Bloomberg News

Freddie Mac, Barclays, BP, Citigroup, UBS in Court News

December 20, 2011

(Updates with Martin Marietta in Lawsuits section; Citigroup in Trials; Microsoft in Verdicts; El Paso County, Texas, judge in Court News.)

Dec. 19 (Bloomberg) -- Daniel Mudd, the former chief executive officer of Fannie Mae, and Richard Syron, ex-CEO of Freddie Mac, were sued by the U.S. Securities and Exchange Commission for understating by hundreds of billions of dollars the subprime loans held by the firms.

The lawsuits filed Dec. 16 in Manhattan federal court were followed by an SEC statement that it had entered into “non- prosecution agreements” with each company. Fannie Mae, the government-sponsored enterprise which issues almost half of all mortgage-backed securities, and Freddie Mac, the McLean, Virginia-based mortgage-finance company, had “agreed to accept responsibility” for their conduct, the SEC said.

The agency said in the lawsuits that Syron, Mudd and other executives understated exposure to subprime mortgage loans. From 2007 to 2008, Freddie Mac executives said the company’s exposure was from $2 billion to $6 billion when it was actually as high as $244 billion, according to one SEC complaint.

From 2006 to 2008, Washington-based Fannie Mae executives said the firm’s exposure to subprime mortgage and reduced- documentation loans was about $4.8 billion when it was almost 10 times greater, according to the regulator.

In the individual lawsuits, the SEC is seeking financial penalties, disgorgement and bars on them serving as officers or directors in other companies.

Also named as defendants are Patricia Cook, Freddie Mac’s former executive vice president; Donald Bisenius, ex-senior vice president at Freddie Mac; Enrico Dallavecchia, who was chief risk officer for Fannie Mae; and Thomas Lund, Fannie’s Mae’s former executive vice president.

Mudd, now CEO of Fortress Investment Group LLC, was ousted when Fannie Mae and Freddie Mac were seized by regulators in September 2008. In a statement, he said the federal government and investors were aware of “every piece of material data about loans held by Fannie Mae.”

“The government reviewed and approved the company’s disclosures during my tenure, and through the present,” Mudd said Dec. 16 in the statement. “Now it appears that the government has negotiated a deal to hold the government, and government-appointed executives who have signed the same disclosures since my departure, blameless -- so that it can sue individuals it fired years ago.”

Tom Green, Syron’s attorney at Sidley Austin LLP in Washington, said there was “no uniform definition” of “subprime” in 2007 and that Freddie Mac included in its disclosures tables detailing credit risks. “There was no shortage of meaningful disclosures,” he said in a statement.

Michael Levy, Lund’s attorney at Bingham McCutchen LLP in Washington, said his client “did not mislead anyone. During a period of unprecedented disruption in the housing market, nobody worked more diligently or honestly to serve the best interests of both investors and homeowners.”

Dallavecchia is now chief risk officer at PNC Financial Services Group. A phone call to Laurie Miller, his attorney at Nixon Peabody LLP, wasn’t immediately returned.

The cases are SEC v. Syron, 11-cv-09201, and SEC v. Mudd, 11-cv-09202, U.S. District Court for the Southern District of New York (Manhattan).

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Barclays, Bank of New York Sued by U.S. Bank Over Collateral

Barclays Plc, Bank of New York Mellon Corp. and MBIA Inc. were sued by U.S. Bank NA over control of $2.27 million in escrowed collateral.

U.S. Bank, based in Cincinnati, wants a judge to order the defendants to resolve their disputes over the money between themselves and to prohibit them from suing U.S. Bank over it, according to a complaint filed Dec. 15 in federal court in Manhattan.

Unless the dispute is resolved, “U.S. Bank will have to continue to hold the escrowed funds,” though it has “no interest” in the money except for legal fees, the bank said in the complaint.

Barclays, based in London, and BNY Mellon are holders of notes secured by collateral consisting of bundled commercial mortgage loans and other assets, according to court papers.

Also named in the lawsuit is Angelo, Gordon & Co. of New York, a collateral manager under a 2007 agreement, according to court papers.

Brandon Ashcraft, a Barclays spokesman; Kevin Heine, a BNY Mellon spokesman; and Kevin Brown, a spokesman for Armonk, New York-based MBIA, declined to comment on the complaint.

The case is U.S. Bank v. Barclays, 11CV9199, U.S. District Court, Southern District of New York (Manhattan).

Nevada Sues Lender Processing Services Claiming Robo-Signing

Nevada Attorney General Catherine Cortez Masto sued Lender Processing Services Inc., alleging the company falsified foreclosure documents and demanded kickbacks for referrals.

