Bloomberg News

Health-Care Law, Goldman, Facebook, JPMorgan in Court News

March 27, 2012

The Obama administration today will defend a requirement that Americans obtain insurance or pay a penalty -- the core of the president’s health care overhaul --in a Supreme Court case central to the Republican campaign to take over the White House.

A group of 26 states will say that Congress exceeded its authority in approving the mandate, as the justices hear their second of three days of arguments. The government, defending the president’s signature legislative victory, will contend that Congress can require people to buy insurance under its constitutional power to regulate the interstate health-care market.

During yesterday’s opening session, several justices suggested they will reject an argument that they can’t consider the case until the penalty is imposed in 2015.

Today, justices may signal whether they’re willing to overturn the insurance requirement or other parts of the law, which would extend coverage to 32 million people and revamp an industry that accounts for 18 percent of the U.S. economy.

The last time the court rejected a measure with such sweeping impact was when it voided parts of Franklin D. Roosevelt’s New Deal, the package of economic programs in the 1930s passed in response to the Great Depression.

If the court throws out Obama’s insurance mandate, that “would constitute the most significant federalism ruling since the 1930s,” said Daniel Conkle, a constitutional law professor at Indiana University’s Maurer School of Law in Bloomington.

The justices probably will issue a ruling by late June, less than five months before the election.

Yesterday’s opening arguments were on a question that could derail the case: whether the penalty for failing to get insurance amounts to a tax. An 1867 law blocks lawsuits over taxes that haven’t been imposed.

Justices including Stephen Breyer and Ruth Bader Ginsburg suggested they didn’t view an 1867 law as barring them from ruling this year. Ginsburg questioned whether health-care penalties would be taxes.

“This is not a revenue-raising measure,” Ginsburg said. “If it’s successful, nobody will pay the penalty and there will be no revenue to raise.”

The six hours of arguments spread over three days are the most the court has heard in a case in 44 years.

Tomorrow, the last day, the justices will consider what should happen to the rest of the law if they invalidate the insurance requirement. The court also will take up whether the law, by expanding the Medicaid program, unconstitutionally coerces states into spending more on health care for the poor.

The fate of the insurance requirement will turn partly on the court’s interpretation of the constitutional provision that lets Congress regulate interstate commerce. Justices’ opinions in previous cases only hint at how they may apply it to the insurance requirement.

The health-care cases are National Federation of Independent Business v. Sebelius, 11-393; Department of Health and Human Services v. Florida, 11-398; and Florida v. Department of Health and Human Services, 11-400.

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Investment Bank Dispute Ordered Reconsidered by High Court

The U.S. Supreme Court (1000L:US) told a lower court to reconsider deadlines for some securities lawsuits, in a dispute about whether investment banks must face accusations that they manipulated dozens of initial public offerings.

The 8-0 ruling yesterday is a partial victory for seven Wall Street firms, including Goldman Sachs Group Inc. (GS:US) and Morgan Stanley (MS:US), whose units were among the defendants in the case.

The ruling ordered lower courts to reconsider how long an investor can wait before filing lawsuits seeking to hold underwriters and corporate insiders accountable for “short swing” trades, those involving stock held for less than six months. Under federal securities law, insiders with large enough holdings must give back any profits from short-swing trades.

The high court overturned part of a decision by the 9th U.S. Circuit Court of Appeals, which said a two-year time limit for lawsuits over short-swing profits doesn’t begin until corporate insiders disclose the transactions in regulatory filings.

The justices split 4-4 on whether the law permits any extension of the deadline beyond two years after the stock-sale profits are realized. Chief Justice John Roberts didn’t participate in the case. The tie vote on that part of the case leaves intact the portion of the lower court decision that permits extensions of the deadline under some circumstances.

The justices, in an opinion written by Justice Antonin Scalia, sent the case back for further proceedings to determine what those circumstances may be, under rules that permit extensions of a statute of limitations in situations where a defendant has fraudulently concealed wrongdoing.

The justices told a federal appeals court to consider whether shareholder Vanessa Simmonds had enough information about the alleged wrongdoing that she should have filed suit sooner.

Investment banks had urged a firm two-year limit starting when stock-sale profits are realized, while Simmonds’s attorneys contended the two-year clock shouldn’t begin running until the insiders filed the disclosure forms.

The case is Credit Suisse v. Simmonds, 10-1261, U.S. Supreme Court (Washington).

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S&P Can’t Blame Global Crisis for Notes’ Collapse, Lawyer Says

Standard & Poor’s can’t blame the 2008 global financial crisis for the collapse of notes it recommended because it rated the debt as a long-term investment, said a lawyer for an Australian financial adviser.

