted the review. The bank cooperated with the office, Dan Frahm, a company spokesman, said.
“Our review was significantly hindered by Bank of America’s reluctance to allow us to interview employees or provide data and information in a timely manner,” William Nixon, an assistant regional inspector general for the agency, said in a sworn declaration.
The declaration, dated June 1 and obtained yesterday by Bloomberg News, was filed as an exhibit in a lawsuit by the state of Arizona against the Charlotte, North Carolina-based bank. Arizona, which is seeking to interview former Bank of America employees, accuses the bank of misleading homeowners who were seeking mortgage modifications.
Federal agencies and attorneys general from all 50 states are investigating the way banks service mortgage loans and conduct foreclosures. The group is in settlement talks with the five largest mortgage servicers, including Bank of America, Wells Fargo & Co. and JPMorgan Chase & Co.
New York Attorney General Eric Schneiderman is investigating mortgage practices and the packaging and sale of loans to investors, according to a person familiar with the matter. Bank of America is included in that probe along with other banks, bond insurers such as MBIA Inc. and trustees for pools of mortgage loans that were securitized.
The HUD inspector general’s report on Bank of America, which hasn’t been made public, was prepared “in light of possible future litigation,” according to Nixon’s declaration. Nixon, who works in Fort Worth, Texas, couldn’t be reached for comment.
“Bank of America fully cooperated with the HUD Office of the inspector general’s review of mortgage servicing practices and any suggestion otherwise is both inaccurate and inconsistent with how we work with all regulators,” Frahm said.
The case is Arizona v. Countrywide Financial Corp., CV2010-033580, Arizona Superior Court, Maricopa County.
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Ex-Galleon Trader Zvi Goffer Convicted of Insider Trading
Former Galleon Group LLC hedge fund trader Zvi Goffer was convicted on all counts by a federal jury in Manhattan in the second trial to result from the U.S. government’s nationwide crackdown on insider trading.
Goffer’s brother Emanuel and Michael Kimelman were also found guilty of conspiracy and securities fraud yesterday by a jury that began deliberations June 2. The verdict comes about a month after Goffer’s boss, Galleon co-founder Raj Rajaratnam, was found guilty in the same courthouse of directing the biggest hedge fund insider trading scheme in history.
Rajaratnam and Zvi Goffer were key players in what prosecutors said were three overlapping insider-trading conspiracies that implicated banks, technology firms, hedge funds and so-called expert networking firms.
Goffer, 34, his brother and Kimelman were charged with using tips from two lawyers to profit on trades in 3Com Corp., Axcan Pharma Inc., Kronos Inc. and Hilton Hotels Corp. Jurors heard recordings of wiretapped phone calls and testimony from witnesses who pleaded guilty in the case and were cooperating with the government.
Prosecutors said the three men, who co-founded Incremental Capital LLC after Zvi Goffer was fired by New York-based Galleon in 2008, used information that the lawyers, then working at the Boston-based law firm Ropes & Gray LLP, learned about pending acquisitions through their work there.
Zvi Goffer’s lawyers argued their client sometimes bluffed about having inside information to impress other Wall Street traders. Lawyers for Emanuel Goffer and Kimelman said that their clients weren’t part of any alleged conspiracy with Zvi Goffer.
They face as long as 20 years in prison on the most serious charges. Zvi Goffer’s sentencing is set for Sept. 21; the other two defendants are scheduled to be sentenced Oct. 7. All defendants remain free on bond pending sentencing.
“We’re disappointed in the verdict,” said William Barzee, a lawyer for Zvi Goffer. “It was a difficult case.” He said his client will appeal.
The case is U.S. v. Goffer, 10-cr-00056, U.S. District Court for the Southern District of New York (Manhattan).
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Mutual Fund Shareholder Suits Curbed by U.S. Supreme Court
A divided U.S. Supreme Court threw out a suit against Janus Capital Group Inc. in a ruling that will limit the ability of shareholders of mutual fund companies to press securities fraud suits.
The court, voting 5-4 along ideological lines, yesterday said shareholders can’t sue Janus and a subsidiary for helping produce allegedly misleading prospectuses for Janus mutual funds. The majority said that the funds are separate legal entities and that neither the parent company nor the subsidiary were responsible for the prospectuses.
