Bloomberg News

Morgan Stanley, HSBC, AT&T, BNY Mellon, UBS in Court News

December 14, 2011

(Updates WGL in Verdicts section. Adds Morgan Stanley, Transocean and Stanford in Lawsuits and Medtronic in Verdicts.)

Dec. 13 (Bloomberg) -- Morgan Stanley can’t ask a court in Singapore to block shareholders living in that country from suing over their losses on $154.7 million in synthetic collateralized debt obligations, a judge in New York ruled.

U.S. District Judge Leonard Sand yesterday granted a request by a group of investors in the CDOs that he block Morgan Stanley from trying win an order from the High Court of the Republic of Singapore that would prevent them from pursuing the suit in New York.

Several Morgan Stanley units created the scheme to redirect funds into the bank’s own coffers, said investors including the Singapore Government Staff Credit Cooperative Society Ltd. in the complaint.

The investors claim Morgan Stanley didn’t tell them it was a counter-party to the agreements, meaning that for each dollar the investors lost, the bank gained a dollar, according to the complaint filed in October 2010. The plaintiffs seek to represent a class of all investors who bought the notes from Aug. 1, 2006, to the end of 2007.

In October, Sand dismissed some of the investors’ claims and permitted the rest of the case to go forward. One month later, Morgan Stanley asked the Singapore court for an order blocking the investors from pursuing the case.

The case is Dandong v. Pinnacle Performance Ltd., 10- cv-08086, U.S. District Court, Southern District of New York (Manhattan).

HSBC Bank USA Pulls Out of MBIA Restructuring Lawsuits

HSBC Bank USA agreed to withdraw from lawsuits challenging bond insurer MBIA Inc.’s restructuring in 2009, becoming the fifth plaintiff to drop out of the litigation since August.

HSBC’s action against MBIA was discontinued with prejudice, according to a filing yesterday in New York State Supreme Court in Manhattan. No reason was given for the withdrawal. A claim dismissed with prejudice can’t be re-filed.

KBC Investments Cayman Islands V Ltd. withdrew from the suits in August, according to court filings. Credit Agricole Corporate & Investment Bank pulled out in September, Wells Fargo & Co. in October and Royal Bank of Scotland Group Plc in November.

Banks including UBS AG and Bank of America Corp. remain plaintiffs in the suits, according to the filing. The banks said in the suits, filed in 2009, that Armonk, New York-based MBIA’s restructuring might make it unable to pay claims.

“The remaining plaintiffs are fully committed to seeing this litigation through to the end,” Robert J. Giuffra, lead counsel for the banks and a partner at Sullivan & Cromwell LLP in New York, said in a telephone interview.

More banks or other firms disputing MBIA’s restructuring may drop out of the lawsuits by the end of the year, Jay Brown, the bond insurer’s chief executive officer, said last month. Banks have discontinued litigation as MBIA negotiates settlements over the credit-default swaps it sold to the lenders to protect against losses on mortgage securities and other debt.

MBIA said Nov. 10 that it had settled $10.6 billion of transactions since Sept. 30 at an undisclosed cost, bringing the amount of bets terminated this year to $23 billion.

Kevin Brown, a spokesman for MBIA, declined to comment.

The cases are ABN Amro Bank NV v. MBIA Inc., 601475/2009, and ABN Amro Bank NV v. Dinallo, 601846/2009, New York State Supreme Court (Manhattan).

AT&T Judge Grants Motion Delaying T-Mobile Antitrust Trial

The judge presiding over the U.S. challenge to AT&T Inc.’s proposed $39 billion purchase of T-Mobile USA Inc. granted a request by both sides to put the case on hold.

The joint motion, filed yesterday in federal court in Washington, asked U.S. District Judge Ellen Segal Huvelle to “stay” the antitrust case that was scheduled for trial on Feb. 13 and to cancel a hearing scheduled for Dec. 15.

AT&T said that it will file a report Jan. 12 “describing the status of their proposed transaction, including discussion of whether they intend to proceed with the transaction at issue in this litigation, whether they intend to proceed with another transaction, the status of any related proceedings at the Federal Communications Commission, and their anticipated plans and timetable for seeking any necessary approval from the Federal Communications Commission.”