Local Government Financial Services Ltd. sued S&P in Federal Court in Sydney, accusing the company of breach of duty and negligence in giving the notes the highest investment rating. LGFS filed the lawsuit after it was sued by a dozen Australian towns that lost more than 90 percent of their investment.

S&P may face potentially unlimited, or so-called indeterminable, claims if it’s found liable for its ratings, the New York-based unit of McGraw-Hill Cos. (MHP:US) said in written submissions that it’s scheduled to present to the court this week. S&P blamed the global financial crisis, when credit markets froze following the 2008 bankruptcy of Lehman Brothers Holdings Inc., for the notes’ collapse.

“To say adverse economic conditions, even very adverse economic conditions” could be blamed for the collapse of a AAA- rated 10-year investment is “totally unreal,” Guy Parker, LGFS’s lawyer said in his closing statement yesterday before Justice Jayne Jagot.

LGFS and the Australian townships also sued ABN Amro Bank NV, which became the Australian affiliate of the Royal Bank of Scotland Group Plc (RBS), and manufactured the investments, according to Parker. ABN Amro Bank in turn sued S&P, saying the ratings company failed to rate the notes “well and competently.”

The case is: Bathurst Regional Council v. Local Government Financial Services Ltd. NSD936/2009. Federal Court of Australia (Sydney).

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New Suits

Strauss-Kahn Charged in France With Prostitute Procurement

Dominique Strauss-Kahn, the former head of the International Monetary Fund, was charged by three investigating judges in the northern French city of Lille with procurement in a prostitution ring, prosecutors said.

The charge stems from an investigation into a prostitution ring linked to the Carlton hotel in Lille. Investigators uncovered evidence women had been hired to travel as far as Washington to have sex with the then-chief of the IMF.

Strauss-Kahn, 62, turned himself in Feb. 21 and was held overnight to answer questions as investigators sought to determine whether he knew the women were prostitutes, or how they were paid. French builder Eiffage SA (FGR) filed a complaint for embezzlement after an internal probe found an employee spent as much as 50,000 euros ($66,790) to pay for prostitutes for Strauss-Kahn.

“The three investigating judges in Lille in charge of the so-called Carlton affair have charged Mr. Dominique Strauss-Kahn with aggravated organized procurement of prostitutes,” prosecutors said last night in a statement.

The charges followed a closed-door meeting yesterday between Strauss-Kahn and judges. Prosecutors said Strauss-Kahn was ordered not to contact other people involved in the case, including the eight other people charged in the case, witnesses and the press, according to the statement. He was released on a 100,000 euro bond.

Paying for sex is legal in France, while procuring prostitutes for someone else isn’t. Under the French penal code, procurement in the context of a prostitution ring can be punished by as much as 20 years in jail and 3 million euros.

Strauss-Kahn “declared with the greatest firmness that he is not guilty of any of these deeds and never had the least awareness that the women he met could have been prostitutes,” Richard Malka, one of his lawyers, said last night upon leaving the judges’ offices in Lille. His lawyers will hold a press conference today in Paris.

The former IMF managing director gave up his post last year after being arrested in New York on charges he sexually assaulted a hotel maid. Local prosecutors dropped that case because of concerns about his accuser’s credibility and Strauss- Kahn returned to France, where he faced a separate accusation of attempted rape, which was also dropped.

The New York case is Diallo v. Strauss-Kahn, 11-307065, New York State Supreme Court (Bronx County).

Oppenheimer Fund Solicitation Challenged in Investor Lawsuit

An Oppenheimer Holdings Inc. (OPY:US) fund was sued by a Massachusetts municipal pension plan that alleges its investment was solicited with “materially untrue and misleading statements.”

The Brockton Retirement Board, which manages the southeastern Massachusetts city’s employee pension plan, yesterday sued Oppenheimer Global Resource Private Equity Fund I LP, sponsor Oppenheimer Asset Management Inc., the fund’s administrator, its general partner and two executives in federal court in Boston.

The Oppenheimer solicitation allegedly overstated the value of holdings in the Global Resource Private Equity Fund, described in a private placement memorandum as a fund of funds intending to invest in natural resource-related companies.

“As a result of defendants’ misleading statements, plaintiff and other members of the class have suffered significant damages,” the pension plan said in a complaint filed on behalf of other investors who bought into the fund based on the same solicitations. Requiring minimum investments of $500,000 for “Class A” units and $5 million for “Class B” units, the fund raised $85 million from April 2008 to April 2010, according to the complaint. Total investment, it said, was $140 million.