“The mutual funds industry is breathing a big sigh of relief today because the spillover consequences of a broad definition of who makes a prospectus could have been huge,” said Robert Skinner, a Ropes & Gray LLP attorney in Boston specializing in investment management litigation.
The case was a follow-up to a 2008 Supreme Court decision that curbed securities suits against a company’s banks and business partners. In his opinion for the court yesterday, Justice Clarence Thomas said the shareholders were seeking to “create the broad liability that we rejected” in the 2008 case.
Justices Stephen Breyer, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan dissented.
“The relationship between Janus Management and the fund could hardly have been closer,” Breyer wrote for the group. “Janus Management’s involvement in preparing and writing the relevant statements could hardly have been greater. And there is a serious suggestion that the board itself knew little or nothing about the falsity of what was said.”
“We are delighted that the Supreme Court has agreed with our position that only the person ultimately responsible for a statement can be sued for fraud in a private class action under Rule 10b-5,” said Janus’s high court lawyer, Mark Perry of Gibson Dunn & Crutcher LLP in Washington.
The case is Janus Capital Group v. First Derivative Traders, 09-525, U.S. Supreme Court (Washington).
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Barclays Will Pay U.K. Customers’ Payment Insurance Claims
Barclays Plc will reimburse the full payment-protection insurance premiums plus 8 percent interest to customers whose claims were put on hold during a court challenge.
The bank will compensate customers sold payment-protection insurance without being told they could buy it from another lender, Barclays said in an e-mailed statement yesterday. The British Bankers’ Association, an industry group, lost a court challenge in April to the Financial Services Authority’s PPI guidelines.
Barclays, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc were given more time to handle the customer complaints by the FSA yesterday after the court challenge created a backlog. Barclays said in May it would set aside 1 billion pounds ($1.63 billion) to resolve the claims.
“Barclays made a commitment to process all on-hold PPI complaints as soon as practicable,” the London-based bank said. “We have said before that when we get things wrong, we apologize, and work hard and work fast to put them right as quickly as possible.”
The banks have as much as 16 weeks to respond to the complaints, rather than eight weeks, the Financial Services Authority said in a statement yesterday.
Edinburgh-based RBS said in May it would earmark 850 million pounds to deal with the claims, after already making a previous provision of 100 million pounds. Lloyds, the biggest provider of PPI, set aside 3.2 billion pounds for the complaints. HSBC Holdings Plc said it estimated its liability at $440 million.
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Wal-Mart Loses Appeal of $187 Million Verdict in Worker Suit
Wal-Mart Stores Inc., the world’s largest retailer, lost its appeal of a $187.6 million verdict in a case accusing the company of denying Pennsylvania workers rest and meal breaks.
A three-member appeals court panel ruled June 10 that there was “sufficient evidence” in the record to conclude Wal-Mart violated state wage laws for contractual rest breaks. The court ruled that the trial court must recalculate more than $45 million in attorneys’ fees in the case.
“Wal-Mart’s own internal audits revealed violations of company policies regarding missed breaks and work off-the- clock,” the panel said in a 211-page opinion.
The verdict is the largest against Wal-Mart over missed breaks, Michael Donovan, an attorney for the Pennsylvania workers said. Wal-Mart agreed to pay as much as $640 million in 2008 to settle more than 60 federal and state lawsuits over similar claims.
Former Wal-Mart employees Dolores Hummel and Michele Braun sued the company in state court in Philadelphia over claims they were pressured by store managers to skip breaks and cut meals short. Lawyers for the women argued that the company made workers skip more than 33 million rest breaks from 1998 to 2001 to boost productivity and cut labor costs.
Wal-Mart argued on appeal that the trial court erred in certifying a class of about 187,000 current and former employees and refusing to dismiss claims under the state wage laws.
Greg Rossiter, a spokesman for Bentonville, Arkansas-based Wal-Mart, said yesterday that the retailer is committed to paying employees for every hour they work and providing them with meal and rest breaks.
“That’s our policy and we take it very seriously,” Rossiter said in a phone interview. “In this case, we believe the trial court’s decision was wrong in a number of respects and we look forward to additional review in the courts.”
Donovan called the ruling a “well-reasoned decision in support of workers’ rights.”
