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(Adds Expert Networker in top section, Madoff in Lawsuits, Legal & General Investment in New Suits, Stanford in Trials and R.J. Reynolds in Verdicts.)
Feb. 17 (Bloomberg) -- John Kinnucan, the Broadband Research LLC founder who said he refused to secretly record a money manager in a U.S. probe of insider trading, was arrested in Portland, Oregon, the FBI said.
Federal Bureau of Investigation agents arrested Kinnucan at his home yesterday, Elizabeth Steele, an FBI spokeswoman in Portland, said in an e-mail. Steele said Kinnucan was in the Multnomah County Jail awaiting his initial appearance today before a federal judge.
“There is no further information that I can give to you at this point,” she said.
Peter Donald, a spokesman in the FBI’s New York office, said he expected Kinnucan to be arraigned today in Portland and eventually be brought to New York to face prosecution. He said the charges are under seal and he couldn’t discuss the case further.
At least 10 agents wearing FBI jackets arrived at Kinnucan’s home at 4:19 p.m. yesterday, said a neighbor, who saw the arrest and didn’t want to be identified because she knows the family. Kinnucan, wearing a T-shirt and blue jeans and with his arms handcuffed behind his back, was led away from his house minutes later by the agents, the neighbor said.
Federal prosecutors in New York previously disclosed in court papers that they had a court-authorized wiretap on Kinnucan’s mobile phone.
Kinnucan, 54, whose public refusal of an FBI request to wear a wire presaged a dozen insider-trading arrests, said in a July 8 interview that he expected to be arrested.
“Am I a target? Yeah, absolutely,” Kinnucan said in the interview. “There’s a saying that the government indicts who they investigate, so I have always assumed that I was a target.”
Kinnucan, who ran the expert networking firm, denied he ever received illegal tips on companies, and insisted the kind of information he provided hedge fund clients was publicly available.
Kinnucan’s calls were recorded in talks with Donald Longueuil, a former SAC portfolio manager, and Level Global Investors LP co-founder Anthony Chiasson, said prosecutors in the office of Manhattan U.S. Attorney Preet Bharara.
Longueuil was sentenced in July to 2 1/2 years in prison for his role in an insider-trading scheme. Chiasson pleaded not guilty Feb. 14 to conspiracy and securities-fraud charges in federal court in Manhattan.
The probe is the biggest insider-trading investigation in a generation, one that has implicated hedge funds, technology firms and expert networking firms such as Broadband Research.
More than 60 people have been charged with insider trading in the five-year probe called “Perfect Hedge” by the FBI in New York and by Bharara’s office.
Nathaniel Burney, a New York lawyer who has represented Kinnucan, said in a phone interview this week that he is no longer his defense lawyer. The identity of Kinnucan’s current attorney couldn’t immediately be determined.
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Madoff Trustee May Struggle to Undo HSBC Ruling, Lawyers Say
The liquidator of Bernard Madoff’s firm asked an appeals court to reinstate $30 billion of his claims against banks including HSBC Holdings Plc and JPMorgan Chase & Co.
Madoff trustee Irving Picard filed arguments in a federal appeals court in New York on why district judges Jed Rakoff and Colleen McMahon were wrong in barring him from demanding damages from the banks, which include UBS AG and UniCredit SpA. He is challenging two similar rulings made on “solid legal ground,” said Peter Henning, a former Securities and Exchange Commission lawyer who teaches at Wayne State University in Detroit.
Rakoff in July threw out almost $9 billion in damages that Picard demanded from HSBC and feeder funds, saying the trustee can’t sue on behalf of customers, using common-law claims against parties who had an alleged duty to detect Madoff’s fraud. Picard demanded $19 billion in damages from the con man’s banker, JPMorgan, which McMahon also dismissed.
