Bloomberg News

Fairfax, Madoff, Megaupload, Capital One, Deutsche Bank in Court News

March 02, 2012

Fairfax Financial Holdings Ltd. (FFH), with seven of eight hedge funds it accused of spreading false rumors out of a lawsuit, may see the $24 billion case shrink again. A judge is poised to rule whether racketeering counts allowing triple damages should be tossed, Bloomberg News’s Thom Weidlich reports.

Three of the funds that won dismissal in the case, including billionaire Steven A. Cohen’s SAC Capital Advisors LP, have a total $29 billion in assets under management. The two main defendants remaining are a New York hedge fund with less than $100 million and a Memphis, Tennessee, brokerage recently sold for $930 million.

Fairfax, in the suit filed in New Jersey state court in 2006, accused the funds of trying to drive down its stock as they bet against it in a so-called bear raid. The remaining defendants seek to block Toronto-based Fairfax from tripling its $8 billion claim, as allowed under the state’s anti-racketeering law. The case can be viewed as an example of civil racketeering suits moving into the realm of hedge funds, one legal expert said.

“If they win that, that could be the nail in the coffin,” Jonathan W. Wolfe, a lawyer who represented a fund released from the litigation, said of the defendants’ effort. “I think you will continue to see this case get smaller and smaller.”

New Jersey Superior Court Judge Stephan C. Hansbury in Morristown is considering whether Fairfax can invoke the racketeering statute. The defendants, arguing at a Jan. 6 hearing that Canadian or New York law applies, said the case doesn’t have enough connection to New Jersey to allow the counts to go forward. They called the racketeering claims “a manipulative public relations sham.”

Hansbury, who scheduled a March 16 hearing on other motions, said he wants to set a trial date as early as May.

Fairfax, which owns stakes in Canadian and U.S. insurers, said in its complaint that the hedge funds coordinated with stock analysts to spread false rumors about it so the funds could profit through short sales, borrowing shares in anticipation of making money by replacing them with cheaper shares later after the price dropped.

The company’s $8 billion damage claim is based on allegations the hedge funds’ actions depressed Fairfax’s credit ratings, diminished its ability to make acquisitions and reduced the amount it could raise in debt and equity offerings, according to court papers.

The case is Fairfax Financial Holdings Ltd. v. SAC Capital Management LLC, L-2032-06, Superior Court of New Jersey, Morris County (Morristown).

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U.S. Criminal Libor Probe Cited in Judge’s Denial of Records

Investors suing Credit Suisse Group AG (CSGN), Bank of America Corp. and other companies over claims they artificially suppressed Libor lost a bid for some documents related to a U.S. Justice Department investigation.

In denying the investors’ request yesterday, U.S. District Judge Naomi Reice Buchwald in Manhattan, who’s presiding over 21 class-action lawsuits, cited a letter from the department claiming that a release of the documents may interfere with its criminal antitrust probe.

“To me, it is simply too much to have them piggyback on the government’s investigation at this stage,” the judge said in a ruling from the bench. “It is quite clear from the Department of Justice’s letter that they would have serious problems with my granting the request.”

The multidistrict litigation before the judge involves group lawsuits filed against member banks of the British Bankers’ Association London Interbank Offer Rate Panel, known as Libor. The member banks are accused of conspired to artificially suppress Libor by understating their borrowing costs to the BBA.

Buchwald said that if she agreed to let investors have the documents they want, it would “inhibit the fullest response to the government requests for information.”

The case is In re LIBOR-Based Financial Instruments Antitrust Litigation, 11-MD-2262, U.S. District Court, Southern District of New York (Manhattan).

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California AG Asserts Right to Sue Madoff Investor Estate

California Attorney General Kamala Harris told a judge she is entitled to pursue a lawsuit against the estate of a former Bernard L. Madoff investor for allegedly violating state laws, and the court should bar interference in the “people’s action” by the Madoff trustee.