Gina Talamona, a Justice Department spokeswoman, declined to comment on the filing.

“We are actively considering whether and how to revise our current transaction to achieve the necessary regulatory approvals,” Dallas-based AT&T said in an e-mailed statement.

Huvelle scheduled a hearing for Jan. 18.

The case is U.S. v. AT&T Inc., 1:11-cv-01560, U.S. District Court, District of Columbia (Washington).

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Transocean Says It Doesn’t Owe Fines for Below-Surface Spill

Transocean Ltd. said it can’t be forced to pay federal fines or penalties for oil spilled below the surface of the Gulf of Mexico in the Deepwater Horizon incident because of an indemnity contract with BP Plc.

Transocean asked a federal judge in New Orleans to find that the indemnity provision in the drilling contract requires BP to pay virtually all damages and cleanup costs. BP has argued that Transocean’s conduct voided the agreement.

The indemnity provision doesn’t cover liabilities that resulted from willful misconduct, the U.S. Justice Department said last week in asking the court to delay ruling on the indemnity provision. Transocean isn’t asking to be held harmless for such misconduct, the company said in a court filing yesterday.

“The drilling contract does not provide for indemnity in the event of intentional or willful misconduct in excess of gross negligence,” Transocean’s lawyers said. The company’s claim for indemnity for Clean Water Act fines “arises only if Transocean is held liable” for “underwater discharge from the well,” the company said.

Transocean “vehemently denies” it engaged in willful misconduct in the drilling of BP’s Macondo well, which exploded off Louisiana last year, the rig owner said yesterday. The blowout killed 11 workers and sparked the worst offshore oil spill in U.S. history.

More than 350 lawsuits representing thousands of claims by coastal property owners and businesses for oil-spill damages are consolidated before Barbier in New Orleans for pretrial processing. BP and Transocean and other companies involved in the drilling project face billions of dollars in damages claims in these suits.

BP sued Transocean in April to recover a part of more than $40 billion, claiming the drilling contractor shares blame for the disaster. Transocean filed counterclaims against BP accusing the oil company of breaching their contract by failing to defend the rig owner and hold it harmless against all claims.

London-based BP claims Transocean’s conduct voided the indemnity clause. The oil giant contends the drilling company must pay its own share of any damages, which will be determined by a trial set to begin in February.

Wyn Hornbuckle, a spokesman for the U.S. Justice Department, declined to comment on Transocean’s filing. Ellen Moskowitz, a BP spokeswoman, didn’t reply to a voice message or e-mail seeking comment on the filing.

The case is In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, MDL-2179, U.S. District Court, Eastern District of Louisiana (New Orleans).

SEC Asks Court to Compel SIPC to Begin Stanford Liquidation

The U.S. Securities and Exchange Commission asked a federal court in Washington to compel the Securities Investor Protection Corp. to start a liquidation proceeding for alleged fraud victims of R. Allen Stanford.

The SEC sued Stanford in 2009, accusing him of leading a $7 billion investment fraud centered on the sale of certificates of deposit by his Antigua-based Stanford International Bank. Two other Stanford businesses were named as defendants. Indicted by a U.S. grand jury in Houston four months later, the financier maintains he is innocent.

“The liquidation proceeding would provide customers of the Stanford brokerage firm a chance to file claims seeking coverage under a federal law known as the Securities Investor Protection Act,” the SEC said yesterday in a press statement announcing the filing of court papers.

That filing couldn’t be independently confirmed.

SIPC’s central aim is to recover investments for customers of failed brokerages, such as in Bernard Madoff’s multi billion- dollar Ponzi scheme and in the October collapse of MF Global Inc. If that can’t be done, it turns to a fund set up by the Securities Investor Protection Act that pays out as much as $500,000 per investor.

“SIPC is going to defend its statutory program,” its president, Stephen P. Harbeck, said in a telephone interview responding to the filing. “Congress did not give us the authority to protect the victims of the Stanford Antigua bank fraud.”

Harbeck said while the victims of the alleged Ponzi scheme are “very sympathetic people,” the agency’s mandate is limited to protecting cash and securities in the possession of a brokerage firm.

