Bloomberg News

Rajaratnam, Goldman Sachs, Brocade, Amaranth in Court News

October 14, 2011

(Updates Stanford in Lawsuit News section and adds Lehman and Nortel in Appeals.)

Oct. 14 (Bloomberg) -- Raj Rajaratnam, the Galleon Group LLC co-founder whom prosecutors called “the modern face of illegal insider trading,” was sentenced to 11 years in prison, one of the longest terms ever for insider trading, though less than half of the maximum sought by the government.

Rajaratnam, 54, is the central figure in what U.S. investigators called the largest hedge fund insider trading case in U.S. history. The probe, which leveraged the widespread use of FBI wiretaps for the first time in such an inquiry, led to convictions of more than two dozen people.

U.S. District Judge Richard Holwell sentenced Rajaratnam yesterday. Holwell, who agreed with prosecutors that Rajaratnam led the scheme and that he obstructed a Securities and Exchange Commission probe, pointed to Rajaratnam’s philanthropy and health in giving him less time than prosecutors had sought. According to filings unsealed yesterday, Rajaratnam suffered a “severe cryptogenic stroke” in 2007, and, also has kidney disease, diabetes, high blood pressure, high cholesterol and sleep apnea.

“This is a lighter sentence than anticipated,” said Anthony Sabino, a professor at St. John’s University in New York, pointing to the U.S. request for as many as 24 1/2 years. Sabino said the judge still sent a message with the 11-year term. “Holwell is clearly achieving a crucial goal here, that is, telling Wall Street that this kind of criminality will not be tolerated, and will be severely punished.”

Holwell denied Rajaratnam’s request to remain free on bail while he appeals his conviction, and told him to surrender on Nov. 28. The judge said he would recommend sending him to the medical center at the federal correctional complex in Butner, North Carolina. Bernard Madoff, the convicted Ponzi scheme mastermind, is serving a 150-year term at the facility.

The judge also ordered Rajaratnam to forfeit $53.8 million and sentenced him to two years of supervised release after his prison term is up. Prosecutors said he made more than $72 million by using illegal tips to trade in stocks of companies including Goldman Sachs Group Inc., Intel Corp., Google Inc., ATI Technologies Inc. and Clearwire Corp.

Rajaratnam said nothing to reporters as he left the courthouse and got into a black sport-utility vehicle.

There is no parole in the federal prison system.

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

For more, click here. To see a list of previous sentences tied to the nationwide insider-trading probe, please click here.

Lawsuit News

Goldman Sachs Investor Lawsuit Over Pay Plan Dismissed

Goldman Sachs Group Inc. persuaded a judge to throw out shareholders’ claims that the investment bank’s compensation system improperly rewarded employees for taking risks that hurt the firm’s stock price.

Delaware Chancery Court Judge Sam Glasscock concluded Oct. 12 that Goldman Sachs’s board acted properly in setting up a pay plan for the fifth-biggest U.S. bank. The judge dismissed a consolidated investor lawsuit claiming the plan wrongly awarded billions of dollars in bonuses to executives and employees, including Chairman Lloyd Blankfein, even as the firm’s market value declined by $50 billion since 1999.

Delaware law “provides corporate directors and officers with broad discretion to act as they find appropriate in the conduct of corporate affairs” and “in the exercise of their business judgment on behalf of the corporation,” Glasscock wrote in a 67-page opinion.

Goldman Sachs, which set a Wall Street pay record in 2007, faced criticism from politicians and labor unions for its compensation practices after getting taxpayer aid during the financial crisis.

Lawyers for the Southeastern Pennsylvania Transportation Authority, the operator of Philadelphia’s bus and rail network and a Goldman Sachs shareholder, argued that the firm’s board should be held accountable for not properly overseeing the compensation system and employees’ wrongful conduct.

Septa’s lawyers said in court filings that Goldman Sachs officials received billions of dollars in pay and bonuses last year, while the firm settled U.S. Securities and Exchange Commission claims that executives misled investors in collateralized debt obligations linked to subprime mortgages.

Goldman Sachs agreed to pay $550 million, the largest penalty ever levied by the SEC against a Wall Street firm, to resolve claims that marketing materials about the investments had “incomplete information.” The bank didn’t admit wrongdoing as part of the accord.

Stephen Cohen, a spokesman for Goldman Sachs, declined to comment on the Delaware ruling.

The Delaware case is In re the Goldman Sachs Group Inc. Shareholder Litigation, CA5215, Delaware Chancery Court (Wilmington).

Stanford Judge Says Receiver May Need to Wind Down Search

R. Allen Stanford’s court-appointed receiver may need to stop searching for a secret “pot of gold” and pay defrauded investors from the assets he has recovered so far, the judge overseeing the case said.

