Bloomberg News

BofA, Oracle, Morgan Stanley, AT&T, Madoff in Court News

October 03, 2011

(Adds BofA in top section and Lawsuits and Emanuel Goffer, Morgan Stanley and Wachovia in Verdicts.)

Oct. 3 (Bloomberg) -- The lawyer who helped craft a proposed $8.5 billion settlement with Bank of America Corp. over soured mortgages urged some of her biggest bondholder clients to oppose a more aggressive stance set forth by a rival attorney, Bloomberg News Jody Shenn and David McLaughlin report.

Gibbs & Bruns LLP’s Kathy Patrick told clients including BlackRock Inc. and Pacific Investment Management Co. last year that they shouldn’t authorize a competing plan to threaten Bank of New York Mellon Corp., the trustee for the bondholders, for failing to act adequately on their behalf.

“I want to be able to distance this effort from any declaration of default so that we can continue to try to work constructively with Bank of New York,” Patrick wrote in the Aug. 4, 2010, e-mail, a copy of which was obtained by Bloomberg News. “We don’t want to be forced to go to war with them if there is an opportunity to achieve victory by other means.”

Investors including American International Group Inc. and local pension funds, along with New York Attorney General Eric Schneiderman, have criticized the settlement in court, saying the payout should be larger or that more information is needed to evaluate it.

The 22 investment firms that hired Patrick and worked with BNY Mellon may have conflicts of interest that prevented them from negotiating for more money on behalf of all investors in the Countrywide bonds, because of “significant ongoing business dealings with Bank of America,” according to a court filing by the Policemen’s Annuity and Benefit Fund of Chicago, the Grand Rapids, Michigan, General Retirement System, and two other retirement systems.

The settlement covers $424 billion of home-loan securities created by Countrywide Financial Corp. before Charlotte, North Carolina-based Bank of America bought the firm in 2008. Some of the bonds involved aren’t owned by the 22 firms, a group that grew from a total of eight last October and also includes the Federal Reserve Bank of New York and MetLife Inc.

The case is Bank of New York Mellon v. Walnut Place LLC, 11-cv-5988, U.S. District Court, Southern District of New York (Manhattan).

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New Suits

Bank of America’s Countrywide Sued by Sealink Funding

Bank of America Corp.’s Countrywide unit was sued by Sealink Funding Ltd. in New York over $1.6 billion of residential mortgage-backed securities the fund purchased between 2005 and 2007.

Sealink filed the suit against Countrywide in New York State Supreme Court Sept. 29, seeking unspecified compensatory, rescissory and punitive damages. Sealink is a fund created to manage Landesbank Sachsen AG’s riskiest assets after the German lender almost collapsed.

“Countrywide was an entity driven by only one purpose --to originate and securitize as many mortgage loans as possible into” mortgage-backed securities “to generate profits for the Countrywide defendants, without regard to the investors that relied on the critical, false information provided to them with respect to the related certificates,” lawyers for Sealink said in the lawsuit.

Sealink filed a similar suit Sept. 29 in the same court against JPMorgan Chase & Co. over $2.4 billion worth of residential mortgage-backed securities purchased between 2005 and 2007.

Dan Frahm, a spokesman for Charlotte, North Carolina-based Bank of America, didn’t immediately return a voice-mail message seeking comment on the lawsuit. Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment.

The cases are Sealink Funding Ltd. vs. Countrywide Financial Corp., 652679/2011, New York State Supreme Court, New York County (Manhattan); Sealink Funding Ltd. vs. Bear Stearns & Co. Inc., 652681/2011, New York State Supreme Court, New York County, Manhattan.

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Oracle Sued by Pension Fund Over Purchase of Ellison Company

Oracle Corp. was sued by a retirement fund over its purchase of Pillar Data Systems Inc., a company controlled by Chief Executive Officer Larry Ellison.

The City of Roseville Employees’ Retirement System sued on behalf of Oracle and named among the defendants Ellison, Oracle President Mark Hurd and Chairman Jeff Henley, according to papers filed Sept. 29 in Delaware Chancery Court in Wilmington. A judge granted the pension fund’s request to file its complaint under seal.

Oracle said in June that it would buy San Jose, California- based Pillar in a deal that required no up-front payments and allowed for an “earn-out” payment that would be made by Nov. 30, 2014, according to a filing with the U.S. Securities and Exchange Commission.