“The chances are not good for turning around a ruling on a matter where the court has substantial discretion,” said Michael Clark, a lawyer with Duane Morris LLP in Houston who specializes in financial fraud and has handled appeals. “He has to show the court misapplied the law in a way that’s beyond a discretion call. Rakoff is a very bright judge, and he sets out clearly why he’s ruled.”
“The district court’s holding is erroneous,” Picard said in his filing in the HSBC case.
Amanda Remus, a Picard spokeswoman, didn’t respond to an e- mail seeking comment on the lawyers’ views that overturning the judges’ rulings would be hard. She has previously said Picard remains confident of his right to make the claims against the banks.
JPMorgan said it didn’t know about the fraud, or in any way participate in it, and couldn’t be held responsible for a scheme orchestrated by Madoff alone.
HSBC faulted Picard for his theory that the bank had obligations to all Madoff investors and should have probed the fraud. HSBC wasn’t the “watchman” for all the con man’s investors and didn’t owe them any duty, a lawyer for the London- based bank said at a court hearing before Rakoff last year in Manhattan.
Madoff, 73, is serving a 150-year sentence in a federal prison in North Carolina.
The main case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-ap-1789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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Bank Mortgage Probes Will Proceed, New York and Delaware Say
State and federal officials will aggressively investigate misconduct in the bundling of mortgages into securities following a settlement with banks over foreclosure abuses, the New York and Delaware attorneys general said.
The $25 billion agreement announced last week was crafted to allow further probes of banks to proceed by states and federal agencies, including inquiries into possible criminal violations, New York Attorney General Eric Schneiderman and Delaware’s Beau Biden said yesterday.
“We are all committed to pursuing real investigations for all the areas that we are still able to investigate, specifically and most importantly on the securitization side,” Biden said in an interview. “You’re going to see a real effort on our part and the New York attorney general to pursue the securitization pieces of this to wherever it takes us.”
The Justice Department in January announced the formation of a joint state-federal group that will investigate misconduct that led to the financial crisis through the bundling of mortgage loans into securities sold to investors. The group is led by officials from the Justice Department, the Securities and Exchange Commission and Schneiderman’s office.
The group will share resources and information, Schneiderman said in a remarks yesterday at a breakfast sponsored by Crain’s New York Business. Schneiderman and Biden have been cooperating in an investigation of bank mortgage practices.
The $25 billion settlement reached with Charlotte, North Carolina-based Bank of America Corp., New York-based JPMorgan Chase & Co., New York-based Citigroup Inc., San Francisco-based Wells Fargo & Co. and Detroit-based Ally Financial Inc. will provide mortgage relief to homeowners and sets requirements for how the banks conduct foreclosure and service loans.
The banks in return were granted liability releases protecting them from certain claims. Biden and Schneiderman said the releases are narrowly tailored to allow further investigations of bank practices.
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Bank of America Seeks to Block CEO Deposition in MBIA Suit
Bank of America Corp. asked a New York state judge to block the deposition of Chief Executive Officer Brian T. Moynihan in a fraud lawsuit brought by MBIA Inc., a court filing showed.
The nation’s second-biggest lender, based in Charlotte, North Carolina, asked New York state Supreme Court Justice Eileen Bransten in Manhattan to issue a protective order against the deposition, according to a proposed order to show cause filed Feb. 15.
“We have moved for a protective order because a chief executive officer of a major corporation may only be deposed when he or she has unique information that is not available through other means.” Bank of America spokesman Lawrence Grayson said yesterday in a statement. “The discovery process remains fully available to MBIA, including through the numerous current and former executives that MBIA will be deposing.”
The proposed order to show cause asks Bransten to order MBIA to explain why a protective order against the deposition shouldn’t be issued. The motion for the protective order wasn’t immediately available in court records.
MBIA, which sued Countrywide in 2008, guarantees payments to investors that bought securities backed by pools of the lender’s loans. The insurer says the loans were riskier than Countrywide promised, and as they defaulted, the Armonk, New York-based company was forced to make payments.