The Pennsylvania cases are Braun v. Wal-Mart Stores Inc., 3373 EDA 2007, and Hummel v. Wal-Mart Stores Inc., 3376 EDA 2007, Superior Court of Pennsylvania.
EBay Settles Investor Suits Over GSI Commerce Purchase
EBay Inc., owner of the largest e-commerce market, agreed to pay about $24 million to resolve investor lawsuits over its $2.4 billion acquisition of online marketing firm GSI Commerce Inc.
GSI shareholders will receive 33 cents a share in addition to EBay’s $29.25-a-share offer under the settlement, the companies said yesterday in a statement. Investors will get the settlement money when the acquisition closes, which is expected on June 17, the companies said.
EBay Chief Executive Officer John Donahoe, two years into a three-year campaign to revive sales growth amid competition from Amazon.com Inc., said GSI will help him better connect buyers and sellers when he announced the transaction in March. GSI, based in King of Prussia, Pennsylvania, has long-term commerce- services relationships with retailers and brands, EBay said.
GSI provides e-commerce and marketing services to over 2,000 brands such as Toys “R” Us, the National Football League and Polo Ralph Lauren, according to court filings.
As part of the transaction, EBay will divest all of GSI’s licensed sports-merchandise business, which provides e-commerce operations for all the major U.S. sports including the NFL, and 70 percent of online-retail sites Rue La La and ShopRunner, court papers show.
EBay officials said they were selling those assets to NRG Commerce LLC, a company set up by GSI Chief Executive Officer Michael Rubin, because they aren’t part of its core long-term growth strategy.
Some GSI shareholders, including the Erie County Employees Retirement system, a pension fund, and the Southeastern Pennsylvania Transportation Authority, which operates trains and buses in the Philadelphia area, filed suit in Delaware Chancery Court earlier this year to challenge the buyout.
Disgruntled GSI investors contend the company’s board sold the marketing firm too cheaply and loaded the deal with terms that favored EBay’s bid.
The case is In RE GSI Commerce Inc. Shareholder Litigation, CA 6346, Delaware Chancery Court (Wilmington).
EFG Ordered to Pay $2.3 Million Over Unauthorized Trades
EFG International AG, the Swiss bank controlled by Greek billionaire Spiro Latsis and his family, was ordered by a Singapore judge to pay $2.3 million to a client for making unauthorized and high-risk trades in her account.
Ng Ton Yee, a former EFG employee, made 160 unauthorized trades in Jiang Ou’s account with the bank in Singapore, incurring a loss of $2.3 million, Judge Steven Chong wrote in a high court ruling released yesterday.
The bank had argued that Jiang, a Chinese citizen who opened a S$5 million ($4 million) account in 2008, was aware of the trades as she had received the transaction statements. Jiang said she didn’t get all the trading confirmation slips, according to the judgment.
“It is plainly unreasonable that a bank should be able to shift the risk of unauthorized transactions by a fraudulent employee to an innocent customer,” Chong said.
Jiang was represented by Lawrence Quahe & Woo LLC and Premier Law LLC acted for the bank.
The case is Jiang Ou v EFG Bank AG S1055/2009 in the Singapore High Court.
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Abbott Sued Over Claim Humira Caused Fungal Infection
Abbott Laboratories was sued by a Tennessee advertising executive who claimed its top-selling arthritis drug Humira caused a life-threatening fungal infection.
Frederick Delano, 69, was diagnosed in February 2009 with disseminated histoplasmosis, according to a complaint filed June 12 in federal court in Memphis, Tennessee. In a May 2010 warning letter to doctors, Abbott said some Humira patients are at risk of developing the fungal infection.
“But in 2008, Fred and his physicians got no warning whatsoever that the medication which he thought would help could, in fact, kill him -- and nearly did,” Delano and his wife, Frances, said in the complaint.
In September 2008, 26 days before Delano’s first dose of Humira, according to his complaint, the U.S. Food and Drug Administration ordered the Abbott Park, Illinois-based drugmaker to warn patients and doctors of an increased risk of potentially fatal Humira-induced histoplasmosis.
“Humira has more than 12 years of clinical and safety data and best-in-class efficacy,” Adelle Infante, an Abbott spokeswoman, said in an e-mail last month in response to a lawsuit claiming Humira caused a New York woman’s optical nerve damage. “The therapeutic risks associated with Humira, including disorders of the nervous systems, are well known and documented in the prescribing label.”