Ellison owns about 55 percent of Pillar, a provider of data-storage systems, according to the SEC filing. Under terms of the deal, the outstanding amount of a $544 million loan Pillar owes to Ellison will be converted into preferred shares with a right to dividends accruing at an annual rate of 1.5 percent.

Those shares will be canceled after the transaction closes in exchange for rights to receive a portion of the earn-out, according to the SEC filing.

The pension fund’s complaint accuses the Oracle board of breaching its fiduciary duty in connection with the acquisition, according to the court filing.

Deborah Hellinger, a spokeswoman for Redwood City, California-based Oracle, declined to comment on the lawsuit.

The case is City of Roseville Employees’ Retirement System v. Ellison, CA6900, Delaware Chancery Court (Wilmington).

Blavatnik Made $1.2 Billion in Lyondell LBO, Lawsuit Says

The leveraged buyout of Lyondell Chemical Co. in 2007 benefited the company’s board as well as billionaire Len Blavatnik, who gained $1.2 billion, according to a revised lawsuit brought by the company’s creditors.

Lyondell Chairman Dan F. Smith netted more than $100 million from the $22 billion merger with a unit of Blavatnik’s Access Industries Holdings LLC, a deal that drove Lyondell into bankruptcy in 2009, according to the complaint filed Sept. 29 in U.S. Bankruptcy Court in Manhattan.

“Blavatnik was internally known at Access as the ‘King of Optionality,’” and turned to Lyondell after previously trying to buy Huntsman International LLC, a similar petrochemical company, trustee Edward Weisfelner said in the revised complaint, brought on behalf of creditors.

Blavatnik and Access took part in a private-equity boom during which companies were bought with borrowed money, then drained of cash or sold for a profit, according to the lawsuit. With interest rates low, lending standards loosened and tighter regulations on public companies following the Enron Corp. and WorldCom Inc. accounting frauds, investors and their bankers turned to companies with little debt and stable cash for highly leveraged acquisitions, and Blavatnik chose Lyondell, the trustee said.

Blavatnik profited from stock bought just before the merger, and earnings projections were “refreshed” by Smith to make them high enough to justify the acquisition price of $48 a share, according to the lawsuit.

Richard Werder, a lawyer for Blavatnik, said the claim that his client netted more than $1.2 billion from Lyondell’s merger with Access’s Basell AF SCA unit is “preposterous.”

Blavatnik is seeking to dismiss some accusations made in the initial complaint, and has said Luxembourg law can’t be used to sue over Netherlands-based Basell. U.S. Bankruptcy Judge Robert Gerber denied a request to dismiss charges based on Luxembourg law, saying Sept. 22 that Blavatnik could later file a motion to dismiss an amended complaint.

The bankruptcy case is In re Lyondell Chemical Co., 09- 10023, and the adversary case is Official Committee of Unsecured Creditors v. Citibank NA, 09-01375, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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Lawsuits/Pretrial

BofA, JPMorgan Proposed Accord Rejected by California’s Harris

A proposed nationwide settlement with banks including Bank of America Corp. and JPMorgan Chase & Co. is being rejected by California Attorney General Kamala Harris, who will pursue her own mortgage investigation in the state that had the second- highest foreclosure rate in August.

The proposed agreement is “inadequate” and would allow too few California homeowners to stay in their homes, Harris said in a letter obtained by Bloomberg News.

“After much consideration, I have concluded that this is not the deal California homeowners have been waiting for,” Harris, a Democrat who took office in January, said in the letter to the U.S. Justice Department and the Iowa attorney general, who is leading talks for the states.

All 50 state attorneys general last year announced they were investigating bank foreclosure procedures following complaints that the companies were using faulty documents in seizing homes.

State attorneys general and federal agencies have been negotiating a settlement with the five largest mortgage servicers, including Charlotte, North Carolina-based Bank of America and New York-based JPMorgan. They have sought a settlement that would fund loan modifications and set requirements for how the banks conduct foreclosures and interact with borrowers. Harris’s office has been negotiating directly with the banks on behalf of the states.

Harris’s move comes amid infighting by state attorneys general over the settlement effort. In August, Iowa Attorney General Tom Miller removed New York Attorney General Eric Schneiderman from an executive committee representing the 50 states. Miller said Schneiderman was “working to actively undermine” the multistate group and encouraged opposition to the negotiations, according a statement from Miller’s office and a Sept. 2 letter he wrote.

Schneiderman and other attorneys general who are conducting their own investigations into bank mortgage practices have raised concerns about liability releases that would be given to banks as part of any deal, protecting them from state and federal lawsuits.