Harris, who has a state enforcement proceeding against the estate of Stanley Chais, made the statements in a bankruptcy court filing in Manhattan Feb. 29 in response to a lawsuit by trustee Irving H. Picard, who said he alone has the right to claw back money stolen from Madoff customers. Her legal action is independent of Picard’s and makes no attempt to recover money belonging to the Madoff brokerage trustee, she said.

“While the trustee’s desire to maximize the amount of money available to the victims of Bernard Madoff is laudable, his attempt to interfere with the people’s action in order to achieve that goal finds no support in the Bankruptcy Code and thus must be rejected,” she said.

Picard is fighting to establish his sole right to sue former Madoff investors who allegedly profited from the Ponzi scheme. Some parties say he is usurping their rights. His settlement with the Jeffry Picower estate has been challenged by former Madoff investors who say they don’t benefit from the agreement and should be allowed to sue the estate themselves.

The case is Picard v. Hall, 12-01001, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Megaupload’s Dotcom to Fight Charges, Says He’s No Piracy King

Megaupload.com founder Kim Dotcom said he will fight U.S. charges that he orchestrated the country’s biggest copyright infringement conspiracy.

“I’m no piracy king,” Dotcom said in an interview with New Zealand’s TV3 yesterday. “I offered online storage and bandwidth to users and that’s it. I am a fighter and I am going to fight this thing.”

Dotcom, 38, was indicted in what U.S. prosecutors dubbed a “mega conspiracy,” accusing his file-sharing website of generating more than $175 million in criminal proceeds from the exchange of pirated film, music, book and software files. He faces as long as 20 years in prison for each of the racketeering and money-laundering charges in the indictment.

High Court Justice Timothy Brewer ruled Feb. 29 that Dotcom can remain out of jail on bail pending an extradition hearing, rejecting an appeal by New Zealand prosecutors. The prosecutors were acting at the request of the U.S. to keep Dotcom in prison until the extradition hearing, currently scheduled for Aug. 20.

“Why would I leave after everything has been frozen, everything has been taken from me?” Dotcom said. “The company that was worth probably a billion dollars plus has been given a death sentence without trial, you know. What point is there for me to run away?”

In a revised indictment filed in a U.S. court in Alexandria, Virginia, on Feb. 17, Dotcom was charged with three new criminal copyright counts and five new wire-fraud counts.

The New Zealand case is Kim Dotcom v. United States of America. DCNSD [25 January 2012]. District Court at North Shore (Albany).

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Capital One, Customers Agree to Mediation in Overdraft Suit

Capital One Financial Corp. (COF) and customers who claim the bank gouged them on overdraft fees for checking accounts agreed to suspend their litigation while they try to mediate the dispute, court records show.

“The parties have agreed to engage in private mediation in an effort to resolve this case without further litigation,” lawyers for the bank and customers said yesterday in a filing in federal court in Miami. They agreed to suspend court filings on whether to certify the case as class-action lawsuit.

At least 30 banks have cases in Miami before U.S. District Judge James Lawrence King, who has consolidated the cases. The customers say the banks reorder debit-card transactions in their computers to maximize overdraft fees. JPMorgan Chase & Co. (JPM), the biggest U.S. bank by assets, has reached a preliminary agreement to pay $110 million to settle litigation.

Bank of America Corp., the second-biggest U.S. bank by assets, agreed last year to pay $410 million without admitting liability. The accord won court approval despite objections that the amount was too little for customers and that lawyers were paid too much.

Union Bank NA agreed to a $35 million settlement with customers in November. An Associated Banc-Corp. (ASBC) unit, Associated Bank, agreed in November to pay $13 million.

The case is In re Checking Account Overdraft Litigation, 09-md-02036, U.S. District Court, Southern District of Florida (Miami).

Ex-BTA Bank Chairman Must Turn Himself In for Prison, Judge Says

Mukhtar Ablyazov, the ex-BTA Bank Chairman who went into hiding last month after being sentenced to 22 months in a U.K. jail, must turn himself in or risk losing his right to defend a $5 billion fraud lawsuit, a judge ruled.

BTA, which accused Ablyazov of theft after he fled to London from Kazakhstan, where the lender is based, can apply to strike out his defense and seek a default judgment if he doesn’t report to court authorities by March 9, Judge Nigel Teare ruled Feb. 29.