Infante didn’t immediately respond to a telephone call or e-mail yesterday seeking comment on the new lawsuit.
The case is Delano v. Abbott Laboratories, 2:11-cv-2475, U.S. District Court, Western District of Tennessee (Memphis).
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Columbia Sportswear Files Antitrust Complaint W.L. Gore
Columbia Sportswear Co., the U.S. maker of outdoor clothing and footwear, said it filed a European Union complaint against Gore-Tex maker W.L. Gore & Associates Inc. for allegedly abusing its dominant market position.
W.L. Gore violates EU competition rules in its sale of waterproof “breathable membranes” for footwear and gloves, Columbia and its Italian subsidiary, OutDry Technologies, said yesterday in a statement. The complaint was filed with the Brussels-based European Commission, which regulates competition in the 27-nation EU.
Columbia has “long been concerned that W. L. Gore & Associates’ commercial practices systematically prevent consumers, brand owners and manufacturers from gaining access to competing product innovations,” the Portland, Oregon-based company said in the statement.
The U.S. Federal Trade Commission in March subpoenaed W.L. Gore seeking documents covering a 10-year period as part of an investigation into whether the company used unfair contracts or exclusionary practices. W.L. Gore in April filed a request to quash the government request, saying it was “outrageously overbroad and burdensome.”
A message left at W.L. Gore’s headquarters in Newark, Delaware, wasn’t returned.
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Chiesi, ‘Virtual Servant’ to Kurland, Seeks a Lower Sentence
Danielle Chiesi, the former New Castle Funds LLC analyst who pleaded guilty to insider trading, asked a judge to sentence her to less time than her former boss, Mark Kurland, claiming he used their sexual relationship to turn her into a “virtual servant” to feed him inside tips.
Chiesi asked U.S. District Judge Richard Holwell for less prison time than the 27 months Kurland received last year after pleading guilty to conspiracy and securities fraud. Prosecutors yesterday argued that Chiesi should get between 37 and 46 months in prison.
“Kurland engaged in a ‘vicious cycle of abuse’ and ‘psychological exploitation’ to turn Dani into his ‘virtual servant,’” her lawyers argued in a sentencing memorandum yesterday, quoting a letter to the judge from Chiesi’s boyfriend, “Billy.” According to Billy, whose full name isn’t disclosed in the public filing, Kurland relocated Chiesi to San Francisco after his wife discovered their 20-year affair.
Chiesi and Kurland both pleaded guilty in connection with a government investigation of hedge-fund insider trading centered on Galleon Group LLC and its cofounder Raj Rajaratnam. Chiesi is scheduled to be sentenced June 30 in Manhattan federal court.
The case is U.S. v. Rajaratnam, 09-cr-1184, U.S. District Court, Southern District of New York (Manhattan).
Regions Investor Suit Over Bad Loans May Proceed, Judge Rules
Regions Financial Corp. investors may proceed with a lawsuit filed in October accusing Alabama’s biggest bank of deceiving them about mounting losses on bad loans, a federal judge ruled.
Plaintiffs including the Employees’ Retirement System of the Virgin Islands provided sufficient evidence to support claims the firm misled them about potential losses, U.S. District Judge Inge Johnson in Birmingham wrote. The judge cited testimony from a former employee that Regions’ audit committee hired lawyers to examine whether employees sought to avoid recognizing failing loans during the subprime-mortgage crisis.
“These allegations clearly show that defendants had access to and were aware of a financial situation that was not as strong as they were suggesting to the public,” Johnson said in a June 7 ruling. “Defendants had access to accounting systems and internal reports that showed contrary information to what was in their public statements and financials.”
The Birmingham-based lender, which holds $3.5 billion in government bailout funds, said in November that it ousted three executives overseeing risk and souring assets amid slow progress in curbing credit losses. The firm’s board is still conducting the internal review, the Wall Street Journal said, citing unidentified people familiar with the matter.
The probe, which follows a Federal Reserve inquiry, looks at when Regions’ employees labeled loans “non-accrual,” or unlikely to pay off, the newspaper said.
Tim Deighton, a spokesman for Regions, and Barbara Hagenbaugh, a spokeswoman for the Federal Reserve Board in Washington, declined to comment.