William Sushon, an attorney at O’Melveny & Myers LLP who filed the proposed order to show cause, didn’t immediately respond to messages seeking further comment. Manisha M. Sheth, an attorney with Quinn Emanuel Urquhart & Sullivan LLP who is representing MBIA, didn’t immediately return a telephone message left at her office.
The case is MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008, New York State Supreme Court (Manhattan).
Exxon Valdez Judge Refuses to Rule Against More Damage Claims
Exxon Mobil Corp. failed to persuade a federal judge to bar the U.S. and Alaskan governments from pursuing further damage claims related to the 1989 Exxon Valdez oil spill.
U.S. District Judge H. Russel Holland in Anchorage refused Feb. 15 Exxon’s request to enforce a 1991 agreement under which the Irving, Texas-based company paid $900 million to settle claims over damage to the environment.
“Exxon presently suffers no particular harm,” Holland wrote in the order. “Its business is not in any fashion disrupted or impeded because of the uncertainty of a claim by the governments.”
The Exxon Valdez tanker ran aground in 1989, dumping 11 million gallons of oil into Prince William Sound. Exxon agreed in 2009 to pay $470 million in interest on a $507.5 million judgment won by local victims of the spill, including fishermen and small businesses. That was in addition to the $900 million civil settlement.
The civil settlement contains a reopener clause that allows governments to pursue additional damages.
“The possibility of a reopener claim has been ‘on the table’ since the consent decree was finalized,” Holland wrote.
Oil from the spill is still trapped between layers of sand on the Alaskan shoreline, according to a study published in Nature Geoscience in 2010.
The case is United States of America v. Exxon Corp. 3:91- cv-0082, U.S. District Court, District of Alaska (Anchorage).
BTA Bank Ex-Chairman Gets 22 Months in Prison for Contempt
Mukhtar Ablyazov, the former chairman of Kazakhstan’s BTA Bank, was sentenced to 22 months in a U.K. jail for breaching a court-ordered freeze on his assets and lying under oath in a $5 billion fraud lawsuit.
The violations were “deliberate and brazen” and require that Ablyazov be placed in immediate custody, Judge Nigel Teare said yesterday in London. Ablyazov, who fled to Britain to escape prosecution in his home country, failed to appear at the hearing. BTA’s lawyer said the ex-banker may be fleeing again.
“Mr. Ablyazov has lied to his own lawyers and lied to this court,” Stephen Smith, a BTA lawyer, said before the sentencing. “He has had plenty of opportunities to tell us the truth and has continually evaded doing so.”
BTA, the biggest Kazakh lender before defaulting on $12 billion of debt in 2009, filed a series of civil suits against Ablyazov and ex-Chief Executive Officer Roman Solodchenko claiming they took more than $5 billion from the Almaty-based bank using fake loans, back-dated documents and offshore companies. Both men have denied the claims.
Lawyers for BTA, which restructured its debt after being nationalized, said Ablyazov violated a 2009 court order by failing to reveal all his assets, including a house in the British countryside and a London mansion, each valued at 20 million pounds ($31.6 million), two apartments in the U.K. capital worth 1 million pounds each, and an offshore firm that allegedly carried out a $300 million fraud against the bank.
Ablyazov’s lawyer, Duncan Matthews, said he didn’t know his client was planning to skip the hearing and there’s no reason to believe he’s fleeing the country. Teare denied his request to delay sentencing so he could advise Ablyazov on “the consequences of his course of action.”
“The judgment should serve as a signal to Mr. Ablyazov’s associates that the full force of the law will be pursued to ensure court orders are obeyed,” Nikolay Varenko, a deputy chairman at the bank, said in an e-mailed statement.
A call to Ablyazov’s spokesman, Locksley Ryan of RLF Partnership Ltd. in London, wasn’t answered and an e-mail didn’t receive an immediate response.
