Bloomberg News

Alabama Immigration Law, Calpers, Mylan-Teva in Court News

August 30, 2011

(Updates with Kenneth Lay tax ruling in Verdicts; BofA and Madoff in Lawsuits; Rambus-Intel in Trials; Innkeepers-Cerberus in New Suits.)

Aug. 30 (Bloomberg) -- Alabama’s new immigration law giving police the power to verify the immigration status of people stopped for questioning, was blocked by a U.S. judge three days before it was scheduled to take effect.

U.S. District Judge Sharon Lovelace Blackburn in Birmingham issued a two-page order yesterday barring enforcement of the law, which includes provisions requiring police to verify the immigration status of anyone they stop whom they suspect may be in the country illegally and criminalizes the knowing rental of housing to unlawful immigrants.

The federal government, the American Civil Liberties Union and Christian clergy, among others, asked Blackburn to temporarily stop enforcement of the law. Birmingham attorney Augusta Dowd argued on behalf of the clergy, which said the law interfered with carrying out their Christian duties, including clothing and feeding the undocumented immigrants.

“In entering this order, the court specifically notes that it is no way addressing the merits of the motions,” Blackburn wrote.

The U.S. Justice Department and the ACLU argued Aug. 24 at a nine-hour hearing that federal law governs the treatment of undocumented immigrants.

The state’s lawyers, Alabama Deputy Attorneys General John Neiman and Misty Fairbanks, said the state has the right to police people in its own borders.

Blackburn said she will rule on the merits of the act no later than Sept. 28 and that her order remains in effect until Sept. 29 or until she rules, whichever comes first.

The cases are Hispanic Interest Coalition of Alabama v. Bentley, 5:11-cv-2484, Parsley v. Bentley, 5:11-cv-2736, and U.S. v. Bentley, 5:11-cv-2746, U.S. District Court, Northern District of Alabama (Birmingham).

Verdicts/Settlements

GE Settles With Justice Department Over Converteam Deal

General Electric Co. reached an agreement with the U.S. Justice Department that allows the company to buy most of Converteam Group SAS from Barclays Private Equity Ltd. and LBO France for $3.2 billion to add equipment that helps electricity flow to the power grid from devices such as wind turbines.

The Justice Department, which filed a lawsuit yesterday in federal court in Washington seeking to block the deal, said in a press release that the settlement requires GE to sell Converteam’s Electric Machinery Holding Co.

“As originally proposed, the acquisition would have lessened the competition that currently exists among manufacturers of low-speed synchronous electric motors,” said Sharis A. Pozen, acting assistant attorney general in charge of the Justice Department’s Antitrust Division, in an e-mailed statement.

The proposed settlement requires approval by a federal judge.

The electric machinery unit of Converteam is a small and non-strategic U.S. subsidiary that Converteam acquired in 2007, Dan Nelson, a GE spokesman, said. Electric Machinery accounted for about 3 percent of Massy, France-based Converteam’s 2010 revenue, he said.

“GE and Converteam have already received all of the other required regulatory approvals and look forward to the closing of their transaction in the coming weeks,” Nelson said in a statement.

Closely held Converteam had $1.5 billion in sales and $239 million in earnings before interest, taxes, depreciation and amortization last year, GE said in March.

Orders at Converteam rose 36 percent in 2010, according to Fairfield, Connecticut-based GE. The company, whose products include motors used in gas pipelines and equipment to convert electricity from wind, thermal and hydro sources into “grid- quality” power, has 5,300 employees.

The case is U.S. v. General Electric Co., 11-cv-01549, U.S. District Court, District of Columbia (Washington).

Fitch Settles Calpers Suit Over SIV Ratings, Makes No Payout

Fitch Ratings Ltd. settled negligence claims brought by the California Public Employees’ Retirement System’s over ratings it gave structured investment vehicles that later collapsed, agreeing to provide Calpers with documents from a similar lawsuit pending in New York.

Under the settlement Fitch will make no payment to Calpers, the biggest U.S. pension fund, said Daniel Noonan, a Fitch spokesman. A notice of the settlement was filed Aug. 26, according to state court records in San Francisco.

Calpers sued Fitch, Moody’s Investors Service Inc. and Standard & Poors over ratings for three SIVs -- Cheyne Finance LLC, Stanfield Victoria Funding LLC and Sigma Finance Inc. -- in which Calpers invested $1.3 billion. Fitch will provide Calpers with a copy of its deposition taken in February and other documents it produced in a pending investor lawsuit against Moody’s and Standard & Poor’s filed by Abu Dhabi Commercial Bank over the Cheyne Financie SIV.

Dismissal of Fitch from the California case “will streamline the litigation against” the other two ratings companies, Wayne Davis, a Calpers spokesman, said in an e-mail.