The scope of the release has divided the two sides and is the main obstacle to reaching a settlement, a person involved in the talks said. The banks have sought broad releases that would go beyond claims stemming from their foreclosure practices, people familiar with the matter have said.

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Morgan Stanley Wins Dismissal of Pension Fund’s CDO Suit

Morgan Stanley won dismissal of a retirement fund’s lawsuit over a collateralized debt obligation called the Libertas CDO.

The Employees’ Retirement System of the Government of the Virgin Islands claimed in the 2009 suit that New York-based Morgan Stanley defrauded investors by collaborating with ratings companies to give the CDO an undeserved AAA rating at the same time it was short-selling almost all of the assets underlying the notes. The CDO was backed by $1.2 billion in assets, according to the complaint.

U.S. District Judge Barbara Jones in Manhattan on Sept. 30 dismissed the investor complaint, which asserted claims for fraud and unjust enrichment under New York state law.

AAA is the highest rating for fixed-income instruments. The portfolio was 92 percent residential mortgage-backed securities and included exposure to more than $130 million in loans from Option One Mortgage Corp. and $100 million from New Century Mortgage Corp., both lenders to homebuyers with poor credit scores, according to the complaint.

The Libertas CDO entered into credit-default swaps that referenced specific residential mortgage-backed securities. According to the complaint, the notes collapsed in value after they were purchased by the Virgin Islands retirement fund.

The case is Employees’ Retirement System of the Government of the Virgin Islands v. Morgan Stanley & Co., 09-cv-10532, U.S. District Court, Southern District of New York (Manhattan).

Puerto Rico Joins U.S. Complaint Against AT&T, T-Mobile

The U.S. Justice Department amended its lawsuit seeking to block AT&T Inc.’s $39 billion takeover of T-Mobile USA Inc., allowing Puerto Rico to join the case.

The government filed its amended complaint in federal court in Washington Sept. 30. The Commonwealth of Puerto Rico is the eighth jurisdiction to sign on to the government’s Aug. 31 complaint, following seven states that joined Sept. 17.

The government’s antitrust suit claims that the merger, which would make Dallas-based AT&T the biggest wireless carrier in the U.S. and cut the number of national competitors to three from four, is anticompetitive and will hurt consumers.

“It is not unusual for state attorneys general to participate in DOJ merger review proceedings or court filings,” Michael Balmoris, an AT&T spokesman, said in an e-mail. “At the same time, we appreciate that multiple state attorneys general and hundreds of other local, state and federal officials are publicly supportive of our merger.”

AT&T continues to work on “parallel paths -- seeking a solution that addresses the DOJ’s concerns while simultaneously preparing for trial,” Balmoris said. The company remains “confident” it will “reach a successful solution,” he said.

The case is U.S. v. AT&T Inc., 11-cv-01560, U.S. District Court, District of Columbia (Washington).

Mets Ruling Used as Weapon in Fighting Madoff Trustee Suits

A judge’s ruling that slashed a billion-dollar claim against the owners of the New York Mets last week is already being used as a weapon by other defendants in lawsuits brought by the liquidator of Bernard Madoff’s firm.

Safra National Bank of New York asked a bankruptcy judge Sept. 29 to dismiss a suit by trustee Irving Picard, citing U.S. District Judge Jed Rakoff’s Sept. 27 ruling. Rye Select Broad Market XL Portfolio Ltd., based in the Cayman Islands, separately asked a federal district judge to take its Madoff suit out of U.S. bankruptcy court, citing Rakoff’s decision in the case against Fred Wilpon and Saul Katz.

Rakoff cut Picard’s claim against the Mets owners to about $386 million, raising the standard for him to get even that much. The judge said Picard could try to reclaim only two years of withdrawals from the Ponzi scheme, while tossing nine of 11 causes of action against Wilpon and Katz.

Safra said in a filing in U.S. Bankruptcy Court in Manhattan that “at a minimum” Picard’s demand for funds it took from the Ponzi scheme beyond two years should be dismissed. Rye, in its bankruptcy court filing, said its case involving swap transactions was similar to the Mets case, and that Rakoff sided with the defendants saying settlement payments were protected by so-called safe harbor law.

Rakoff’s two-year ruling could cost Picard about $2.7 billion on all his clawback suits, the trustee said Sept. 29. Another $3.5 billion of so-called preference payments was “in question” because of another aspect of Rakoff’s ruling.