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U.K. FSA Arrests Legal & General Employee in Trading Probe
A Legal & General Investment Management Ltd. employee was arrested in London and three premises were searched as part of the U.K. markets regulator’s highest-profile insider-trading investigation.
The man was released on bail after he was interviewed under caution at a London police station, the Financial Services Authority said in an e-mailed statement yesterday. The FSA and the Serious Organized Crime Agency searched an office and home in London and a residence in Kent, an area southeast of the British capital.
“A 44-year-old man employed by Legal & General Investment Management was arrested on 16 February and released on bail pending further enquiries,” the company said in an e-mailed statement. “We are not aware of any detriment caused to customers or any impact on our financial results.”
The case relates to an insider-trading investigation where employees from Deutsche Bank AG, Exane BNP Paribas and Moore Capital Management LLC were arrested in March 2010. Those questioned include Julian Rifat of Moore Capital, Deutsche Bank’s Martyn Dodgson, Exane’s Clive Roberts, Novum Securities Ltd.’s Graeme Shelley and Iraj Parvizi, a director at Aria Capital Ltd. No one has been charged in the case.
The FSA conducted further searches in April 2011 and arrested someone at the time, the regulator said yesterday.
The agency is probing whether the men used knowledge of upcoming securities sales to engage in the front running of block trades, generally on behalf of a corporate client, to generate a profit for themselves. The case is codenamed Tabernula, Latin for “little tavern.”
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Stanford Operations Run by CFO Davis, Not Boss, Manager Says
R. Allen Stanford left daily operating decisions to his finance chief, who volunteered to “lay himself off” for a $650,000 lump-sum payout as regulators were closing in on the company in February 2009, a former manager testified.
“We were in the midst of a crisis, and I told him it would look strange if we lay off our global CFO,” Joan Stack, former global human resources manager at Stanford Financial Group, said she told finance chief James M. Davis. “He was the person I felt made the day-to-day decisions.”
Davis replied that he would “stay behind the scenes” and continue running the firm, Stack told jurors yesterday in federal court in Houston at Stanford’s criminal fraud trial. In exchange for appearing to step aside, Davis asked for an upfront payment of 65 percent of his 2009 salary, she said.
Davis made this proposal “at a very fast-moving time” when “cash flow problems” were causing Stanford’s firm to cancel 2008 year-end bonuses and lay off half its employees, Stack testified. “We were trying to get to a point where costs would be reduced to the point the organization would survive,” Stack said.
Jurors previously heard Davis testify that Stanford was the mastermind and prime beneficiary of an alleged $7 billion investment fraud centered on what the government claims were bogus certificates of deposit at Antigua-based Stanford International Bank Ltd.
Prosecutors accuse Stanford of skimming more than $2 billion of investor deposits to finance an extravagant lifestyle and risky ventures ranging from Caribbean airlines and real estate development to cricket tournaments. Investors were told their funds were kept in safe, liquid assets rather than speculative ventures.
Davis pleaded guilty to his role in the alleged scheme and testified as a government witness in the trial, now in its fourth week. “Follow the money,” Davis told jurors, pointing across the courtroom at Stanford.
Stanford, 61, denies wrongdoing in connection with the alleged investment fraud. If convicted of the most serious charges against him, he faces as long as 20 years in prison. He has been jailed as a flight risk since being indicted in June 2009.
The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas).
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Merger Suits Often Mean Cash for Lawyers, Zero for Investors
A shareholder lawyer told a Delaware judge at a midsummer court hearing two years ago that his team deserved $700,000 for work on a lawsuit in which his clients received nothing.
Shareholders of BJ Services Co., an oilfield-services company now owned by Baker Hughes Inc., claimed its sale to the former parent would undervalue their holdings. The settlement of the case gave investors “crucial” data such as performance projections for five more years, Shane T. Rowley of Faruqi & Faruqi LLP told the judge, seeking to justify the legal fees.