In a separately issued press statement, Harbeck’s agency called the SEC’s position that it should cover investor losses on CDs issued by a bank outside the U.S. “unprecedented.”

The case is Securities and Exchange Commission v. Securities Investor Protection Corp., U.S. District Court, District of Columbia (Washington). The 2009 case is Securities and Exchange Commission v. Stanford International Bank Ltd., 09cv298, U.S. District Court, Northern District of Texas (Dallas).

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For the latest lawsuits news, click here.

New Suits

Bank of New York Mellon Sued for Negligence Over Madoff

Bank of New York Mellon Corp. was sued on behalf of three funds for negligence in connection with the Ponzi scheme run by Bernard L. Madoff.

Bank of New York Mellon and its BNY Alternative Investment Services unit, which served as administrator, sub-administrator and custodian of the Rye funds, acted with “gross negligence” and helped funnel billions of dollars into Madoff’s scheme, according to a complaint filed in New York State Supreme Court on Dec. 9.

Bank of New York Mellon and BNY “turned a blind eye to Madoff’s scam and reaped tens of millions of dollars in fees from the Rye funds, whose assets were entrusted to the BNY defendants and ultimately plundered by Madoff,” according to the complaint, which seeks unspecified compensatory and punitive damages. Tremont Partners Inc. served as the general partner and investment manager for the funds.

Kevin Heine, a spokesman for Bank of New York Mellon in New York, declined to immediately comment on the lawsuit.

The case is Plaintiffs’ State and Securities Law Settlement Class Counsel on Behalf of the State Law Subclass and the Securities Subclass in “In re: Tremont Securities Law, State Law and Insurance Litigation” v. Bank of New York Mellon Corp., 653415/2011, New York State Supreme Court (Manhattan).

SEC Sues Glaxo Unit Over Share Buybacks Before Acquisition

Stiefel Laboratories Inc. and its former chairman were sued by U.S. regulators for buying back stock from employees without disclosing key information, including its acquisition talks with GlaxoSmithKline Plc.

Stiefel Labs, based in Coral Gables, Florida, and former chairman Charles Stiefel defrauded shareholders out of more than $110 million by using low valuations for stock buybacks from November 2006 to April 2009, the Securities and Exchange Commission said in a complaint filed at U.S. District Court in Florida yesterday.

Stiefel Labs announced in April 2009 that London-based GlaxoSmithKline would acquire the firm at a price more than 300 percent higher than the per-share price used in buybacks, the SEC said. The SEC is seeking disgorgement, or repayment, of ill- gotten gains and unspecified fines, which could potentially amount to the value of the gains, said Eric Bustillo, head of the SEC’s regional office in Miami.

“Private companies and their officers must understand that they are not immune from the federal securities laws, which protect all shareholders regardless of whether they bought stock in the open market or earned shares through a company’s stock plan,” Bustillo said in a statement.

A phone call to Holly Skolnick and David Coulson, Stiefel’s attorneys at Greenberg Traurig LLP in Miami, wasn’t immediately returned.

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

Trials

Deutsche Bank Risk Chief Says Breuer Didn’t Ask About Loan

Deutsche Bank AG Chief Risk Officer Hugo Banziger told a German court he doesn’t remember discussing the financial situation at Leo Kirch’s media group before February 2002 with the bank’s then-chief executive Rolf Breuer.

Banziger, who testified yesterday at Breuer’s trial in Munich, said Breuer never asked further questions about Kirch’s situation mentioned in bank memos. While Breuer attended a 2001 meeting where Banziger, chief credit officer at the time, talked about a loan to Kirch, Banziger said the briefing was mainly for the supervisory board rather than executives.

“At that time, I rarely talked to Breuer and we mostly discussed effects of the dot-com bubble,” said Banziger. “I don’t remember that Kirch was an issue during these conversations.”

Kirch, who died in July, was once one of Germany’s biggest media tycoons and pursued civil lawsuits against Breuer and Deutsche Bank seeking at least 3.3 billion euros ($4.4 billion). The lawsuits, which are continuing after Kirch’s death, claim his company failed after Breuer questioned its creditworthiness in a 2002 Bloomberg TV interview.