The case is Local 703, I.B. of T. Grocery and Food Employees Welfare Fund v. Regions Financial Corp., 10-cv-02847, U.S. District Court, Northern District of Alabama, Southern Division (Birmingham).
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Analyst Tells Jury He Heard Jiau Phone in Confidential Data
A former analyst at hedge fund Barai Capital Management LP testified that he listened in on phone calls while his boss at the time got nonpublic information on companies from Winifred Jiau, an ex-consultant at Primary Global Research LLC who is on trial in New York.
The ex-analyst, Jason Pflaum, told a Manhattan federal jury yesterday that he monitored and recorded the calls to aid Samir Barai, who is hearing impaired. Pflaum said he also wrote contemporaneous electronic instant messages to help his boss keep up with the conversation with Jiau, 43.
Jiau, who is charged with passing illegal tips on Nvidia Corp. and Marvell Technology Group Ltd., is the first of the so- called expert-networking consultants to go on trial on insider trading charges.
For a fee, Jiau shared “earnings information about Marvell and Nvidia,” Pflaum said under questioning by Assistant U.S. Attorney David Leibowitz. “Very specific revenue numbers, gross margins -- in some cases operating margins -- earnings-per-share information.”
The Jiau trial is part of a crackdown on employees and consultants at Primary Global Research, a Mountain View, California-based company that links investors with industry experts who work for public companies.
Pflaum, who worked for Barai from March 2008 through January 2011, testified that he gave the U.S. information on “more than 10” people he said he knew had committed insider trading. Barai pleaded guilty May 27 to conspiracy, wire fraud and obstruction.
The case is U.S. v. Jiau, 11-cr-00161, U.S. District Court, Southern District of New York (Manhattan).
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Industrial Enterprises Ex-Chief Entered Secret Guilty Plea
John D. Mazzuto, the former chief executive officer of Industrial Enterprises of America Inc., secretly pleaded guilty to his role in a $60 million stock fraud at the seller of automotive chemicals.
Mazzuto admitted in New York state court to committing two counts of grand larceny, a scheme to defraud and a violation of general business law, according to the Jan. 14 plea agreement made public last week. He agreed to cooperate and is testifying against James W. Margulies, an Ohio attorney who served as IEAM counsel, chief financial officer and, briefly, CEO. Margulies is now on trial.
Mazzuto, 62, a Yale University graduate and former managing director at Chemical Bank, created IEAM by taking a private company he controlled and merging it with a public company. According to prosecutors, IEAM illegally issued millions of shares of stock to friends, family, associates and Yale.
On the witness stand last week, Mazzuto said he, Margulies and others engaged in fraudulent accounting and securities practices, inflating the company’s stock value and deceiving investors.
“Since I was the public face of the company, I got investors to buy the stock,” Mazzuto testified. “Jim’s role was to then create all the paperwork to make these transactions look legitimate even though they weren’t.”
Margulies, 47, who also was indicted for grand larceny, a scheme to defraud, conspiracy and other crimes, denies the charges, his lawyer, Martin Adelman, said in a June 10 interview after Mazzuto ended his testimony for the day.
“The company is fully cooperating with the prosecution,” Tom Curran, an attorney for IEAM, said yesterday in a phone interview. “The company is actively engaged in an effort to gather all of its records to determine what action needs to be taken to regain property that may have been transferred.”
The case is People v. Mazzuto, 2503-2010, New York state Supreme Court (Manhattan). The class action is Mallozzi v. Industrial Enterprises of America Inc., 07-CV-10321, U.S. District Court, Southern District of New York (Manhattan). The bankruptcy is In re Industrial Enterprises of America Inc., 09-11508, U.S. Bankruptcy Court, District of Delaware. The Baker lawsuit is Industrial Enterprises of America Inc. v. Baker & McKenzie LLP, U.S. Bankruptcy Court, District of Delaware.
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--With assistance from Bob Van Voris, Karen Freifeld, David McLaughlin, Laura Marcinek and Lisa Rapaport in New York; Laurel Brubaker Calkins in Houston; Greg Stohr in Washington; Margaret Cronin Fisk in Southfield, Michigan; Erik Larson, Lindsay Fortado and Howard Mustoe in London; Sophia Pearson and Jef Feeley in Wilmington, Delaware; and Andrea Tan in Singapore. Editor: Glenn Holdcraft
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