Bloomberg News

Cerberus-Innkeepers, Shell, Madoff, Rajaratnam in Court News

October 11, 2011

(Updates with Teva, mortgage talks in Verdicts and Settlements.)

Oct. 11 (Bloomberg) -- Cerberus Capital Management LP reached a tentative settlement with Innkeepers USA Trust over claims that it breached an agreement to buy the hotel company, according to two people with knowledge of the discussions.

Under the settlement Cerberus and Chatham Lodging Trust will cut the amount they pay for Innkeepers, said the people, who didn’t disclose the new price and asked not to be named because the talks are private. The accord, which culminated a weekend of negotiations, isn’t final and could fall apart, they said. A definitive agreement is subject to approval by the U.S. bankruptcy court judge overseeing Innkeepers’ restructuring.

Cerberus, a New York-based private-equity firm, and Chatham in August terminated their $1.1 billion agreement to buy 64 hotels from Innkeepers, citing a clause that allowed them to back out if there was an adverse change in the lodging company’s business. Innkeepers, which sued to force the buyers to go through with the May 16 deal, would have had to rework its reorganization plan if it lost the case.

“The parties are in negotiations but no settlement has been reached yet,” Marc Beilinson, chief restructuring officer of Palm Beach, Florida-based Innkeepers, said in a statement. Officials at Cerberus and Chatham declined to comment.

A trial on the dispute, scheduled to start yesterday, was adjourned until today, according to court papers. Innkeepers lawyer Paul Basta and Cerberus lawyer Howard Godnick didn’t immediately return calls for comment.

The lawsuit against Cerberus is Innkeepers USA Trust v. Cerberus Four Holdings LLC (In re Innkeepers USA Trust), 11-02557, U.S. Bankruptcy Court, Southern District New York (Manhattan). The Chapter 11 case is In re Innkeepers USA Trust, 10-13800, in the same court.

For more, click here.

Trials and Appeals

Shell Fund Joins Appeal of Madoff Judge’s ‘Feeder’ Ruling

Shell Pension Fund, which runs pension plans for Royal Dutch Shell Plc companies, joined an appeal of a court ruling in the Bernard Madoff case that denied customer status to so-called feeder fund investors.

U.S. Bankruptcy Judge Burton Lifland backed the liquidator of the Madoff’s firm in June, saying investors in feeders can’t file claims for payment with the estate because they didn’t have accounts with the Madoff firm in their own names. More than 50 companies, pension funds and individuals -- from National Bank of Kuwait SAK and Aozora Bank Ltd. to Upstate New York Bakery Drivers & Industry Pension Fund -- appealed the ruling, asking a district judge to decide whether Lifland erred in defining what a customer was.

“The claimants met the statutory definition of ‘customer’ and entrusted their investment funds to the insolvent broker/dealer for investment through intermediaries,” they said in a court filing last week. A copy of Shell’s joinder in the appeal was filed Oct. 7 in U.S. Bankruptcy Court in Manhattan.

Shell Pension Fund had assets of 17.4 billion euros in 2010, according to its website. Shell Pension Fund may have lost about $45 million as a result of its indirect exposure to the Ponzi scheme, Royal Dutch Shell said after Madoff’s 2008 arrest.

The Madoff bankruptcy case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Madoff Trustee Assails Rakoff’s Mets Ruling, Seeks Appeal

The liquidator of Bernard Madoff’s firm assailed a judge’s ruling in a $1 billion lawsuit against the New York Mets owners, saying it “arbitrarily” gave some of Madoff’s investors fictitious profits that “all customers were previously denied” by a higher court ruling.

Trustee Irving Picard made the statements in a filing in U.S. District Court in Manhattan. Picard also asked U.S. District Judge Jed Rakoff to clear the way for an appeal of his ruling.