The criminal trial centers on a 2003 appeals court hearing in one of the Kirch suits where Breuer testified his TV- interview comments were based on public information, not bank data. Breuer said he “had never seen the Kirch credit file” at the bank, nor correspondence with German financial regulators concerning Kirch, according to the indictment.

Prosecutors charged Breuer with attempted fraud, claiming he lied to avoid a conviction and that his initials are on a copy of a regulator’s September 2001 letter asking about risks of the Kirch loan. They also cite the supervisory board briefing by Banziger as evidence Breuer knew details about the loan.

For more, click here.

Ex-UBS Banker to Argue Unauthorized Trading Encouraged

Sachin Karpe, a desk head at UBS AG’s wealth-management unit fired for unauthorized trading in 39 client accounts, will argue the practice was “encouraged” at the bank, a lawyer for the U.K. finance regulator said.

Karpe and Laila Karan, a former client adviser who Karpe oversaw on the Asia-2 desk, are challenging the Financial Services Authority’s attempt to fine them for causing losses of $42.4 million on 21 client accounts through unauthorized trading. A lawyer for the FSA said on the first day of a hearing yesterday that part of Karpe’s defense is that he made foreign exchange trades with clients’ money to minimize customer losses.

“Karpe seems to be saying three things, that he had his clients’ implied consent, that the practice was widespread within UBS, and third, that the practice was encouraged,” Jonathan Crow, the FSA lawyer, told a tribunal in London. “Karpe’s case is simply illogical” and “UBS did not encourage unauthorized trading.”

The case is an instance of risk-management failures at the bank, several years before Kweku Adoboli, a former trader in UBS’s investment bank, was charged with causing $2.3 billion in losses through unauthorized trading. Adoboli, who was charged with fraud and false accounting tied to the loss, may enter a plea at a London criminal court next week.

Karpe’s lawyer, Ian Hargreaves, didn’t respond to an e-mail seeking comment.

Another defendant, Jaspreet Ahuja, has decided to settle with the FSA, Crow said.

“UBS has already acknowledged that there were weaknesses in certain aspects of Wealth Management U.K.’s control environment,” UBS spokesman Oliver Gadney said in a statement. “UBS supports the action being taken by the FSA” against Karpe and Karan.

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Verdicts/Settlements

Medtronic to Pay $23.5 Million to Settle False Claims Case

Medtronic Inc., the world’s largest maker of heart rhythm devices, agreed to pay $23.5 million to resolve allegations that it paid kickbacks to doctors who implanted its pacemakers and defibrillators in patients, the U.S. Justice Department said in a statement.

Medtronic agreed yesterday to settle two lawsuits filed in federal courts in California and Minnesota accusing the company of violating the federal False Claims Act by paying physicians $1,000 to $2,000 for each patient who was implanted with one of the company’s devices, according to the Justice Department.

“Patients who rely on their health-care providers to implant vital medical devices expect that those decisions will be made with the patients’ best interests in mind,” Tony West, assistant attorney general for the Justice Department’s Civil Division, said in an e-mailed statement. “Kickbacks, like those alleged here, distort sound medical judgments with financial incentives paid for by the taxpayers.”

The lawsuits were filed by whistle-blowers who will receive more than $3.96 million from the federal recovery.

The company caused false claims to be submitted to Medicare and Medicaid by using two post-market studies and two device registries as vehicles to pay participating physicians illegal kickbacks to induce them to implant its pacemakers and defibrillators, the Justice Department said in the statement.

Medtronic said in an e-mailed statement that it makes no admissions that the studies were “improper or unlawful.” The company also said it established a reserve for the anticipated payment in the fourth quarter of fiscal year 2011.

“We are happy that the investigation is behind us, so we can continue designing and executing clinical trials that generate evidence to improve patient care, outcomes and cost effectiveness,” Marshall Stanton, vice president of clinical research and reimbursement for the cardiac and vascular group at Minneapolis-based Medtronic, said in the statement.

Imperial Tobacco Wins Appeal of $175 Million Price-Fixing Fine

Imperial Tobacco Group Plc won a U.K. lawsuit overturning 112.3 million ($175.7 million) pounds in fines over an alleged price-fixing cartel for cigarettes with Wal-Mart Stores Inc.’s Asda unit and nine other retailers.