“I’m concerned the receiver is expending resources that could otherwise be distributed to investors trying to track down missing resources,” U.S. District Judge David Godbey said during a court hearing yesterday in Dallas for dozens of Stanford-related civil cases.

Stanford, 61, was sued by the U.S. Securities and Exchange Commission in February 2009 on claims he swindled investors of more than $7 billion through allegedly bogus certificates of deposit at his Antigua-based Stanford International Bank.

“If we knew where it was and were able to go get it, we would’ve,” SEC attorney David Reece told Godbey, referring to Stanford’s missing billions.

“When the U.S. Justice Department has already checked and there’s no pot of gold, then the receiver can stand down,” Godbey told lawyers for the receiver and investors.

Godbey told lawyers in Dallas yesterday he’s concerned that receiver Ralph Janvey is duplicating efforts by U.S. prosecutors, who are also tracking Stanford’s assets overseas. The Justice Department has won administrative freezes on more than $300 million in Stanford-related bank accounts in Switzerland and the U.K. These accounts are beyond Janvey’s control and may represent the receivership’s largest category of recoverable assets, according to court filings.

The Stanford receivership has about $100 million in unrestricted cash on hand, Kevin Sadler, Janvey’s lead lawyer, told Godbey yesterday.

For the latest lawsuits news, click here.

Trials and Appeals

Ex-Brocade Chief Reyes Conviction for Backdating Upheld

Greg Reyes, the former chief executive officer of Brocade Communications Systems Inc., lost a bid to reverse his conviction for backdating employee stock-option grants and hiding the practice from auditors and investors.

The U.S. Court of Appeals in San Francisco yesterday upheld the 18-month prison sentence and $15 million fine imposed after his second criminal trial. Reyes’s first conviction was thrown out by the same appeals court in 2009 because of prosecutorial misconduct.

The three-judge appeals panel said that it found no misconduct in the second trial and that there was sufficient evidence that the backdating was material to investors. Reyes, 49, argued that prosecutors falsely alleged that he granted himself backdated stock options and made other mistakes at trial.

Seth Waxman, Reyes’s attorney, didn’t immediately return a message seeking comment on the ruling.

In 2007, Reyes was the first chief executive convicted by a jury in a broad government crackdown on options backdating. Hiding the backdated stock grants inflated the San Jose, California-based company’s shares because the costs associated with the grants weren’t reported to shareholders or regulators, prosecutors said.

Brocade investors lost as much as $197.8 million in 2005 when they sold shares that had fallen in value after the practice was uncovered and the company restated financial results, prosecutors said in court filings. The company paid a $7 million fine to resolve a U.S. Securities and Exchange Commission lawsuit over backdating and $160 million to settle securities-fraud claims by shareholders.

Reyes was ousted from Brocade, a maker of switches for data-storage systems, in 2005.

The case is U.S. v. Reyes, 10-10323, U.S. Court of Appeals for the Ninth Circuit (San Francisco).

Lehman, Nortel Lose Appeal Over $3.5 Billion Pension Shortfall

The administrators of Lehman Brothers Holdings Inc. and Nortel Networks Corp. lost a bid to overturn a court order forcing them to pay 2.25 billion pounds ($3.5 billion) into underfunded pensions plans.

A London appeals court ruled in favor of the U.K. Pensions Regulator, which is seeking 148 million pounds from Lehman and 2.1 billion pounds from Nortel to meet the shortfall. The case hinged on whether employee pensions take priority over creditors when a company collapses into administration.

“It would be extraordinary if the onset of insolvency were to thwart a process already under way, or even only contemplated, on the part of the Pensions Regulator,” Justice Timothy Lloyd said today.

Lehman filed the largest bankruptcy in U.S. history in September 2008, and the U.K. unit is being liquidated in London. Nortel and affiliates filed for bankruptcy in the U.S. and Canada in January 2009 while its U.K. operations were placed in administration.

In a December ruling appealed by the companies, Judge Michael Briggs said Lehman and Nortel’s administrators would have to find money to ensure they could meet their obligations to a combined 43,000 members of their pension plans.

The ruling is likely to be appealed to the U.K. Supreme Court, said Nick Moser, an insolvency lawyer in the London office of Taylor Wessing LLP.

For the latest trial and appeals news, click here.

Verdicts and Settlements

Pinault’s Artemis to Settle AIG Suit for $62.5 Million

French billionaire Francois Pinault’s holding company Artemis SA agreed to pay American International Group Inc.’s SunAmerica unit $62.5 million to settle a lawsuit over an investment in a California insurer.

AIG Retirement Services, as SunAmerica is now known, and Artemis on Oct. 12 filed a request for U.S. District Judge John Walter in Los Angeles to approve the settlement, The other defendants in the case, Credit Lyonnais SA and MAAF Assurances SA, already settled with AIG.