“The dismissal will not impact the case,” said Davis. “Calpers can still fully recover its damages it if prevails against Moody’s or S&P, which will not be able to avoid liability through the Fitch dismissals.”

Fitch denied liability and settled “to avoid the cost and expense of litigation,” according to the settlement agreement.

“Fitch is pleased with the resolution of this case and the disposition reached with Calpers,” Noonan said yesterday in an e-mail. Noonan declined to comment about other terms of the settlement.

The case is Calpers v. Moody’s, 09-490241, Superior Court of California, County of San Francisco.

For more, click here.

Kenneth Lay, Deceased Enron CEO, Triumphs Over IRS in Tax Court

Kenneth Lay, the deceased chief executive officer of Enron Corp., defeated the Internal Revenue Service in the agency’s bid to collect $3.9 million from his estate and his wife, the U.S. Tax Court ruled.

The case decided yesterday involved transactions among Lay, his wife, Linda, and Enron that were executed on Sept. 21, 2001. The Lays sold $10 million in annuities to Enron as part of an agreement for him to retake the CEO position, under the stipulation that the annuities would be returned to Lay if he worked a 4.25-year term. The company didn’t survive that long, and it filed for bankruptcy protection in December 2001.

The IRS contested the Lays’ contention that the annuities were sold to Enron for no gain, according to the Tax Court decision by Judge Joseph Goeke. In 2009, the IRS filed a notice of tax deficiency for $3.9 million, arguing that the Lays should have reported the $10 million as income in 2001. Instead, they reported that they sold the annuities to Enron at their cost basis, generating no taxable income.

Goeke wrote in the decision that the agency’s position was incorrect, and he ruled for Linda Lay and for Kenneth Lay’s estate. The transactions, he wrote, were legitimate, and neither of the Lays nor the estate received any distributions or death benefit from the annuity.

Lay, who died in 2006 at age 64, was convicted in May 2006 by a federal jury in Houston. He and the company’s former CEO, Jeffrey Skilling, were found guilty of deceiving shareholders about Enron’s financial condition by hiding debt and losses in a series of off balance-sheet entities. Lay’s convictions were later thrown out because he didn’t have a chance to appeal the cases before he died.

Charles Egerton, an Orlando, Florida, attorney who represented the estate and Linda Lay in the Tax Court case, didn’t respond to an e-mail and phone message late yesterday.

For the latest verdict and settlement news, click here.

Lawsuits/Pretrial

Mylan Motion to Dismiss Teva Patent Suit Denied by Judge

Mylan Inc.’s motion to dismiss a patent lawsuit by Teva Pharmaceutical Industries Ltd. over the multiple-sclerosis drug Copaxone was denied by a federal judge.

U.S. District Judge Barbara Jones rejected Mylan’s claim that Teva’s patent for the drug was invalid, according to a filing yesterday in federal court. A trial on the patent infringement case in Manhattan is set to begin Sept. 7.

Teva, which licensed patents from Yeda Research and Development Co. for Copaxone, sued Novartis AG’s Sandoz in 2008 and Mylan in 2009 after they separately tried to win approvals from the U.S. Food and Drug Administration to market generic versions of the drug before its patents expired in 2014.

Jones consolidated the cases. An earlier motion by Sandoz to dismiss the patent claim as invalid was also rejected.

The Sandoz case is Teva Phamaceutical Industries Ltd. v. Sandoz Inc., 08-7611, U.S. District Court, Southern District of New York (Manhattan). The Mylan case is Teva Pharmaceuticals Industries Ltd. v. Mylan Inc., 09-8824, U.S. District Court, Southern District of New York (Manhattan).

FDIC Objects to BofA’s $8.5 Billion Mortgage-Bond Settlement

The Federal Deposit Insurance Corp. filed an objection to Bank of America Corp.’s proposed $8.5 billion mortgage-bond settlement with investors, joining investors and states that are challenging the agreement.

The FDIC, the receiver for failed banks, owns securities covered by the settlement and said it doesn’t have enough information to evaluate the accord, according to a filing yesterday in federal court in Manhattan.

Under the agreement, Bank of America would pay $8.5 billion to resolve claims from investors in Countrywide Financial Corp. mortgage bonds. The settlement was negotiated with a group of institutional investors, including BlackRock Inc. and Pacific Investment Management Co. LLC, and would apply to investors outside that group.

Bank of New York Mellon Corp., the trustee for the mortgage-securitization trusts covered by the agreement, has asked a New York state judge to approve the settlement in November. An investor group is trying to move the case to federal court, which Bank of New York opposes.

Investors that would be bound by the settlement, including American International Group Inc., have criticized the deal and Bank of New York’s role representing investors in the mortgage bonds. New York Attorney General Eric Schneiderman and Delaware Attorney General Beau Biden have sought to intervene in the case and asked the court to reject it.