Picard will first ask Rakoff for permission to appeal to the federal appeals court in New York. The appeals court will then decide whether to review the ruling.

The Mets case is Picard v. Katz, 11-cv-03605, U.S. District Court, Southern District of New York (Manhattan).

AT&T Asks U.S. Judge to Throw Out Sprint’s Antitrust Lawsuit

AT&T Inc. asked a federal judge to throw out a lawsuit Sprint Nextel Corp. brought seeking to block the company’s proposed $39 billion purchase of wireless carrier T-Mobile USA Inc.

AT&T claimed Sprint, the third-biggest U.S. wireless operator, doesn’t have the right to challenge the merger because the company is a competitor, not a consumer of wireless services. The bid to dismiss the case was filed Sept. 30 in federal court in Washington.

“Sprint knows that competition will be enhanced, not harmed, by the combination of AT&T and T-Mobile and that a post- merger AT&T -- freed of spectrum shortages that impair its ability to offer customers better services at lower prices -- will be a more formidable competitor,” AT&T said in its filing. “What is good for consumers is bad for Sprint, and that is why Sprint has filed suit.”

Sprint brought its antitrust lawsuit on Sept. 6, less than a week after the U.S. sued to block the deal, saying the proposed merger would harm consumers and weaken Sprint’s ability to compete with AT&T and Verizon Communications Inc.

The Justice Department sued Dallas-based AT&T and Bonn- based Deutsche Telekom AG’s T-Mobile unit on Aug. 31, arguing a combination of the two companies, which would make AT&T the biggest U.S. wireless carrier, would “substantially” reduce competition. Seven states and Puerto Rico joined the government’s case.

The case is Sprint Nextel Corp. v. AT&T Inc., 11-cv-01600, U.S. District Court, District of Columbia (Washington). The government’s case is U.S. v. AT&T Inc., 11-cv-01560, U.S. District Court, District of Columbia (Washington).

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Verdicts/Settlements

Wells Fargo, BDO Seidman Settle Lawsuits for $130 Million

Wells Fargo & Co.’s Wachovia Capital Markets unit and BDO Seidman LLP settled lawsuits over their roles in the collapse of Le-Nature’s Inc., a defunct water bottler, for $130 million.

U.S. Bankruptcy Judge Thomas P. Agresti approved one piece of the settlement Sept. 30 at a hearing in Pittsburgh. Under that deal, Wells Fargo and BDO would pay $50 million to a trustee for creditors of Le-Nature’s, whose chief executive officer pleaded guilty to fraud in June.

A group of Le-Nature’s lenders will receive $56 million and the California Public Employees’ Retirement System $24 million under another part of the settlement, according to court documents filed in the Le-Nature’s bankruptcy case in Pittsburgh. The lenders and Calpers sued Wachovia and New York- based auditor BDO Seidman in New York state court.

Agresti said he was skeptical of the settlement at the start of the hearing because of the high legal fees associated with the case, and changed his mind after listening to trustee Marc S. Kirschner testify.

“He convinced me, as the judge who came in here with an attitude to be honest, and he turned me around,” Agresti said in court Sept. 30.

Mary Eshet, a spokeswoman for Wells Fargo, said she couldn’t immediately comment on the settlement.

The bankruptcy case is In Re Le-Nature’s, 06-25454, U.S. Bankruptcy Court, Western District of Pennsylvania (Pittsburgh).

Emanuel Goffer Deserves Up to 63 Months in Prison, U.S. Says

Emanuel Goffer, convicted of insider trading with his brother Zvi Goffer, should be sentenced to as much as 63 months in prison, U.S. prosecutors said.

Emanuel Goffer, who is scheduled for sentencing on Oct. 7 by U.S. District Judge Richard Sullivan in Manhattan, asked last week for less than 46 months, saying he plays a critical role in raising a 3-year-old son who has developmental problems. Sullivan sentenced Zvi Goffer to 10 years in prison Sept. 21.

“Goffer’s active participation in this brazen insider trading scheme warrants a substantial sentence,” the government said in papers filed Sept. 30, arguing in favor of a sentence within the range called for by non-binding federal guidelines.

Prosecutors Andrew Fish, Reed Brodsky and Richard Tarlowe wrote in their brief Sept. 30 that Goffer, who co-founded Incremental Capital LLC in New York, was responsible for instant messages and trades intended to provide cover for the illegal trades. He used an untraceable prepaid cell phone to pass tips to his brother and helped pay for the bribes to the two former lawyers who originated the tips, they argued.