The decision yesterday by the Competition Appeal Tribunal in London was a setback for the Office of Fair Trading, Britain’s antitrust regulator that was forced to abandon some key claims in the case after expert witnesses weakened its evidence halfway through a trial last month. The appeal was filed by Imperial, Asda and four other companies that were fined about 163 million pounds.

“The OFT’s case was deeply flawed, as it was based on a misinterpretation of the law and a misunderstanding of the facts,” Imperial’s lawyer, Euan Burrows of Ashurst LLP, said in a statement. The company “had always rejected the allegation that it had acted anti-competitively.”

The seven-year-old case alleges two manufacturers and 10 retailers fixed prices on cigarettes, hand-rolled tobacco, pipe tobacco and cigars from 2001 to 2003, resulting in fines last year totaling 225 million pounds. J Sainsbury Plc, the U.K.’s third-largest supermarket chain, was a whistle-blower in the investigation and provided evidence of the agreements to the OFT. Half of the companies didn’t appeal.

Kasia Reardon, an OFT spokeswoman, said the agency was disappointed in the ruling and would comment further after considering the judgment.

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WGL Unit to Pay $731,000 to Settle Anacostia Pollution Case

A unit of WGL Holdings Inc. agreed to pay almost $731,000 to settle pollution claims brought by the U.S. and the District of Columbia over the discharge of hazardous materials along the Anacostia River in Washington.

Washington Gas Light Co. will also “excavate and remove” portions of the riverbank containing contaminated soil stemming from the company’s gas plant, which operated for almost 100 years in the area, the U.S. Interior Department said yesterday in an e-mailed statement. The U.S. announced the settlement shortly after it sued the company in federal court in Washington.

“This settlement is a major step forward in restoring this vibrant river, increasing public access, protecting habitat and wildlife, and educating and employing our youth,” Interior Secretary Ken Salazar said in the statement.

The company made gas on the land from 1888 until the mid-1980s, according to the Interior Department statement. Byproducts and waste from the gasification process created hazardous contaminants, including benzene, arsenic, heavy metals, tar, oil, coal, lampblack and coke.

“For decades Washington Gas has voluntarily conducted mitigation actions on the site,” Eric Grant, vice president of corporate relations for Washington Gas, said in an e-mailed statement. “We are glad that the government has entered an agreement for Washington Gas to move forward with the work it has always been prepared to do.”

The case is U.S. v. Washington Gas Light Co., 11-02199, U.S. District Court for the District of Columbia (Washington).

For the latest verdict and settlement news, click here.

Litigation Departments

N.J. Attorney General Dow Will Leave Post for Port Authority

New Jersey Governor Chris Christie said he asked Attorney General Paula Dow to step down to take a temporary regulatory role at the Port Authority of New York and New Jersey, which he accused of “gross mismanagement.”

Christie said Dow will be first deputy general counsel at the agency, which operates the George Washington Bridge and other Hudson River crossings between New Jersey and New York. She will be replaced by chief counsel Jeff Chiesa, Christie, 49, told reporters yesterday during a press conference in Trenton.

The Port Authority, and its former Executive Director Chris Ward, have come under criticism by Christie and New York Governor Andrew Cuomo for spending on overtime and rebuilding of the World Trade Center site. The governors ordered a $2 million independent audit of the agency, which in September raised bridge and tunnel tolls by 56 percent over five years.

The governor said he also will nominate Dow to be an Essex County Superior Court judge after she finishes at the Port Authority. Christie said the nomination is a “peace offering” to Essex County lawmakers who have held up his appointees from that region.

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--With assistance from Bob Van Voris and Chris Dolmetsch in New York; Joshua Gallu in Washington; Lindsay Fortado and Erik Larson in London; Karin Matussek in Munich; Tom Schoenberg, Jesse Hamilton and Sara Forden in Washington; Margaret Cronin Fisk in Southfield, Michigan; Laure Brubaker Calkins in Houston; Andrew Harris in Chicago; and Terrence Dopp in Trenton. Editors: Andrew Dunn, Glenn Holdcraft.

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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