The company, based in Jacksonville, Florida, engaged in the practice known as robo-signing, requiring employees to execute or notarize up to 4,000 foreclosure-related documents a day, Masto said Dec. 16 in a statement. She sued Dec. 15 in state court in Las Vegas.

Lender Processing Services “engaged in a pattern and practice of deceptive conduct that willfully misled consumers, courts and the public, resulting in countless foreclosures that were predicated upon false, deceptive and deficient documents that LPS prepared and/or executed,” the attorney general said in the complaint.

The company “strongly disputes the allegations,” Michelle Kersch, a Lender Processing Services spokeswoman, said in an e- mail. “LPS has cooperated with the attorney general’s office for more than 14 months to resolve its inquiry in a manner which would benefit the citizens of Nevada.”

The case is State of Nevada v. Lender Processing Services Inc., A-11-653289-B, District Court, Clark County, Nevada (Las Vegas).

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

Lawsuits/Pretrial

Martin Marietta Says Proposed Vulcan Takeover Mischaracterized

Martin Marietta Materials Inc. said its position on a potential takeover of Vulcan Materials Co. was “seriously” mischaracterized in court papers filed by Vulcan.

In a letter to Vulcan’s board Dec. 17, Martin Marietta said the proposed combination is a “compelling value-enhancing opportunity.” It made the letter public in a statement sent through Business Wire.

Martin Marietta announced a hostile takeover for Vulcan in an all-stock transaction valued on Dec. 12 at about $4.7 billion. The offer is being made directly to investors after Vulcan, the largest U.S. producer of crushed stone, broke off talks on a combination, Martin Marietta has said.

“Statements in Vulcan’s New Jersey court papers that our proposal is an attempt ‘to snatch Vulcan for the lowest possible price,” are “simply inaccurate,” Martin Marietta Chief Executive Officer Ward Nye wrote in the letter.

Vulcan said in a court filing Dec. 17 in state court in New Jersey that Martin Marietta’s lawsuit is “so palpably deficient that the court should dismiss it.”

Martin Marietta is seeking a court order declaring that only a simple majority vote is required to approve a merger, according to Vulcan’s filing.

Douglas Eakeley, a lawyer for Vulcan, confirmed the filing by the company. The filing couldn’t be independently confirmed with the court.

Nye, in his letter, said he was concerned the papers imply the transaction has been rejected, even though Vulcan’s board hasn’t publicly stated its position on the proposal. Vulcan said in a Dec. 12 statement that its board is reviewing the offer and will make a recommendation to shareholders within 10 working days.

Mark Semer, a spokesman for Martin Marietta at Kekst & Co. in New York, didn’t return a voice-mail message seeking comment on the filing and statement. Meghan Stafford, a spokeswoman for Vulcan, declined to comment.

The case is Martin Marietta Materials Inc. v. Vulcan Materials Co., C-83-11, Superior Court of New Jersey, Chancery Division, Mercer County.

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Transocean Asks Judge to Force BP to Indemnify Spill Damages

Transocean Ltd.’s drilling contract with BP Plc promised indemnification for damages from oil spilled below the surface of the Gulf of Mexico and should be enforced for claims over the Deepwater Horizon accident, the rig owner told a judge.

Claiming the drilling contractor shares blame for the disaster, London-based BP sued Transocean in April to recover part of more than $40 billion in damages and costs from the 2010 spill. Transocean accused BP of breaching their contract by failing to defend the rig owner and hold it harmless against claims.

“What Transocean seeks is to hold BP to its promise,” John M. Elsley, a lawyer for Transocean, told U.S. District Judge Carl Barbier at a hearing in New Orleans federal court Dec. 16. “BP does not want that to happen.”

BP has argued that Transocean’s conduct voided the agreement. Transocean, based in Vernier, Switzerland, denies willful misconduct and claims the indemnity provision requires BP to pay virtually all damages and cleanup costs because it was a subsurface spill.

“The court must rule Transocean cannot be indemnified if there is gross negligence,” Andrew Langan, a lawyer for BP, told the judge Dec. 16. “The drilling contract does not, cannot provide for indemnification from damages,” Langan said. “We think maritime law prohibits indemnification for gross negligence, regardless.”

Barbier didn’t rule on the issue Dec. 16 and said he would take it “under advisement.”

The April 2010 Macondo well blowout and the explosion that followed killed 11 workers and set off the worst offshore oil spill in U.S. history. The sinking of Transocean’s Deepwater Horizon drilling rig and spill led to hundreds of lawsuits against BP and its partners and contractors.

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).