Rakoff last month cut Picard’s suit against the baseball team’s owners by two-thirds, saying he could try to reclaim only two years of withdrawals from the Ponzi scheme. The ruling, which would allow Fred Wilpon and Saul Katz to keep purported profits resulting from Madoff’s “machinations,” was “in direct contravention” of an appeals court ruling that ruled out account statements as a basis for compensating Madoff investors for losses, Picard said in his Oct. 7 filing.

Rakoff’s decision limiting Picard to two years of withdrawals could cost the trustee about $2.7 billion on all of his clawback suits, Picard has said. Another $3.5 billion of so- called preference payments is “in question” because of another aspect of Rakoff’s ruling, he has said.

In the Oct. 7 filing, Picard asked Rakoff to enter a final judgment in the Mets case so it could be appealed, or to allow an appeal without the final judgment. If Rakoff lets the trustee appeal, the appeals court will decide whether to review the judge’s ruling.

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

For the latest trial and appeals news, click here.

Verdicts, Settlements and Sentences

Teva Must Pay $162.5 Million in Damages over Propofol

A Teva Pharmaceutical Industries Ltd. unit and two other drugmakers must pay $162.5 million in punitive damages for selling the anesthetic Propofol in a way that led three colonoscopy patients to develop Hepatitis C, a jury ruled.

Jurors in state court Las Vegas ordered Teva Parenteral Medicines Inc., Baxter Healthcare Corp. and McKesson Corp. to pay so-called punishment damages over sales of the anesthetic in vials large enough to be reused by doctors. Anne Arnold, Richard Sacks and Anthony Devito contend they contracted Hepatitis C from reused vials during colonoscopy procedures. They had sought more than $700 million in damages.

It’s the second punitive award against Baxter and the unit of Petach Tikva, Israel-based Teva over a 2008 hepatitis outbreak in Nevada tied to Propofol. The first case resulted in a punitive verdict of more than $500 million against the drugmakers. Teva has agreed to cover all damage awards arising from the Nevada cases on behalf of Baxter and McKesson.

“It only took two atomic bombs to force the Japanese to surrender,” Will Kemp, one of the lawyers for the colonoscopy patients, said in a telephone interview yesterday. “We’re hoping Teva will start thinking about settling these cases after being hit with two punitive-damage verdicts of this size.”

Denise Bradley, a U.S.-based spokeswoman for Teva, said they plan to appeal the punitive award to the colonoscopy patients and the jury’s earlier award of $20.1 million in compensatory damages. The combined verdicts make the case the 10th largest jury award in the U.S. this year, according to data compiled by Bloomberg.

“We believe that if we had been able to present our full defense, this verdict and the following decision would have had a different outcome,” Bradley said in an e-mailed statement. “We believe that the allegations against Teva are without merit.”

Deborah Spak, a Baxter spokeswoman, didn’t immediately return calls and e-mails seeking comment on the award.

“McKesson believes that the claims against it lack merit and that the verdicts against it will be reversed,” Megan Hawkins, a McKesson spokeswoman, said in an e-mailed statement.

A separate jury in the same courthouse yesterday also held Teva and Baxter liable for another colonoscopy patient’s hepatitis diagnosis and awarded he and his wife $14 million in compensatory damages. Jurors in that case will decide later this week how much the companies should pay in punitive damages.

Teva makes Propofol and San Francisco-based McKesson Corp. serves as its current U.S. distributor. Baxter, based in Deerfield, Illinois, sold the drug for Teva until 2009, according to court filings.

Teva signed an indemnity agreement accepting financial responsibility for all the Nevada Propofol cases. A judge in Delaware ruled last month that the agreement was “valid and enforceable.”

The drug is an intravenous agent used for sedation or anesthesia, according to Teva’s website. The patients’ lawyers allege Teva intentionally sold Propofol in jumbo-sized vials to encourage doctors to reuse them, even with the risk of spreading blood-borne diseases such as hepatitis, an incurable liver disease.

Attorneys for Teva and the Propofol distributors countered that improperly sanitized medical equipment, not reused Propofol containers, caused some Nevada colonoscopy patients to develop hepatitis and that the drugmakers shouldn’t be held responsible for colonoscopy clinics’ shoddy medical practices.

