Bloomberg News

Delaware Arbitration, J&J, E*Trade, Nasdaq: Compliance

August 31, 2012

Delaware Chancery Court judges sitting as arbitrators must hold public hearings and can’t exclude the public and news media, a federal judge decided.

The decision, by U.S. District Judge Mary A. McLaughlin in Philadelphia, came in a case brought last year by the Delaware Coalition for Open Government against chief Delaware Chancery Court Judge Leo Strine and the four other Chancery Court judges. The lawsuit challenged a new practice, resulting from a 2009 law, which allowed parties to opt for confidential, expedited arbitration with a sitting judge acting as the arbitrator.

“An arbitrator and a judge perform very different functions,” McLaughlin decided in a 26-page opinion yesterday. This type of proceeding, she said, “functions essentially as a non-jury trial” giving rise to a qualified right of access under the First Amendment.

David Finger, the attorney who filed the case, said the ruling will strengthen the courts and improve the economy of private arbitration using lawyers and retired judges who are experts in Delaware law.

The state of Delaware plans to appeal the decision.

“In an increasingly competitive global marketplace, the United States cannot afford to be at a competitive disadvantage in providing efficient ways for businesses to resolve their disputes,” Delaware said in a statement issued by Larry Hamermesh, a law professor at Widener University who represented Strine and the other Delaware judges in the case.

The case is Delaware Coalition for Open Government Inc. v. Strine, 11-cv-1015, U.S. District Court, District of Delaware (Wilmington).

Compliance Action

J&J Will Pay $181 Million Over Risperdal Marketing Claims

Johnson & Johnson (JNJ:US) will pay $181 million to resolve claims by 36 states that it improperly marketed and advertised the antipsychotic drugs Risperdal and Invega.

J&J and its Janssen unit settled claims that it promoted the drugs from 1998 through 2004 for uses not approved by the U.S. Food and Drug Administration. New York Attorney General Eric Schneiderman said yesterday the accord is the largest multistate consumer protection-based pharmaceutical settlement.

“This landmark settlement holds the companies accountable for practices that put patients in danger, and serves as a warning to other pharmaceutical giants that they must play by one set of rules,” Schneiderman said in a statement.

J&J agreed it won’t promote the drugs for off-label uses or tout them falsely. The company said Aug. 2 that it agreed in principal with the U.S. to settle three False Claims Act lawsuits. They involve Medicaid-related claims for Risperdal, Invega and the heart-failure drug Natrecor, as well as kickback allegations involving Omnicare Inc. (OCR:US) J&J will pay as much as $2.2 billion, according to people familiar with the matter.

The company, based in New Brunswick, New Jersey, settled “to resolve the concerns of the attorneys general under state consumer protection laws and to avoid unnecessary expense and a prolonged legal process,” it said in a statement.

J&J didn’t admit wrongdoing or pay a fine or penalty.

“We have chosen this path to achieve a prompt and full resolution of these state claims and to ensure we continue to focus on our mission of providing medicines to meet the significant unmet needs of many people who suffer from mental illness,” Michael Yang, Janssen’s president, said in a statement.

The settlement announced yesterday includes the District of Columbia, as well as the 36 states.

For more, click here.

E*Trade Reaches Agreement With States in Antitrust Probe

E*Trade Financial Corp. (ETFC:US) agreed to pay $100,000 and implement an antitrust compliance policy and training program under a deal with states investigating the retail securities brokerage industry.

E*Trade also agreed to cooperate with the probe of possibly collusive conduct by several retail securities brokers and firms that assist brokers executing orders, Connecticut Attorney General George Jepsen said yesterday in a statement.

The agreement was reached with Connecticut, Missouri and Iowa, according to letters to the companies from Connecticut describing the deal. TradeKing Group Inc. also reached a deal with the states and agreed to pay $100,000, Jepsen said. TD Ameritrade Holding Corp. (AMTD:US) and Scottrade Inc. previously reached deals in the investigation.

Robert Horton, an E*Trade spokesman, declined to comment on the agreement. Representatives of TradeKing couldn’t be immediately reached for comment. Neither company made an admission of wrongdoing, according to the letters, which were posted on the website of the Connecticut attorney general.

Knight Supports Nasdaq’s $62 Million Payout for Facebook IPO

Knight Capital Group Inc. (KCG:US) supports Nasdaq OMX Group Inc. (NDAQ:US)’s proposal to pay $62 million to companies that suffered losses in Facebook Inc. (FB:US)’s public debut, it said in a letter to the Securities and Exchange Commission.

The market maker joined Citadel LLC in backing the plan to reimburse members for losses resulting from technology errors on May 18, the first day of trading in Facebook shares. Citigroup (C:US) Inc. asked the SEC last week to reject Nasdaq OMX’s proposal, and UBS AG, which said it lost more than $350 million in trading related to Facebook, urged the agency to work with the exchange company to revise the plan to increase the amount paid.