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Ex-Bank, Soccer Executive Fights ‘Political’ Warrant

Former Bankas Snoras AB owners Vladimir Antonov and Raimondas Baranauskas told a U.K. judge that Lithuania’s bid to extradite them over claims of fraud and embezzlement is a politically motivated campaign of revenge.

Allegations the men pushed the bank into insolvency are reminiscent of tactics allegedly used by Russia’s leaders to seize assets of political foes, Antonov’s lawyer, James Lewis, said at the hearing Dec. 16. Lithuania seized the bank and issued arrest warrants last month after Antonov’s media company published articles critical of the government, Lewis said.

“The very same methods that were used in Russia were used by this former Soviet satellite in the very same manner,” Lewis said at the hearing. “Everything will be revealed.”

Antonov, 36, and Baranauskas, 53, were arrested on Nov. 24 in London after Lithuanian authorities issued European arrest warrants. The men denied claims they stole about 879 million litas ($331.8 million) by forging documents to show false deposits in unspecified Swiss banks. Authorities are trying to trace the whereabouts of more than $1.6 billion missing from Antonov’s banks in Lithuania and Latvia.

Judge John Zani denied Dec. 16 the men’s requests to ease their bail requirements. He scheduled a preliminary hearing on the matter for Jan. 30 and a full claims hearing for May.

“This is a political case; we are going to prove it,” Antonov said after the hearing.

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Trials

Citigroup Suit Should Be Put on Hold During Appeal, SEC Says

The U.S. Securities and Exchange Commission asked to put on hold its case against Citigroup Inc. over mortgage-backed securities while the agency appeals a federal judge’s rejection of a $285 million settlement.

The appeal, filed in the U.S. Court of Appeals in New York, challenged U.S. District Judge Jed Rakoff’s refusal last month to approve an accord resolving claims that Citigroup misled investors in a $1 billion financial product linked to risky mortgages.

Rakoff criticized the agency’s practice of settling without requiring the subject of the allegations to admit wrongdoing. The Manhattan judge said the Citigroup settlement didn’t provide him with “any proven or admitted facts” to inform his judgment. The SEC said it wanted to preserve agency resources by putting the case on hold while the appeals court considers Rakoff’s ruling.

“In addition, if this action is not stayed, the commission may lose permanently the benefits of the proposed settlement and be forced to incur the risks and costs of this litigation avoided by the proposed consent judgment,” the SEC said in court papers filed Dec. 16.

SEC Enforcement Director Robert Khuzami said in a Dec. 15 statement announcing the appeal that the judge’s decision “is at odds with decades of court decisions that have upheld similar settlements.”

Danielle Romero-Apsilos, a Citigroup spokeswoman, said Dec. 16 in a statement that the New York-based bank disagrees with the court’s rejection of the settlement. The agreement “fully complies with long-established legal standards,” she said.

The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11-cv-07387, U.S. District Court, Southern District of New York (Manhattan).

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Penn State Officials to Face Perjury Trial in Sandusky Case

Pennsylvania State University’s athletic director and a former school vice president must face trial on charges of lying about their knowledge of a 2002 sex-abuse allegation against former assistant football coach Jerry Sandusky, a judge ruled.

Magisterial District Judge William Wenner in Harrisburg, Pennsylvania, ordered Dec. 16 Athletic Director Timothy Curley and Gary Schultz, the former vice president, to go on trial for perjury and failing to report that a member of the football program told them he saw Sandusky sexually molesting a boy. Both men, who deny wrongdoing, remain free on bail.

Wenner ruled after hearing testimony from Penn State assistant football coach, Mike McQueary, and from the former head of the campus police and McQueary’s father.

McQueary testified that he told Curley and Schultz he had seen Sandusky sexually molesting what appeared to be a 10-year- old boy in a locker room shower on campus in March 2002.

“There is no question in my mind that I conveyed to them that I saw Jerry with a boy in the showers and that it was severe sexual acts going on and that it was wrong and over the line,” McQueary, 37, told the court Dec. 16.

Neither Curley nor Schultz, who oversaw university police, reported the incident to law enforcement or attempted to learn the identity of the boy, identified in the grand jury report as Victim 2.

Curley, 57, and Schultz, 62, denied that McQueary told them about witnessing anal sex, according to the grand jury report. Curley testified to the grand jury in January that McQueary told him about conduct termed as “horsing around.”

Schultz testified that McQueary reported “disturbing” or “inappropriate” conduct. Schultz was initially unsure about what he remembered McQueary told him and later conceded the report was of inappropriate sexual conduct, according to court documents.

Sandusky, 67, has been charged with more than 40 counts stemming from the alleged sexual abuse of 10 boys. He waived his preliminary hearing this week and prosecutors said his case will proceed to trial. Sandusky, under home confinement on $250,000 bail, denies the charges.