The FDIC’s involvement may make it more difficult for Charlotte, North Carolina-based Bank of America to get approval for the settlement, said Bert Ely, a bank-industry consultant in Alexandria, Virginia.

Andrew Gray, an FDIC spokesman, said in an e-mail that the FDIC generally doesn’t comment on pending litigation.

“This filing is simply a formal notice to preserve our right to make claims as a part of the settlement and seeks additional information to evaluate those potential claims,”  he said. “It is not an evaluation or opinion on the settlement itself.”

“We believe that the trustee acted reasonably in entering into the settlement, and that there are compelling reasons why the agreement should receive judicial approval,” Lawrence Grayson, a Bank of America spokesman, said in an e-mail.

Kevin Heine, a spokesman for Bank of New York, said the company had no comment.

The state case is In the matter of the application of The Bank of New York Mellon, 651786-2011, New York State Supreme Court, New York County (Manhattan). The federal case is In the Matter of the Application of Bank of New York Mellon, 11- cv-5988, U.S. District Court, Southern District of New York (Manhattan).

SIPC Says Madoff Suit Against Sonja Kohn Shouldn’t Be Dismissed

The Securities Investor Protection Corp. said it opposes the dismissal of a lawsuit brought by the liquidator of Bernard Madoff’s investment firm against Bank Medici AG founder Sonja Kohn and UniCredit SpA.

Lawyers for SIPC said in a filing yesterday in federal court in Manhattan that, as the agency charged with the administration of the Securities Investor Protection Act and as an adviser to the court, it opposes UniCredit’s and the related defendants’ request to dismiss trustee Irving Picard’s common law claims, including those for unjust enrichment.

UniCredit last month asked a district judge to dismiss Picard’s “hollow” racketeering claims seeking $59 billion from the bank, or three times what investors lost in the Ponzi scheme.

Picard named Milan-based UniCredit and its Bank Austria unit in a December complaint against Bank Medici, Kohn and dozens of other Austrian and Italian parties. He demanded $19.6 billion -- his estimate at the time of all principal lost by Madoff investors -- using the Racketeer Influenced and Corrupt Organizations Act to triple the amount.

The claim is the largest of more than 1,000 filed by Picard.

In yesterday’s filing, SIPC said that while Picard in his opposition to the motion to dismiss focused on the RICO claims, it seeks to support his common law claims. U.S. District Judge Jed Rakoff last month ruled that Picard didn’t have standing to pursue common law claims against London-based HSBC Holdings Plc.

The SIPC lawyers said the ruling is inconsistent with the provisions and purposes of the Securities Investors Protection Act.

The case is Picard v. Kohn, 11-cv-01181, U.S. District Court, Southern District of New York (Manhattan).

For the latest lawsuits news, click here.

Trials/Appeals

Intel Trial Witnesses Blame Rambus for Doomed Chip

Rambus Inc. can blame itself and not the semiconductor makers targeted in its $3.95 billion suit for the failure of a memory chip to become the industry standard, according to Intel Corp. managers who worked with the company.

Paul Fahey, an Intel engineer called to testify in defense of Hynix Semiconductor Inc. and Micron Technology Inc. at an antitrust trial in state court in San Francisco, told jurors that Rambus’s technology was flawed and its engineers less competent than their peers. Rambus’s insistence on a so-called guillotine contract also led Intel to conclude its alliance with the company was “doomed,” William Swope, a former Intel strategic planning manager, testified.

Rambus engineers “were not as competent and they didn’t work as hard,” said Fahey, who in 1999 as a program manager for Intel oversaw the development of Rambus’s version of dynamic random access memory, or DRAM.

The testimony from Fahey, Swope and at least three other current and former Intel employees may undermine Rambus’s claim that Hynix and Micron colluded to drive its DRAM chips, which it called RDRAM, out of the market. By 2003, Intel abandoned its work on RDRAM as a solution to a computer-memory bottleneck that threatened to stymie the growth of the Santa Clara, California- based company, the world’s biggest chipmaker.

In the trial that began June 8, Rambus argues that Hynix and Micron conspired to lower the prices of their own chips and deserted their commitment to produce RDRAM, relegating it to a niche role. Sunnyvale, California-based Rambus, which doesn’t manufacture the chips it designs, contends it would have earned $3.95 billion in royalties without the alleged conspiracy. Under California law, a jury finding of damages in that amount would be automatically tripled to $11.9 billion.

Linda Ashmore, a Rambus spokeswoman, and Chuck Mulloy, an Intel spokesman, declined to comment on the testimony by Intel employees. Ken Nissly, a lawyer representing Ichon, South Korea- based Hynix, and Micron spokesman Dan Francisco also declined to comment. Boise, Idaho-based Micron is the largest U.S. maker of computer memory chips. DRAM chips are used to store data temporarily to help devices run multiple programs at the same time on computers.