“I can’t think of fruit that’s closer to the ground,” Chancery Court Judge John W. Noble responded. Still, the judge awarded Rowley and his colleagues $500,000 for their efforts.
Scenarios like the one played out at the July 2010 hearing in Wilmington are common in the Delaware court, the chief U.S. venue for mergers and acquisitions suits, Bloomberg News’ Ann Woolner, Phil Milford and Rodney Yap report. Of 57 such investor class actions settled or otherwise concluded there in 2010 and 2011, 40 -- or 70 percent -- made money for plaintiffs’ lawyers but not clients, according to data compiled by Bloomberg News.
“The greatest benefit is for the plaintiffs’ attorneys” in such litigation, said John C. Coffee Jr., a Columbia University professor who teaches securities law.
None of the 10 cases that New York-based Faruqi & Faruqi helped to settle during the two years produced cash for clients, according to court records. Legal fees in those 10 cases totaled $6 million, split among plaintiffs’ firms.
Overall, lawyers won $32.4 million for themselves in the 40 cases that generated no money for clients. The lowest legal fee award was $150,000; the highest was $4 million. The median came to $512,500, according to the data.
The 17 M&A lawsuits that resulted in cash for clients produced $350 million for the shareholders. The largest, a Del Monte Foods Inc. case, gave plaintiffs $89.4 million. Of that amount, attorneys were paid $22.3 million.
Even without consistent monetary awards, such lawsuits let shareholders scrutinize transactions and gain changes in terms, according to defenders of M&A litigation. Deal-makers, knowing their work will be closely evaluated by lawyers, produce fairer, more transparent transactions as a result, he said.
The “policing” effects of litigation have “real value,” Bernard Black, a Northwestern University law and finance professor who co-wrote an academic study of the Delaware courts, said. That “might well justify the money we throw at plaintiffs’ lawyers.”
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R.J. Reynolds, Philip Morris Win Federal Jury Trial in Florida
Altria Group Inc.’s Philip Morris USA and R.J. Reynolds Tobacco Co. won a defense verdict in a wrongful-death case filed by the widow of a smoker who died of lung cancer, Altria said.
A jury in federal court in Jacksonville, Florida, returned the verdict for the companies yesterday on the first day of deliberations, Altria said in a statement. The trial was the first federal trial of thousands of so-called “Engle” tobacco injury claims.
Virginia Gollihue claimed her husband, Manuel Gollihue, died from lung cancer at age 53 after smoking at least two packs a day of the defendants’ cigarettes for almost 38 years. His illness and death were caused by his addiction to nicotine, Virginia Gollihue claimed.
Gollihue’s suit was the first individual claim by a smoker tried in a Florida federal court after the state’s supreme court in 2006 threw out a $145 billion punitive-damage verdict against the industry and ended a class action filed on behalf of Florida smokers.
The ruling, which permitted smokers in the class to sue individually, is known as the “Engle” decision, after Howard Engle, the lead plaintiff in the case.
So far, smokers have won 40 of the 58 Engle verdicts in state court trials, according to Edward L. Sweda Jr., senior attorney for the Tobacco Products Liability Project, which tracks the suits. Trials in federal court have been delayed by pretrial appeals.
As of Feb. 13, Philip Morris faced 3,306 Engle cases in Florida state courts and 3,238 in federal courts, according to an Altria Securities and Exchange Commission filing. Reynolds is a defendant in 6,561 cases in state and federal courts combined, it said in an SEC filing.
The jury deliberated for 47 minutes before delivering its verdict, according to Stephanie Parker, a partner with the Jones Day law firm who represented Reynolds in the trial.
In a separate case yesterday, a jury in Oregon state court issued a $25 million verdict against Philip Morris in a lawsuit by the family of a woman who smoked low-tar cigarettes and died of lung cancer in 1999, said Chuck Tauman, the family’s attorney.