The Brockton plan invested $5 million, $3.2 million of which has been drawn upon in capital calls by the fund’s general partner, according to the complaint.

Brian Maddox of FT Consulting, a spokesman for Oppenheimer, said the firm hasn’t seen the complaint yet and had no comment.

The case is Brockton Retirement Board v. Oppenheimer Global Resource Private Equity Fund I LP., 12-cv=10552, U.S. District Court for Massachusetts (Boston).

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

Lawsuits/Pretrial

Facebook Asks to Dismiss Suit, Says Ceglia Aims to Disrupt IPO

Facebook Inc. (FB:US) asked a court to dismiss a claim by Paul Ceglia for a part of the company, saying he forged the 2003 contract his case is based on, fabricated e-mails and destroyed evidence of his alleged fraud.

Facebook, which operates the world’s biggest social- networking site, also asked to the court to block Ceglia from seeking evidence from its chief executive officer and cofounder, Mark Zuckerberg, including about 285 messages from Zuckerberg’s Harvard University e-mail account and computers he used as a student.

Ceglia hopes to use the litigation to “leverage his fraud by disrupting Facebook’s highly publicized initial public offering,” the company said in its court papers. Facebook filed last month for a planned IPO.

“This entire lawsuit is a fraud and a lie,” Facebook said, arguing that the case should be thrown out “immediately.”

Ceglia’s lawyers said in a statement yesterday that a jury should be permitted to consider evidence from Ceglia’s experts that his contract is genuine.

“Mr. Ceglia deserves his day in court, where the jury will resolve this dispute over the ownership of Facebook,” Ceglia’s lawyers said.

Ceglia sued Facebook and Zuckerberg in 2010, claiming he gave Zuckerberg money to develop his idea for Facebook in exchange for a half-interest in the social network. Ceglia claims he’s now entitled to half of Zuckerberg’s Facebook holdings.

Facebook yesterday produced about a dozen e-mails that hadn’t been disclosed publicly, seeking to bolster its defense against Ceglia’s claim. Those e-mails, along with three the company disclosed in court papers last year, show Zuckerberg continually demanding money he said Ceglia owed him. Facebook said it has recovered about 300 e-mails between Zuckerberg and people who worked for StreetFax, including Ceglia.

Ceglia’s lawyers have said they want access to Zuckerberg’s computers from the time of Facebook’s founding.

Both sides agree Ceglia hired Zuckerberg in 2003 to work on StreetFax, an Internet business Ceglia was starting to sell pictures of street intersections to insurance companies.

Facebook claims the true contract between Ceglia and Zuckerberg referred only to the StreetFax work and didn’t mention Facebook, which Zuckerberg started in 2004. The company, based in Menlo Park, California, attached a copy of the contract to the papers it filed yesterday. Facebook said it found the document on one of Ceglia’s computers,

The case is Ceglia v. Zuckerberg, 1:10-cv-00569, U.S. District Court, Western District of New York (Buffalo).

Madoff Feeder Fund’s Liquidators Drop Ernst & Young Lawsuit

The liquidators of M-Invest Ltd., a so-called feeder fund for Bernard Madoff’s bankrupt investment firm, dropped a lawsuit accusing Ernst & Young LLP of negligence, malpractice and breach of contract.

The liquidators said in documents filed in New York State Supreme Court in December that they were suing the New York- based accounting firm over audits of M-Invest’s annual financial statements from 2003 to 2007 and seeking $900 million in damages. Ernst & Young said the suit was without merit.

The plaintiffs discontinued the action, according to a court document filed March 23. No reason was given. Scott M. Berman, an attorney for the liquidators, and Charlie Perkins, a spokesman for Ernst & Young, declined to comment on the filing in a telephone interview.

Union Bancaire Privee, a private Swiss bank that set up M- Invest, a Cayman Islands corporation, to invest money with Madoff, agreed to pay as much as $500 million in December 2010 to settle claims by Irving Picard, the trustee liquidating Madoff’s firm.

The agreement ended claims against Union Bancaire, which was accused of accused of profiting from Madoff’s Ponzi scheme. Union Bancaire and M-Invest didn’t admit any liability, according to the agreement.

Madoff, 73, is serving a 150-year sentence in a federal prison in North Carolina after admitting to directing the biggest Ponzi scheme in history. The Securities Investor Protection Corp. has said that investors in so-called feeder funds aren’t customers of Madoff’s firm and can’t make claims on the estate of the bankrupt brokerage.