Ablyazov “has gone into hiding,” Teare, who oversaw a two-week trial in December, said in his judgment. “Not even his own solicitors, who continue to act for him in this matter and to receive instructions from him, know where he is.”

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, backdated documents and offshore companies. Both men have denied the claims.

Ablyazov failed to attend a Feb. 16 sentencing hearing after Teare found him in contempt of court for lying about his assets, including a mansion and two apartments in London, and moving money in violation of 2009 asset freeze issued in the fraud case.

An e-mail to Ablyazov’s spokesman, Locksley Ryan, wasn’t immediately answered. Ablyazov’s lawyer, Duncan Matthews, said last month that denying his right to defend himself in the fraud case would be “the most Draconian order the court could take.”

The case is JSC BTA Bank v. Ablyazov, [2011] EWHC 1136 (Comm), Royal Courts of Justice (London).

For the latest lawsuits news, click here.

New Suits

Koch Brothers Sue Widow of Cato Shareholder Over Stock

Billionaire brothers Charles G. Koch, co-founder of the Cato Institute, and David H. Koch sued the free-market advocacy group and stockholder William Niskanen’s widow seeking control of his shares.

Niskanen’s death in October triggered an obligation for his wife and estate representative, Kathryn Washburn, to offer his shares to the institute and, if it declined to buy them, the surviving shareholders, according to a copy of the complaint obtained by Bloomberg News. The filing couldn’t be immediately confirmed in a search of online records at the Johnson County, Kansas, District Court in Olathe, about 22 miles southwest of Kansas City, Missouri.

“Almost four months after Niskanen’s death, defendant Washburn has not offered to sell the Niskanen shares to the corporation,” in accordance with the shareholders’ agreement, the brothers allege in the complaint.

The Washington-based organization has been a supporter of litigation challenging President Barack Obama’s 2010 health-care reform legislation. The Koch brothers, principals of the closely held refining and chemical company Koch Industries Inc., have been active in Republican Party fundraising.

The brothers seek a court order compelling Washburn to offer her husband’s shares to Cato and declaring that if the organization declines to buy them, then that right passes to the remaining three shareholders, who include the institute’s president, Edward H. Crane.

Crane, in an e-mailed statement to Bloomberg News, said he and Cato view the case as an attempted “hostile takeover” of the organization he and Charles Koch co-founded in 1977.

“Mr. Koch’s actions represent an effort to transform Cato from an independent, nonpartisan research organization into a political entity that might better support his partisan agenda,” Crane said.

Washburn couldn’t immediately be located for comment.

The Koch brothers’ lawyer, Dan Crabtree of Kansas City- based Stinson Morrison Hecker LLP (1328L), referred a request for comment to a Koch spokeswoman, Melissa Cohlmia. She didn’t immediately reply to a voice-mail message.

Koch Industries is based in Wichita, Kansas.

The case is Koch v. Washburn, 12-cv-01749, Johnson County District Court, 10th Judicial District (Olathe).

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

Trials/Appeals

Martin Marietta CFO Estimates Vulcan Savings at $330 Million

Martin Marietta Materials Inc. (MLM)’s chief financial officer said a proposed merger with Vulcan Materials Co. (VMC) may yield cost savings of as much as $330 million in three years, $80 million more than estimated in December.

Anne Lloyd, the CFO, testified in court yesterday that she didn’t use any confidential data from Vulcan in calculating the potential savings, which may include 1,100 job cuts. Martin Marietta, based in Raleigh, North Carolina, is pursuing a hostile acquisition of Birmingham, Alabama-based Vulcan originally valued at $4.7 billion. Vulcan has rejected the offer as inadequate.

Martin Marietta “has remained profitable” by using a technique called “Martinizing” to compare its cost structure to those of dozens of companies it considered buying, Lloyd told Delaware Chancery Court Judge Leo Strine Jr. yesterday as a trial over the Vulcan bid entered a third day in Wilmington.