The case is Gollihue v. R.J. Reynolds Tobacco Co., 09- CV-10530, U.S. District Court, Middle District of Florida (Jacksonville).
J&J’s Risperdal Wasn’t Factor in Man’s Diabetes, Jury Rules
Johnson & Johnson’s anti-psychotic drug Risperdal wasn’t a substantial factor in causing a Nebraska man’s diabetes, even though J&J failed to give an adequate warning to his doctor about the drug’s risks, a New Jersey jury ruled.
Jurors in state court in New Brunswick, where J&J is based, found by a 5-1 vote that the company didn’t adequately warn the doctor for Gary Skala of the risk of diabetes. Because they ruled 5-1 against Skala, 56, on the causation question, they didn’t award him any damages.
Skala’s lawsuit was the first of more than 400 personal- injury lawsuits over Risperdal to go to trial. J&J lawyers said the company properly warned of the drug’s risks after its introduction in 1994. They said Skala was an obese “couch potato” whose disease was caused by his weight, his heavy drinking, his sedentary lifestyle and other risks, not Risperdal.
“The label was adequate, and the information was there,” J&J attorney Jeffrey Peck told jurors Feb. 15 in his closing argument. “Doctors used the medicine because it worked. In this case, Dr. Skala’s doctors prescribed it and it saved his life.”
An attorney for Skala, Fletch Trammell, argued to jurors that Risperdal was a “substantial contributing factor” in his diabetes by helping to cause his obesity. While the drug may have helped his mental illness, Trammell said, J&J’s Janssen unit failed to warn Skala’s doctor of the diabetes risk.
Trammell said he was disappointed with the verdict, which he called a “Pyrrhic victory.”
Teresa Mueller, a spokeswoman for J&J, the world’s second- biggest health-products company, said in an e-mail: “We are pleased with the jury’s decision to reject the plaintiff’s claims. Since the early 1990s, Risperdal has improved the lives of countless people throughout the world who suffer from debilitating mental illnesses.”
The New Jersey case is Skala v. Johnson & Johnson, MID- L-6820-06 (MT), Superior Court of New Jersey, Law Division, Middlesex County (New Brunswick).
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Motorola Solutions’ $200 Million Accord Tentatively Approved
Motorola Solutions Inc. and a group of investors who sued a corporate predecessor claiming it misled them about the company’s prospects in 2006 won a U.S. judge’s tentative approval of a $200 million settlement.
U.S. District Judge Amy St. Eve yesterday preliminarily signed off on the proposed agreement after hearing from the parties’ lawyers at the federal courthouse in Chicago. She will consider a motion for final approval on May 9, after class members have had an opportunity to file objections.
In an August 2007 complaint, Motorola Inc.’s then-Chief Executive Officer Edward Zander and other executives were accused of overstating the prospects of the company and its mobile phone-making unit in the second half of 2006. By 2007, Motorola was the world’s third-biggest mobile phone maker, down from second-biggest.
Motorola Solutions and lawyers for the stockholders announced the settlement agreement on Feb. 2.
The lead plaintiffs in the case are the Macomb County Employees’ Retirement System and the St. Clair Shores Police & Fire Pension System, both of Michigan.
The U.S. Justice Department on Feb. 13 approved Motorola Mobility’s acquisition by Google Inc. for $12.5 billion.
The case is Silverman v. Motorola Inc., 07-cv-4507, U.S. District Court, Northern District of Illinois (Chicago).
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--With assistance from Lindsay Fortado and Erik Larson in London; Chris Dolmetsch, David McLaughlin, Bob Van Voris, Patricia Hurtado and Linda Sandler in New York; Andrew Harris in Chicago; Joe Schneider in Sydney; David Voreacos in Newark, New Jersey; Laurel Brubaker Calkins in Houston; Anthony Effinger in Portland, Oregon; and Jef Feeley in Wilmington, Delaware. Editor: Stephen Farr
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