The case is M-Invest Ltd. v. Ernst & Young LLP, 653353/2011, New York State Supreme Court (Manhattan).

For the latest lawsuits news, click here.

Verdicts/Settlements

Deutsche Bank to Pay $32.5 Million to Settle Mortgage Suit

Deutsche Bank AG (DBK), Germany’s biggest lender, agreed to pay $32.5 million to settle claims in U.S. litigation that it lied about the quality of home loans underlying securities it sold.

The investors that sued, including the Massachusetts Bricklayers and Masons Trust Funds, filed a motion for preliminary approval of the settlement in federal court in Central Islip, New York, yesterday.

“The proposed settlement will provide a substantial monetary benefit to the settlement class,” lawyers for the plaintiffs wrote in the filing. U.S. District Judge Leonard D. Wexler must approve the deal.

Pools of home loans securitized into bonds were a central part of the housing bubble that, once burst, helped push the U.S. into the biggest recession since the 1930s. The market for mortgage-backed securities peaked at $2.3 trillion in 2007. Investors have filed class-action, or group, lawsuits against at least 16 private issuers of securities backed by mortgages.

The banks have argued the housing collapse, rather than any misrepresentation on their part, caused investor losses.

“We are pleased to have resolved this matter,” Renee Calabro, a spokeswoman for Frankfurt-based Deutsche Bank, said in a telephone interview.

The case is Massachusetts Bricklayers and Masons Trust Funds v. Deutsche Alt-A Securities Inc., 08-cv-3178, U.S. District Court, Eastern District of New York (Central Islip).

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JPMorgan Wins Case Against Trader Over Decimal Point Dispute

JPMorgan Chase & Co. (JPM:US) doesn’t have to pay a trader 580,000 pounds ($921,000) after a missing decimal point in an employment contract led him to believe his salary would be 10 times what was offered, a London court ruled.

Kai Herbert, a Switzerland-based currency trader, sued JPMorgan for lost earnings claiming he signed a contract to relocate to Johannesburg for a salary of 24 million rand ($3.1 million). JPMorgan said there was a typographical error and the figure should have been 2.4 million rand.

“Herbert took the commercial risk of accepting the offer, knowing full well that the figure was an error,” Judge Henry Globe said in yesterday’s judgment.

The trader resigned from UBS AG (UBSN) in June 2010 following the offer from New York-based JPMorgan to relocate to South Africa. Herbert didn’t report for work after discovering the discrepancy and JPMorgan rescinded the employment offer in December 2010.

Herbert has been unemployed since, other than eight months at Credit Suisse Group AG (CSGN), where he was fired in a round of job cuts in November. Banks globally have cut about 196,000 jobs since the start of 2011, according to data compiled by Bloomberg.

Kate Haywood, a spokeswoman for JPMorgan declined to comment. Dale Langley, Herbert’s lawyer, wasn’t immediately available to comment.

The case is Herbert v. JPMorgan, High Court of Justice Queen’s Bench Division, HQ11X02595.

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R.J. Reynolds Loses Bid to Fight Smoker’s Verdict in High Court

The U.S. Supreme Court won’t review a $28.3 million wrongful death verdict against R.J. Reynolds Tobacco Co., declining to consider legal questions that may affect thousands of similar cases by smokers and their families.

The court yesterday left intact the verdict in a case filed in the wake of a 2006 Florida Supreme Court decision that lets plaintiffs in cigarette-liability suits use factual findings by a jury in an earlier case to prove their claims. Reynolds, Altria Group Inc. (MO:US) and other U.S. cigarette makers claim Florida trial judges are applying the findings too broadly, depriving them of their right to defend themselves in court.

“The Florida state courts are engaged in serial due- process violations that threaten the defendants with literally billions of dollars of liability,” Reynolds said in a brief seeking review by the U.S. Supreme Court.

In its 2006 ruling, Florida’s highest court decertified a statewide class action and threw out a $145 billion punitive damage verdict against the industry. At the same time, the court endorsed many jury findings in the case, including that the companies were negligent, conspired to hide information about the dangers of smoking and sold defective products.

The ruling is known as the Engle decision, after Howard Engle, the lead plaintiff in the case filed in 1994 on behalf of Florida smokers addicted to nicotine who developed cancer, heart disease and other illnesses. Engle, a Florida pediatrician, died in 2009.

Reynolds asked the U.S. Supreme Court to review a case in which a Pensacola jury in 2009 awarded $3.3 million in compensatory damages and $25 million in punitive damages to Mathilde Martin, whose husband, Benny, died of lung cancer at age 66 after smoking Camel and Lucky Strike cigarettes for most of his life. An intermediate Florida appeals court upheld the verdict and the state Supreme Court declined to hear the case.