Martin Marietta sued on Dec. 12, the same day it made the hostile bid, in a preemptive move to get the court to rule that the offer wasn’t prohibited by a May 2010 confidentiality agreement between the companies. Vulcan has countersued.

Strine must decide if the stock solicitation is contractually valid. The combination would create the world’s largest producer of sand, gravel and crushed stone.

Don James, chairman of Vulcan, told Strine in earlier testimony that he proposed a friendly “merger of equals” in 2010 and that talks foundered before Martin Marietta Chief Executive Officer Ward Nye disclosed the hostile bid.

The case is Martin Marietta Materials v. Vulcan Materials, CA7102, Delaware Chancery Court (Wilmington).

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AU Optronics Price-Fixing Case Goes to Jury in San Francisco

Jurors in AU Optronics Corp. (2409)’s price-fixing case began deliberating in federal court in San Francisco yesterday, more than two years after U.S. regulators accused the company of violating antitrust laws.

The company, Taiwan’s second-largest maker of liquid- crystal displays, was charged in 2009 with participating in a conspiracy to fix prices of LCD panels, used in computers and other devices, that netted at least $500 million and raised costs for consumers. Five company executives also are on trial.

The executives met with competitors secretly in hotel rooms, karaoke bars and other locations in Taipei from 2001 to 2006 to set LCD prices in response to an oversupply that pushed down prices by 40 percent, government lawyers told the jury during an eight-week trial.

Lawyers for the company and the executives denied their clients fixed prices and told the jury that the government lacked specific evidence that they entered into illegal agreements. The meetings were a way of monitoring market trends and garnering price information, which isn’t illegal, they said.

AU Optronics is the only LCD maker charged with price- fixing by the U.S. to take its case to trial. Since 2008, rivals including LG Display Co., Chunghwa Picture Tubes, Chi Mei Optoelectronics Corp. and Sharp Corp. agreed to plead guilty and pay more than $860 million in fines.

The case is U.S. v. AU Optronics, 09-110, U.S. District Court, Northern District of California (San Francisco).

Australia Judges Question Judgment Rule in Fortescue Case

Two judges at Australia’s top court, hearing an appeal by Chairman Andrew Forrest of Fortescue Metals Group Ltd. (FMG) against a ruling that he misled shareholders, questioned the use of the “business judgment” rule adopted from the U.S. as a weapon in prosecution.

“Here, we’ve taken the U.S. situation and turned it upside down,” Justice William Gummow said yesterday at a High Court hearing in Canberra. The business judgment defense gives directors leeway in decision making by providing immunity from lawsuits as long as they show they acted honestly. “The rule is meant to assist the director” against technicalities, Gummow said.

The Australian federal appeals court ruled Forrest misled shareholders in describing contracts with three Chinese companies as binding and that he couldn’t use the excuse that he was exercising his business judgment as chairman of Fortescue. Forrest faces removal from the post if the High Court affirms the lower court’s ruling.

“Just because something went south, doesn’t mean you breached” regulations, Justice Kenneth Hayne said yesterday.

Chief Justice Robert French adjourned the hearing until March 30 after hearing some arguments from the regulator’s lawyer Neil Young.

The main point at issue is what Forrest and the company conveyed to shareholders through press releases and interviews, Young said. They said they had agreements with the three Chinese companies when they knew those agreements weren’t complete, he said.

Investors, analysts and shareholders who relied on the statements weren’t aware the agreements weren’t final and could only take the company at face value, Young said.

Fortescue’s lawyer David Jackson urged the panel Feb. 29 to overturn the appeal court decision, saying the company and Forrest sincerely believed they had binding contracts with the Chinese companies when they issued the statements.

The case is Forrest v. Australian Securities and Investment Commission. P44/2011. High Court of Australia (Canberra).

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Proview ‘Hopes’ Apple Makes Contact on IPad Settlement Talks

A lawyer representing Proview International Holdings Ltd. (334) in its dispute with Apple Inc. (AAPL) over the iPad trademark in China said he “hopes” the U.S. company makes contact to begin settlement talks.