The cases are Commonwealth of Pennsylvania v. Curley, MJ12303-cr-0000353-2011, and Commonwealth of Pennsylvania v. Schultz, MJ12303-cr-0000354-2011, Magisterial District Judge 12- 3-03, Dauphin County (Harrisburg).

CDR Financial’s Rubin Asks Appeals Court for Delay of Trial

CDR Financial Products Inc.’s David Rubin asked an appeals court to delay a trial scheduled for next month because of his wife’s terminal illness, after a lower-court judge rejected the request.

U.S. District Judge Victor Marrero in New York last week denied Rubin’s request for a postponement in the trial, which is to take two months starting Jan. 9. Marrero also denied a request that Rubin be tried separately from two codefendants.

Rubin, the founder of Beverly Hills, California-based CDR, and two other employees are charged along with the company as part of an investigation into bid- and auction-rigging in the municipal bond market. Rubin, the firm’s former chief financial officer, took kickbacks for running sham auctions for the investments, prosecutors said. All pleaded not guilty.

“The trial continuance sought by this petition arises from an impending family tragedy that will have an inevitable but very unfortunate end,” Rubin’s lawyer, Bradley Simon, said Dec. 16 in a petition to the Manhattan-based Court of Appeals.

Rubin, who lives in California, says his wife is in the final stages of aggressive pancreatic cancer. The couple have seven children, the youngest 2 1/2, he said.

“Some reasonable continuance is appropriate,” the defense lawyer said. “Mr. Rubin plainly cannot abandon his wife and family for two months at this critical time.”

The case is U.S. v. Rubin, 1:09-cr-01058, U.S. District Court, Southern District of New York (Manhattan).

For the latest trial and appeals news, click here.

Verdicts/Settlements

Novell-Microsoft Trial Over WordPerfect Ends as Jurors Deadlock

Novell Inc.’s antitrust lawsuit against Microsoft Corp. over the WordPerfect computer program ended in a mistrial after jurors said they were unable to reach a unanimous verdict.

Jurors in federal court in Salt Lake City told the judge Dec. 16 that they were deadlocked after deliberating for three days. After talking to the 12-member panel, U.S. District Judge J. Frederick Motz dismissed the jurors, some of whom were in tears. The trial began Oct. 18.

Novell sought as much as $1.3 billion in damages over allegations that Microsoft, while developing the Windows 95 operating system in 1994, blocked an element of the software to thwart Novell’s WordPerfect and Quattro Pro programs.

Novell will probably seek a retrial, said Jim Lundberg, an attorney for the company, who said the jury vote was 11-1 against Microsoft.

“We are hoping that in retrial, although it is technically complicated, that we can convince a jury that Novell’s claims are valid,” he said in an interview.

Steve Aeschbacher, a lawyer for Microsoft, said in an interview the company will probably renew its bid to have the case dismissed for “legal deficiency,” citing flawed antitrust theories.

“We are disappointed,” Jim Jardine, another attorney for Microsoft, said in an interview. “We hoped to get a verdict. But we are confident. This jury was a very diligent jury, and there are other steps that we can do to move forward.”

Five jurors contacted by Microsoft after they were dismissed said they would not have awarded damages to Novell, Tim Brown, a spokesman for Microsoft, said in an e-mail.

“There was one juror that had difficulty,” Jeffrey Johnson, a lawyer for Novell, said after the mistrial. “He had strongly held views and he wasn’t going to budge.”

The case is Novell Inc. v. Microsoft Corp., 04-01045, U.S. District Court, District of Utah (Salt Lake City).

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Cameron to Pay BP $250 Million in Gulf Oil Spill Settlement

Cameron International Corp., the maker of the blowout preventer on BP Plc’s Macondo well that caused the worst offshore U.S. oil spill, will pay $250 million to settle all claims in the accident.

BP will fully indemnify Cameron against all damage claims, though not for fines or penalties, the companies said in separate statements Dec. 16. London-based BP will apply the money to the $20 billion fund for spill victims that it set up last year, the company said.

Cameron, based in Houston, is the fourth company to reach a settlement with BP over the spill. Cement contractor Halliburton Co. and Transocean Ltd., owner of the Deepwater Horizon rig that burned and sank, have yet to agree on a payout ahead of the Feb. 27 New Orleans trial that will determine liability for the disaster.

“Today’s settlement allows BP and Cameron to put our legal issues behind us and move forward to improve safety in the drilling industry,” BP Chief Executive Officer Bob Dudley said in a statement.