Knight, along with Citigroup and the Securities Industry and Financial Markets Association, recommended a broader discussion of the limitation of liability that exchanges enjoy for financial losses resulting from their own technical mishaps. Nasdaq’s reimbursement plan is voluntary since the exchange’s cap on specific losses it causes is $3 million.

“As exchanges have evolved over the years, with greater and greater emphasis on profits and business expansion, the time is right for a more fulsome discussion on this issue,” Knight said in a letter dated Aug. 29. The broker asked the SEC to approve the $62 million payout and defer commenting on “issues relating to liability limitations and/or regulatory immunity until there can be a more comprehensive discussion,” it said.

Joseph Christinat, a spokesman for New York-based Nasdaq OMX, declined to comment.

For more, click here.

Universal’s EMI Bid Said to Face Vote Paving Way for EU Ruling

Universal Music Group’s 1.2 billion-pound ($1.9 billion) bid for EMI’s recorded music business faces a key vote by national regulators late next week, paving the way for a European Union ruling, according to three people familiar with the situation.

A positive vote on the deal by the national agencies may allow the European Commission to rule on the purchase as soon as a Sept. 19 meeting, said two of the people, who couldn’t be identified because the process isn’t public.

Vivendi SA (VIV)’s Universal Music has offered to sell global rights to EMI labels it earlier pledged to divest to eliminate regulators’ concerns that the deal could make the world’s largest record company too powerful in some European markets, one of the people said.

Universal Music’s revised package of asset sales adds to an earlier proposal to sell 60 percent of EMI’s European assets, two people said earlier this month. Extra concessions may make the iconic London-based label less attractive for Paris-based Vivendi, saddled with debt and under investor pressure to improve earnings, as it faces a deadline next month to pay for EMI.

The extra remedies include the sale of global rights to Parlophone Records, home to Coldplay and the Beastie Boys, according to one of the people.

The commission said it couldn’t confirm the announcement date for its decision, which must be taken by commissioners at one of three sessions before a Sept. 27 deadline, according to a press officer who declined to be named in line with official policy.

Universal Music officials declined to comment on any offer or the timing of any decision. EMI Music also declined to comment.

Citigroup agreed in November to sell EMI’s recorded music and publishing business in separate transactions for a combined $4.1 billion.

Ex-News Corp. Lawyer Said to Be Arrested Over Phone-Hacking

News Corp. (NWSA:US)’s former top U.K. lawyer, who clashed with James Murdoch over what he knew about phone-hacking at the News of the World tabloid, was arrested in the probe, according to a person familiar with the matter.

Tom Crone was detained at his home and is being interviewed by the Metropolitan Police Service, said the person, who asked not be identified because the matter isn’t public. The Met didn’t identify Crone in a statement yesterday about the arrest of a 60-year-old man in the investigation.

Crone emerged as a key figure in the scandal last year when he and Colin Myler, a former editor at the newspaper, contradicted testimony by Murdoch, News Corp.’s deputy chief operating officer, to Parliament regarding when he found out that phone hacking at the News of the World went beyond one reporter jailed for the practice in 2007.

Crone also clashed with News Corp. Chairman Rupert Murdoch after the men were called to testify at a parliamentary committee and a separate judge-led inquiry into media ethics. Crone said in April that the elder Murdoch told a “shameful lie” to the inquiry when he said the lawyer was involved in a cover-up of phone hacking.

The Guardian newspaper first reported Crone’s identity.

Crone’s lawyer, Henri Brandman, didn’t immediately return a call for comment. Daisy Dunlop, a spokeswoman for News Corp.’s U.K. unit, News International, declined to comment on yesterday’s arrest.

SEC Said Poised to Act Against Ex-Stanford Brokerage Executives

The U.S. Securities and Exchange Commission is poised to file enforcement actions against four former executives of R. Allen Stanford’s Houston-based brokerage over claims they facilitated the sale of bogus investments that fueled a $7 billion Ponzi scheme, a person familiar with the matter said.

The agency’s commissioners this week authorized sanctions against top officials at the Stanford Financial Group Co. unit for aiding and abetting the fraud, which unraveled in February 2009, the person said. The actions will name Jay Comeaux, the brokerage’s president from 1996 to 2005, his successor Daniel Bogar, private client group head Jason Green and Bernard Young, a former regulator who became chief compliance officer, according to the person, who asked not to be identified because the matters aren’t public.

Comeaux has agreed to settle the claims without admitting or denying the allegations and consented to be permanently barred from associating with a broker or investment adviser, the person said. Bogar, Green and Young are fighting the SEC’s claims.

Stanford, 62, was found guilty in March of using the brokerage to sell fraudulent certificates of deposit issued by his Antigua-based bank over the course of 20 years. He is serving a 110-year prison sentence for the fraud, which drew on more than 20,000 investors worldwide. Stanford’s former accountants and other executives also face criminal and civil claims.