“Teva should not be held liable for the blatant disregard for patient safety by the medical professionals at their facility,” Bradley said in yesterday’s statement. “While the mistreatment of patients is unacceptable, it was not Teva’s fault.”

The case is Sacks v. Endoscopy Center of Southern Nevada LLC, 08A572315, District Court for Clark County, Nevada (Las Vegas).

For more, click here.

Banks to Face Claims in Foreclosure Settlement, Iowa Says

U.S. banks may still face state securities fraud claims and municipal lawsuits over unpaid mortgage fees under a settlement that is “getting closer,” said the official leading talks for state attorneys general.

Iowa Attorney General Tom Miller said in an interview yesterday that any settlement wouldn’t prevent a growing number of municipalities from suing banks for allegedly cheating them out of millions of dollars in filing fees, or individual states from pursuing securities claims against banks.

State attorneys general and federal officials have been negotiating a settlement with the largest mortgage servicers, including Bank of America Corp. and JPMorgan Chase & Co. Officials are seeking an agreement that would fund loan modifications for homeowners and set requirements for how the banks conduct foreclosures.

“We’re getting closer to resolving it,” Miller said. “We still have issues that could frustrate the agreement, but we’re getting closer.”

Mark Rodgers, a spokesman for Citigroup Inc., one of the five banks involved in the talks, declined to comment. Gina Proia, a spokeswoman for Ally Financial Inc., also declined to comment.

Representatives of the three other banks -- Bank of America, JPMorgan and Wells Fargo & Co. -- couldn’t immediately be reached for comment.

Several attorneys general, including New York’s Eric Schneiderman, Delaware’s Beau Biden, and Massachusetts Attorney General Martha Coakley, have raised concerns about the scope of the liability releases that would be given to the banks as part of any deal.

They have said the banks shouldn’t receive releases for matters that haven’t been fully investigated, including the packaging of mortgage loans into securities and the use of a mortgage database known as MERS.

California Attorney General Kamala Harris said Sept. 30 that she was rejecting a proposed settlement with the banks and would conduct her own mortgage investigation because the state “was being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated.”

For more, click here.

Rajaratnam May Get Quarter Century Term Under Guidelines

Galleon Group LLC’s Raj Rajaratnam faces a federal judge this week who will weigh wildly divergent portraits of the disgraced hedge fund manager while interpreting guidelines that may call for one of the longest insider trading sentences in U.S. history.

Prosecutors paint Rajaratnam as a “serial insider trader” who corrupted friends and business associates to illegally make profits or avoid losses totaling $72 million. Defense lawyers say Rajaratnam is a generous man who committed victimless crimes. A prison stretch would kill him, they claim.

U.S. District Judge Richard Holwell in Manhattan, who will sentence Rajaratnam Oct. 13, presided over the jury trial in which the fund manager was convicted of running the biggest insider trading ring in a generation. The judge will consult nonbinding sentencing guidelines that sometimes recommend longer terms for white-collar criminals than some violent offenders.

“The sentence called for by the guidelines is likely to be excessive,” said Barry Boss, a partner in the Washington office of Cozen O’Connor and co-chairman of the American Bar Association’s Criminal Justice Section Sentencing Committee.

Rajaratnam, 54, was convicted in May of 14 counts of securities fraud and conspiracy. Prosecutors asked Holwell to give him a prison sentence of 19 1/2 to 24 1/2 years, which they said is within the guidelines. The defense, claiming Rajaratnam’s actions made him only $7.4 million, argued for a guideline calculation that would call for a sentence of 6 1/2 to 8 years, according to a person familiar with the defense case who spoke on condition of anonymity. Defense lawyer John Dowd declined to comment on the range.

There is no parole under the federal prison system.

The case is U.S. v. Rajaratnam, 09-01184, U.S. District Court, Southern District of New York (Manhattan).

For more, click here. To see a description of Galleon Group-related defendants who have already been sentenced in the U.S. probe, click here.