Roger Xie said the two sides haven’t held any formal negotiations on the issue of which company owns the right to use the iPad brand in the world’s most populous nation. Lawyers presented arguments for almost six hours Feb. 29 at the Higher People’s Court of Guangdong before being asked by the three- judge panel if they wished to settle.

“Up to now, we didn’t have any formal negotiations with Apple,” Xie said yesterday in a telephone interview. “I hope they will positively contact us and make an appointment with us about formal negotiations out of court. It would be useful.”

Apple has appealed a November ruling by a lower court that the trademark belongs to the Shenzhen unit of failed display maker Proview. Apple claims its 2009 purchase of the rights from Proview’s Taiwan unit covers the mainland.

Judges adjourned the Feb. 29 hearing without giving a new court date or a timeframe for a ruling. Under Chinese law, the time limit for ruling on an appeal is three months, although that can be extended in exceptional circumstances, Xie said yesterday.

Apple’s Beijing-based spokeswoman, Carolyn Wu, didn’t immediately return calls and e-mails seeking comment.

For more, click here.

For the latest trial and appeals news, click here.

Verdicts/Settlements

Deutsche Bank’s Board Rejects Kirch Settlement After Review

Deutsche Bank AG (DBK) rejected a proposal to settle a 10-year dispute tied to comments by its former Chief Executive Officer Rolf Breuer about Leo Kirch’s media group.

The bank, Germany’s biggest lender, made the decision after a “thorough review,” it said in an e-mailed statement yesterday. “Based on this review, which included the consideration of internal and external legal advice, the board decided without dissent not to accept the settlement proposal.”

Deutsche Bank and Kirch’s heirs discussed a possible 800 million-euro ($1 billion) settlement of claims Breuer’s comments caused the collapse of Kirch’s media group, a person with knowledge of the negotiations said last month. The Frankfurt- based bank last year was said to have rejected a 775 million- euro settlement proposed by a Munich court.

“It seems the people at Deutsche Bank who had to look at the proposal came to the conclusion the bank’s legal odds in court are better than what the settlement amount suggested,” said Michael Seufert, an analyst with Norddeutsche Landesbank Girozentrale in Hanover, Germany. “The pain threshold was reached with the 800 million euros, and the bank’s leadership had to look at what’s in the interest of shareholders.”

Kirch, who died in July, pursued claims against Breuer and Deutsche Bank seeking at least 3.3 billion euros. The lawsuits, which continued after Kirch’s death, claim his media group failed because Breuer questioned its creditworthiness in a 2002 Bloomberg TV interview.

In the interview, Breuer said “everything that you can read and hear” is that “the financial sector isn’t prepared to provide further” loans or equity to Kirch. Within months, Kirch’s group filed the country’s biggest bankruptcy since World War II.

A spokesman for Kirch’s heirs, who declined to be identified, said they “are relaxed about Deutsche Bank’s decision and can only shake our heads about the leadership chaos at the bank.”

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Deutsche Bank Settles Suit by Loreley Financing Over CDOs

Deutsche Bank AG (DBK), Germany’s biggest bank, settled a lawsuit filed by Loreley Financing over $440 million of collateralized- debt obligations purchased from 2005 to 2007.

Loreley Financing sued Deutsche Bank (DBK) in New York State Supreme Court in Manhattan in October, accusing the bank of defrauding it into buying CDOs that were “designed to fail.” The litigation was discontinued with prejudice, meaning it can’t be renewed, according to court documents filed Feb. 29 that didn’t disclose terms of the settlement.

Loreley Financing is a group of special-purpose entities based in Jersey, the largest of the Channel Islands, a U.K. dependency known as a tax haven. The entities were formed for long-term investing in CDOs, pools of assets such as mortgage bonds packaged into new securities, Loreley Financing said in the complaint.

Christian Streckert, a spokesman for Frankfurt-based Deutsche Bank, confirmed the settlement and said the bank was pleased to have resolved the dispute. He declined to comment further.

The case is Loreley Financing (Jersey) No. 3 Ltd. v. Deutsche Bank Securities Inc., 652737/2011, New York State Supreme Court, New York County (Manhattan).

For the latest verdict and settlement news, click here.

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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