The Macondo accident killed 11 workers and triggered a spill that the government says gushed almost 5 million barrels of oil into the Gulf of Mexico. It led to hundreds of lawsuits against BP and its partners and contractors, including multiple claims brought by vessel captains, residents and others exposed to chemicals and oil during the cleanup.

“This agreement with BP is the right action, as it removes uncertainty facing Cameron in the litigation associated with the Deepwater Horizon event,” Cameron CEO Jack Moore said in the statement. Cameron expects insurers to fund at least $170 million of the settlement and it will take a charge for the rest in the fourth quarter.

McCormick & Schmick’s Settles Lawsuits Over Landry’s Offer

McCormick & Schmick’s Seafood Restaurants Inc. moved a step closer to being acquired by Landry’s Inc. by settling shareholder lawsuits over the $131.6 million takeover.

Under the settlement, which requires approval from Delaware Chancery Court Judge J. Travis Laster, investors will get more information about the process leading to the $8.75-a-share deal and the investors’ lawyers will negotiate a fee award with the companies, according to court documents filed Dec.16.

The settlement “shall not be deemed a presumption, concession or admission by any defendant of any fault, liability or wrongdoing,” McCormick said in the filing.

Matthew Sherman, a spokesman for McCormick, didn’t return an e-mail seeking comment on the settlement.

The settlement was reached before a hearing scheduled in Wilmington Dec. 16 where shareholders who sued seeking a better price from Landry’s planned to ask Laster to issue an injunction to block the sale.

The case is In Re McCormick & Schmick’s Shareholder Litigation, CA7058, Delaware Chancery Court (Wilmington).

For the latest verdict and settlement news, click here.

Litigation Departments

Ex-UBS Trader Fires Lawyers in Unauthorized Trading Case

Former UBS AG trader Kweku Adoboli dismissed the lawyers defending him over allegations he caused the Swiss bank $2.3 billion in losses from unauthorized trading and hired London law firm Bark & Co.

Adoboli, 31, is no longer using Kingsley Napley in London to advise him in the case, Melanie Riley, a spokeswoman for the firm, said Dec.16. Tim Harris of Bark & Co. is now representing him, a receptionist at the London law firm said.

Adoboli is scheduled to appear in court next week to enter a plea in the case. He was granted a four-week adjournment last month, when he was initially scheduled to enter a plea at a London criminal court.

His legal team said at the hearing last month they needed more time to gain “a better understanding of exactly what it was that preceded the calamitous losses.”

Adoboli has been in custody since Sept. 15 when UBS asked London police to arrest him on suspicion of causing the loss from unauthorized trading. He is being held at Wandsworth prison in southwest London.

The former trader, who holds a Ghanaian passport, is charged with fraud and false accounting dating back to 2008. Prosecutors have said he falsified records on exchange-traded- fund transactions. UBS said the loss came from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures. The trades’ risk was masked by fictitious positions, according to the bank.

Adoboli has said through his lawyers he was “sorry beyond words” for “his disastrous miscalculations.”

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For the latest litigation department news, click here.

Court News

Ex-El Paso County, Texas, Judge Charged With Taking Bribes

A former Texas judge was accused by the U.S. of taking bribes in 2007 in exchange for his vote to refinance about $40 million in El Paso County debt and replace a county financial adviser.

The ex-judge, Antonio Guillermo Cobos, 44, was charged with three counts of conspiracy and fraud, Robert Pitman, the U.S. attorney in San Antonio, said Dec.16 in a statement. If convicted, Cobos faces as long as 20 years in prison on each of the counts, according to Pitman.

“The citizens of El Paso County expect, and are entitled, to have their elected representatives make decisions on the basis of the merits of what they are voting on, not whether or how they can personally benefit,” Pitman said in the statement.

Daryl Fields, a spokesman for Pitman, couldn’t provide the name of Cobos’s lawyer.

The indictment of Cobos and a co-defendant was the eighth one in a Federal Bureau of Investigation probe that began in 2004, according to the statement.

The case is U.S. v. Cobos, 11-3019, U.S. District Court, Western District of Texas (El Paso).

--With assistance from David Glovin and Patricia Hurtado in New York; Joshua Gallu and Dan Hart in Washington; Lindsay Fortado, Brian Swint and Erik Larson in London; Phil Milford in Wilmington, Delaware; Margaret Cronin Fisk in Detroit; Allen Johnson Jr. in New Orleans; Sophia Pearson in Harrisburg, Pennsylvania; Joel Rosenblatt in San Francisco, Shelley Osterloh in Salt Lake City; Edvard Pettersson in Los Angeles; Thomas Black in Dallas; and Milda Seputyte in Vilnius. Editor: Fred Strasser

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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