Both Goffer brothers were convicted in June along with Michael Kimelman. A jury found Zvi Goffer guilty of 14 counts of conspiracy and securities fraud, while Emanuel and Kimelman were both convicted of one count of conspiracy and two counts of securities fraud.

Zvi Goffer’s former boss, Galleon co-founder Raj Rajaratnam, was found guilty in May of directing the biggest hedge fund insider-trading scheme in history. His sentencing is scheduled for Oct. 13.

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

Morgan Stanley to Settle Antitrust Case for $4.8 Million

Morgan Stanley agreed to pay $4.8 million to settle a U.S. antitrust case over a 2006 derivative contract with KeySpan Corp. that the Justice Department said probably led to higher electricity prices in New York City.

The proposed settlement was filed Sept. 29 in federal court in Manhattan, the Justice Department said in a statement. KeySpan last year agreed to pay $12 million to settle.

Morgan Stanley entered into agreements with KeySpan and Astoria Generating Co., KeySpan’s largest competitor in the capacity market, that gave KeySpan a financial interest in Astoria and ensured the company would withhold output from the market and increase prices, the Justice Department said.

“Morgan Stanley is pleased to have settled this matter with the Department of Justice,” Mary Claire Delaney, a spokeswoman for the New York-based bank, said in an e-mailed statement.

The case is U.S. v. Morgan Stanley, 11-6875, U.S. District Court, Southern District of New York (Manhattan).

Hedge Fund Must Pay Wachovia $2.1 Million Over Swap Dispute

An Isle of Jersey-registered hedge fund was ordered to pay Wachovia Corp., the bank now owned by Wells Fargo & Co., $2.1 million in a dispute over a credit-default swap.

U.S. District Judge Laura Taylor Swain in Manhattan determined in an order Sept. 29 the amount VCG Special Opportunities Master Fund Ltd. must pay after ruling in Wachovia’s favor last year. Swain had also ruled against VCG’s claims that the bank cheated it by forcing it to make higher margin payments than necessary on the swap.

The court “grants Wachovia’s motion for an award of the full amount of its claimed damages, attorneys’ fees and expenses,” Swain wrote Sept. 29.

Swain had ruled last year that Wachovia’s calculation of its exposure to a collateralized-debt obligation the swap covered didn’t violate “good faith and fair dealing” by determining VCG owed more in collateral than the swap’s $10 million value.

The $2.1 million includes $1.02 million Wachovia was owed, $1.03 million in legal fees, and interest, Swain said.

Steven Mintz, a lawyer for VCG at Mintz & Gold LLP, didn’t return a call for comment on the decision.

The case is CDO Plus Master Fund Ltd. v. Wachovia Bank, 07- 11078, U.S. District Court, Southern District of New York (Manhattan).

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On The Docket

Ecclestone Set for November Testimony in Gribkowsky’s Trial

Formula One Chief Executive Officer Bernie Ecclestone will testify in the second week of November in the trial of former Bayerische Landesbank risk manager Gerhard Gribkowsky over the sale of the lender’s stake in the racing company, Margarete Noetzel, a spokeswoman for the Munich Regional Court, said in a telephone interview Sept. 30

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Court Filings

Dynegy Suit Most Popular Docket on Bloomberg Last Week

Dynegy Inc., which was sued by Avenue Investments LP over claims the Houston-based power producer stole assets from holders of $3.6 billion in notes in a restructuring, was the most-read litigation docket on the Bloomberg Law system last week.

Bondholders led by Avenue Investments seek to undo the restructuring, calling it a fraudulent conveyance that removed the company’s coal-fired power plants from the reach of bondholders and transferred them to shareholders, according to the lawsuit filed Sept. 21 in New York state Supreme Court.

The case is Avenue Investments LP v. Dynegy Inc., 652599/2011, New York state Supreme Court (Manhattan).

For more, click here.

--With assistance from Bob Van Voris, Chris Dolmetsch, Linda Sandler, Karen Freifeld, Tiffany Kary, Patricia Hurtado, Jody Shenn and David McLaughlin in New York; Sophia Pearson and Steven Church in Wilmington, Delaware; Sara Forden and Tom Schoenberg in Washington; Nicholas Comfort in Frankfurt; Edvard Pettersson in Los Angeles; Thom Weidlich in Brooklyn, New York; and Mariajose Vera in Munich. Editor: Stephen Farr

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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