With the Artemis settlement, AIG’s total recovery from the lawsuit is $236.5 million.

“We’re very pleased to have resolved this matter amicably,” Mark Herr, a spokesman for New York-based AIG, said yesterday in a phone interview. The case was scheduled for trial Oct. 18.

The AIG unit sued a group of French companies including Artemis in 2005, alleging that it was defrauded when it bought a 33 percent stake in New California Holdings Inc. because it didn’t know that the French owners, a group led by MAAF Assurances, were a front for Credit Lyonnais. At the time, the French bank couldn’t own an insurer under U.S. law.

Pinault’s holding company, whose other investments include auction house Christie’s International and retailer and luxury- goods maker PPR SA, is still a defendant in a lawsuit by the California Insurance Commissioner over the company’s role in the Executive Life transactions.

Alan Salpeter, a lawyer representing Artemis, didn’t immediately return calls seeking comment on the AIG settlement.

The case is AIG Retirement Services v. Altus Finance, 05-1035, U.S. District Court, Central District of California (Los Angeles).

Amaranth Reaches Settlement in Natural Gas Class Action

Amaranth Advisors LLC, the hedge fund that collapsed in 2006 after losing $6.6 billion on natural gas trades, tentatively settled a class-action lawsuit in which it was accused of market manipulation.

U.S. District Judge Shira A. Scheindlin in Manhattan said in an order Oct. 5 that the parties in the case had reached an agreement. In August 2009, the Commodity Futures Trading Commission announced that Greenwich, Connecticut-based Amaranth paid $7.5 million to settle allegations that the hedge fund tried to manipulate natural gas futures three years earlier.

In April, the Federal Energy Regulatory Commission issued a $30 million civil penalty against Amaranth trader Brian Hunter, who was accused of manipulating the natural gas market in 2006.

Hunter’s attorney, Michael Kim, didn’t return calls seeking comment. Chris Lovell, an attorney for the plaintiffs at Lovell Stewart Halebian LLP in New York, and Stephen Senderowitz, a lawyer for Amaranth at Winston & Strawn LLP in Chicago, declined to comment. A hearing in the case is scheduled for Nov. 30.

The case is In Re Amaranth Natural Gas Commodities Litigation, 07-06377, U.S. District Court, Southern District of New York (Manhattan.)

For the latest verdict and settlement news, click here.

New Suits

Noven Files Patent Suit Against Watson Over Daytrana Copy

Hisamitsu Pharmaceutical Co.’s Noven Pharmaceuticals unit sued Watson Pharmaceuticals Inc. to prevent it from selling a generic version of Daytrana, a skin patch for children with attention deficit disorder.

Watson is seeking U.S. Food and Drug Administration approval to sell a copy of Daytrana, according to the complaint filed yesterday in federal court in Newark, New Jersey. Miami- based Noven said the Watson version would infringe two patents and seeks a court order to prevent sales until the patents expire in 2018.

Under federal drug law, the filing of the lawsuit prevents the FDA from granting Watson final approval for 30 months unless a court rules in the generic-drug maker’s favor before then.

“We are challenging the patents on the product,” said Charlie Mayr, a spokesman for Parsippany, New Jersey-based Watson, in a phone interview. He declined to comment further.

The case is Noven Pharmaceuticals v. Watson Laboratories, U.S. District Court, District of New Jersey (Newark).

Law Firm News

Clifford Chance Boosts New York Practice With Three Hires

Clifford Chance LLP hired former Nixon Peabody partner Edward O’Callaghan and former prosecutors David Raskin and Christopher Morvillo in New York.

The moves will help Clifford Chance strengthen its white collar criminal defense, regulatory enforcement and government investigations group, the firm said yesterday in a statement.

“It’s a rare occurrence when three litigators the caliber of David, Chris and Ed agree to move from different organizations to form, and join, a terrific team,” David DiBari, head of Clifford Chance’s U.S. Litigation & Dispute Resolution practice, said in the statement.

All three new hires are former federal prosecutors. O’Callaghan, 42, led Nixon Peabody’s government investigations and white-collar defense group. Morvillo, 47, is a partner at the New York white-collar firm Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer and the son of name partner Robert Morvillo. Raskin, 47, joins Clifford from the U.S. Attorney’s Office in Manhattan.

--With assistance from Patricia Hurtado, Bob Van Voris, David Glovin and Asjylyn Loder in New York; Jef Feeley and Phil Milford in Wilmington, Delaware; Sophia Pearson in Philadelphia; David Voreacos in Newark, New Jersey; Susan Decker in Washington; Karen Gullo in San Francisco; Edvard Pettersson in Los Angeles; Laurel Brubaker Calkins in Houston; Andrew Harris in Chicago; and Kit Chellel in London. Editor: Stephen Farr

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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