J. Randall Henderson, an attorney for Young, said his client will fight the claims “with whatever possible in terms of resources and energy.”

Phone calls after regular business hours to attorneys for Bogar, Comeaux and Green weren’t immediately returned. SEC spokesman John Nester declined to comment.

In the Courts

FDA Sued Over Alleged Delays in Implementing Safe Food Rules

The U.S. Food and Drug Administration was sued over claims that it has failed to enact regulations intended to help prevent outbreaks of food-borne illnesses 18 months after a safety law was signed.

The government missed a January deadline for setting standards for the safe production and harvesting of fruits and vegetables and was supposed to establish regulations requiring food shippers to use sanitary practices by July, lawyers for the Center for Food Safety and the Center for Environmental Health said in a complaint filed Aug. 29 in federal court in San Francisco.

The groups’ lawsuit claims the government has failed to promulgate seven major food safety regulations required by the Food Safety and Modernization Act, signed into law by President Barack Obama in January 2011.

The lawsuit seeks a court order requiring the FDA to implement the regulations. Curtis Allen, an FDA spokesman, said in an e-mail that the agency can’t comment on pending litigation.

The case is Center for Food Safety v. Hamburg, 12-4529, U.S. District Court, Northern District of California (San Francisco).

Fannie Mae Executives Get Securities Lawsuits Narrowed

A lawsuit alleging ex-Fannie Mae (FNMA:US) Chief Executive Officer Daniel Mudd and other former officials misled investors about the company’s exposure to subprime and Alt-A mortgages was narrowed by a federal judge in New York.

Investors who bought Fannie Mae shares from November 2006 to September 2008, including a Massachusetts pension board, sued the company as a group in Manhattan federal court. U.S. District Judge Paul Crotty yesterday ruled they could pursue securities- fraud claims against Fannie Mae and its executives and dismissed state-law claims and some related lawsuits by individual investors. Crotty also allowed other aspects of the litigation to continue.

Fannie Mae bought mortgages from lenders and issued mortgage-backed securities. The U.S. government seized control of Fannie Mae and Freddie Mac (FMCC:US), another mortgage-finance company, in September 2008 after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies.

The judge also dismissed a suit against Goldman Sachs Group Inc. (GS:US) that had been consolidated with the Fannie Mae litigation. Liberty Mutual Insurance Co. alleged the bank misled investors in its capacity as lead underwriter for the Fannie Mae offerings, which Liberty purchased.

“Since Liberty failed to allege any actionable misstatements contained in the offering circular, it cannot show that Goldman made or supplied false statements to Liberty,” Crotty said. The judge also dismissed claims against Citigroup Inc. that were consolidated with the Fannie Mae litigation.

The judge rejected bids by Fannie Mae, Mudd and Enrico Dallavecchia, Fannie Mae’s former chief risk officer, to dismiss securities-fraud claims against them stemming from statements about the company’s subprime exposure.

Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment on the lawsuit. James Wareham, a lawyer for Mudd, didn’t immediately return a voice-mail message seeking comment on the ruling. Andrew Levander, a lawyer for Dallavecchia, didn’t immediately return a voice-mail left at his office after business hours. Andrew Wilson, a spokesman for Washington-based Fannie Mae, declined to comment.

Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, declined to immediately comment on the lawsuit.

Crotty said that while Fannie Mae had argued the plaintiffs were improperly relying on a “fraud by hindsight theory,” he said it wouldn’t defeat the plaintiffs’ allegations of misrepresentation and omissions that were allegedly misleading at the time they were made.

Crotty did grant a motion by Fannie Mae, Mudd and Dallavecchia to dismiss state-law claims, citing the federal Securities Litigation Uniform Standards Act of 1998.

Earlier this month, Crotty said Mudd and Dallavecchia must face a suit filed by the U.S. Securities and Exchange Commission that accuses him of misleading investors about the company’s exposure to risky loans.

The case is In Re Fannie Mae 2008 Securities Litigation, 09-mdl-2013, Southern District of New York, (Manhattan).

Comings and Goings

Senior Treasury Tax Official Michael Caballero Joins Covington

Michael Caballero, the former international tax counsel at the U.S. Treasury Department, will join Covington & Burling LLP’s Washington office as a partner in its tax practice on Sept. 10.

At the Treasury Department, Caballero led legislative, regulatory and treaty projects, included the implementation of the Foreign Account Tax Compliance Act, the firm said in a statement. Caballero also coordinated the representation of the U.S. in various international forums, such as the Organisation for Economic Co-operation and Development.

Before moving to the Treasury Department, Caballero was a partner at Paul Hastings LLP. He is currently chairman of the D.C. Bar’s International Tax Committee.

To contact the reporter on this story: Ellen Rosen in New York at erosen14@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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Companies Mentioned

  • JNJ
    (Johnson & Johnson)
    • $101.22 USD
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  • OCR
    (Omnicare Inc)
    • $63.94 USD
    • -0.29
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