Hynix and Micron have said they will finish their case by early September. Rambus will then have another chance to rebut their evidence.

The case is Rambus Inc. v. Micron Technology Inc., 04-0431105, California Superior Court (San Francisco).

For more, click here.

New Suits

SEC Sues Florida Men for Bilking Teachers in $22 Million Scam

The U.S. Securities and Exchange Commission sued two Florida men, claiming they defrauded teachers and retirees in a $22 million Ponzi scheme by posing as a private-equity fund while enriching themselves.

James D. Risher and Daniel Sebastian fraudulently lured more than 100 investors with promises of annual returns of as much as 124 percent, the SEC said yesterday in a lawsuit filed in U.S. District Court in Florida. Risher, who spent 11 of the past 21 years in jail, spent customers’ funds on jewelry, gifts and real estate in North Carolina and Florida, the SEC said.

“Risher, who masqueraded as a highly successful equity trader, teamed up with Sebastian to tout sophisticated trading strategies they claimed would generate substantial profits,” Eric Bustillo, head of the SEC’s regional office in Miami, said in a statement. “Instead, Risher and Sebastian used investors’ life savings and retirement nest eggs to line their own pockets.”

Burton Wiand, Sebastian’s attorney, said in a telephone interview that his client had been “deceived” by Risher and voluntarily reported the scheme to the SEC and criminal authorities once it became evident to him. Sebastian has since cooperated with government officials as well as attorneys representing former clients, Wiand said.

Risher was indicted on related criminal charges June 29. A phone call to Adam Allen, a public defender who has represented Risher in the criminal matter, wasn’t immediately returned.

Innkeepers Sues Cerberus, Chatham for Breach of Commitment

Innkeepers USA Trust, an operator of Residence Inns, Marriott hotels and Hampton Inns, sued Cerberus Capital Management LP and Chatham Lodging Trust, saying its agreement to sell 64 hotels to Cerberus and Chatham can’t be called off due to market conditions or a change in its business.

Last week, Cerberus and Chatham terminated the deal. Innkeepers, in the lawsuit filed in Manhattan bankruptcy court yesterday, says there has been no change in its business since a binding agreement was signed with Cerberus and Chatham on May 16.

“General market volatility is wholly irrelevant here,” lawyers for Innkeepers wrote. The lawsuit seeks to hold Cerberus and Chatham to their commitment, and seeks damages for potentially more than their $20 million deposit.

The material adverse change clause in Innkeepers’ agreement allowed Cerberus and Chatham to pull out of the deal for “any condition, change or development that could reasonably be expected to have a material adverse effect on the business, assets, liabilities or operations, condition or prospect” of Innkeepers.

Innkeepers, whose parent is managed by an affiliate of Leon Black’s private-equity firm Apollo Global Management LLC, filed for bankruptcy on July 19, 2010, with a pre-arranged reorganization plan proposed by Apollo and Lehman Ali, a unit of bankrupt Lehman Brothers Holdings Inc., which was rejected by creditors.

Cerberus and Chatham later won an auction to acquire the 64 hotels after topping a $970.7 million offer from Lehman Ali and Five Mile Capital Partners. According to that agreement, which also had a material adverse change clause, the termination date on the offer isn’t until Sept. 15.

The case is In re Innkeepers USA Trust, 10-13800, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

For more, click here.

Lufthansa Sued Over Claims It Hampers Competition, FTD Reports

Deutsche Lufthansa AG was sued by Verband Sozialer Wettbewerb e.V. over allegation it forces large clients to disclose rebates they get from other airlines, Financial Times Deutschland reported, without saying where it got the information.

German antitrust-regulators are also looking at the issue, the newspaper said. The Verband Sozialer Wettbewerb is an interest group working for fair business practices, according to the FT Deutschland.

Lufthansa spokesman Boris Ogursky said the company won’t comment on the suit. Its terms and conditions comply with legal requirements and its contracts have no clause requiring customers to disclose rebates they get from Lufthansa’s competitors, he said.

Bloomberg News was unable to contact the Verband Sozialer Wettbewerb by phone before office hours. The Federal Cartel Office’s press department didn’t immediately reply to an e-mail seeking comment.

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

--With assistance from Andrew Harris in Chicago; Laurence Viele Davidson in Atlanta; Joshua Gallu, Richard Rubin and Tom Schoenberg in Washington; Dakin Campbell, Karen Gullo and Joel Rosenblatt in San Francisco; Don Jeffrey, Patricia Hurtado, Tiffany Kary and David McLaughlin in New York; Edvard Pettersson in Los Angeles; and Karin Matussek in Berlin. Editors: Mary Romano, Glenn Holdcraft.

To contact the reporter on this story: Ellen Rosen in New York at erosen14@bloomberg.net.

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


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