The case is R.J. Reynolds Tobacco Co. v. Martin, 11-741, U.S. Supreme Court (Washington).

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Biomet to Pay $22.9 Million to Settle U.S. Bribery Claims

Biomet Inc., (BMET:US) a closely held maker of medical devices, agreed to pay $22.9 million to settle U.S. accusations that it bribed foreign doctors to win business, the government said.

Biomet, based in Warsaw, Indiana, will pay a $17.3 million criminal fine to the U.S. Justice Department and $5.6 million to the Securities and Exchange Commission, the SEC said yesterday in a statement.

The SEC sued Biomet under the Foreign Corrupt Practices Act yesterday in federal court in Washington. The regulator alleged the company and four of its subsidiaries from 2000 to 2008 paid bribes to doctors in Argentina, Brazil and China.

Biomet cooperated with the government probes and conducted its own internal investigation, the company said in an e-mailed statement.

“Moving forward, we intend to continue to adhere to our enhanced global compliance procedures, and to promote the company’s commitment to the highest ethical standards in all the markets that we serve,” Jeffrey Binder, Biomet’s president and chief executive officer, said in a statement.

The case is U.S. Securities and Exchange Commission v. Biomet Inc., 12-00454, U.S. District Court, District of Columbia (Washington).

Clearwater’s Edwards Loses Loan Conversion Lawsuit Against ANZ

Jason Edwards, the chief lawyer at Clearwater Capital Partners LLC, lost a lawsuit against Australia & New Zealand Banking Group Ltd. (ANZ) in which he claimed the lender had unfairly converted his multicurrency loan.

“Edwards is a lawyer who works in the finance industry, who took out a mortgage loan with ANZ on terms he agreed to and who knew what he was getting into,” Singapore High Court Justice Tay Yong Kwang wrote in a ruling made public yesterday.

Edwards sued the Australian lender in 2010 after the value of the loan rose 47 percent to $4.2 million because his U.S. currency and Japanese yen debt were converted to the Australian dollar, according to his complaint. The yen and the U.S. dollar were the worst performers against the Aussie among 16 major currencies in 2009, according to data compiled by Bloomberg.

“This case, at its simplest, is one of a borrower who took out a loan to buy properties and to invest and now refuses or is unable to pay back,” Tay wrote in his 57-page ruling. “It is not in dispute that Edwards is a financially astute and sophisticated customer.”

Edwards, the general counsel of Clearwater which invests in Asian distressed assets, obtained the loan in 2006 to refinance his property in Australia’s Queensland state, according to court documents. The interest on Australian dollar loans was higher than the rate on U.S. dollar- or yen-denominated debt, according to the suit.

Melbourne-based ANZ had said it was within its rights to convert the currency according to the loan contract and had informed Edwards.

The case is Jason Glenn Edwards v. Australia & New Zealand Banking Group Ltd., S489/2010 in the Singapore High Court.

For the latest verdict and settlement news, click here.

Litigation Departments

Dewey Law Firm Adds Four Partners to Chairman’s Office

Dewey & LeBoeuf LLP (1151L:US), the New York-based law firm that lost its insurance group to other firms this month, is creating a new chairman’s office with five coequal members, including the heads of its most profitable groups, according to a letter to the partners obtained by Bloomberg News.

The new members include the heads of its bankruptcy, corporate, litigation and public policy practice groups, according to the letter, which also provides current revenue data. Current Chairman Steven Davis, who will relocate to London, will be joined in the chairman’s office by Martin Bienenstock, who runs the firm’s restructuring group; Rich Shutran, head of the corporate department; Jeffrey Kessler, head of litigation; and Charles Landgraf, who runs the the Washington office and the legislative and public policy group, according to the letter.

The new management team is being set up after “internal requests for more hands-on management,” Shutran said in a phone interview yesterday. Once voted in, the new structure will also send a message to clients that the heads of the most profitable practices are committed to the firm’s future, he said.

“We’re responding to a general sentiment that we should be more involved in the executive management of the firm,” he said.

“On insurance, we’re confident that the group’s departure has no impact on our firm’s profitability,” Shutran said. “That group was break-even at best.”

Dewey earned about $250 million last year, Shutran said.

Revenue for the first two months of this year rose 28 percent from a year earlier, and so called billable value increased 13 percent, according to the letter. Revenue for the 12 months through Feb. 29 grew 6 percent with an increase in billable value of 9.7 percent, according to the letter.

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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