For the latest verdict and settlement news, click here.

Lawsuit News

Geronzi Indicted on Charges Connected to Parmalat’s Collapse

Former Capitalia SpA Chairman Cesare Geronzi must stand trial on charges of fraudulent bankruptcy and extortion in connection with Parmalat SpA’s collapse.

Ennio Amodio, Geronzi’s lawyer, said the indictment violates the banker’s rights because he faced similar charges in the bankruptcy case of foodmaker Cirio Finanziaria SpA. Amodio, speaking in a telephone interview, said his client hadn’t committed any wrongdoing.

Prosecutors are investigating the role played by Geronzi in Parmalat’s purchase of dairy company Eurolat from Cirio. In July a judge sentenced him to a four-year jail term for his role in the bankruptcy of Cirio. Geronzi appealed the sentence.

The Rome judge’s decision to indict Geronzi was earlier reported by newswire Ansa and confirmed by Amodio.

Brown University Told to Show Fundraiser Record in Rape Case

Brown University was ordered by a federal judge to produce fundraising documents from an alumnus whose daughter accused a fellow student of rape.

U.S. District Judge John McConnell in Providence, Rhode Island, granted a request by William McCormick III, who was accused of rape in a school internal investigation, and his parents to compel the university to produce the records of the father of the alleged victim, within 14 days, according to an order dated Oct. 7.

The McCormicks sued Brown, the student who said she was raped, and her father in October 2009, claiming that the university falsely accused McCormick of sexual assault. In an amended complaint filed in December 2009, the McCormicks said that the family of the victim had libeled their son and caused him to be expelled from the college.

The father is “an alumnus of Brown and has raised very substantial sums of money for Brown,” the McCormicks said in the complaint.

Marisa Quinn, a spokeswoman for Brown, didn’t immediately respond to a phone message seeking comment on the order.

McCormick, whose family lives in Waukesha, Wisconsin, was a nationally ranked wrestler in high school, according to court papers. He was awarded a scholarship to Brown, enrolled in September 2006 and was sent home two weeks later, court records show. A court filing states that he agreed to give up his education and scholarship “under duress and under the implied threat of false criminal rape charges.”

No criminal complaint was filed in the alleged incident.

For the latest lawsuits news, click here.

New Suits

Ecuador Seeks $504 Million From ConocoPhillips in Dispute

Ecuador said it’s suing a ConocoPhillips subsidiary for $504 million as part of a dispute over alleged environmental damage caused by the company’s oil operations in the South American country.

Ecuador wants $488 million to clean up areas in the Amazon region where subsidiary Burlington Resources Oriente Ltd. operated and an additional $16 million to repair drilling infrastructure, the Attorney General said today in an e-mailed statement. The agency filed its lawsuit against the company on Sept. 30.

The lawsuit against Burlington is part of an arbitration case at the World Bank’s International Centre for Settlement of Investment Disputes after Ecuador seized the company’s oil fields over a tax dispute in 2009. Burlington was a minority partner with France’s Perenco SA in the Block 21 and Block 7 concession areas in the northeast.

Ecuador “presented countersuits for environmental damage caused by the U.S. company as well as for the poor state of the infrastructure,” the Attorney General’s Office said. The nation wants the court “to declare Burlington responsible and order them to pay the damages in their entirety.”

ConocoPhillips’s press office in Houston didn’t immediately respond to a telephone message seeking comment. Calls to Burlington’s offices in Quito went unanswered.

The arbitration court is expected to make a final ruling on the case in 2013, the Attorney General’s Office said.

--With assistance from Cristina Alesci, Patricia Hurtado, Don Jeffrey, Tiffany Kary, David McLaughlin; Linda Sandler and Bob Van Voris in New York; Jef Feeley in Wilmington, Delaware; Liz Benston in Las Vegas; Margaret Cronin Fisk in Southfield, Michigan; Sonia Sirletti in Milan; and Nathan Gill in Quito, Ecuador. Editor: 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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