lawsuit

Ray Brescia: Robo-Sign Scandal Gives State Attorneys General Opportunity to Move Towards a Resolution of the Foreclosure Crisis.

December 17, 2010

In the fall of 2010, in one of the largest scandals to ever hit the American court system, information gathered from lawsuits across the country revealed that tens of thousands of foreclosure filings were likely fraudulent — if not outright criminal. These revelations sparked a nation-wide investigation by all 50 state attorneys general to assess not only the extent of the scandal and its potential impacts but also potential legal and policy responses to such behavior. That investigation is nearing its close. The state attorneys general will have to consider what steps to take in light of this scandal. Some of the weapons in the law enforcement arsenal are consumer protection laws. Once we know all that there is to know about the scandal, the state attorneys general should wield consumer protection laws to not only rein in that scandal, but also make progress on resolving the entire foreclosure crisis. This can be accomplished by using consumer protection lawsuits to apply pressure on banks to engage in mortgage principal reductions. The robo-sign scandal gives them an opening, and the leverage, to do so. One of the important consumer protection statutes at the disposal of the state attorneys general includes each state’s Unfair and Deceptive Acts and Practices (UDAP) laws. All fifty states and the District of Columbia have some statutory ban on unfair and/or deceptive practices in trade or commerce. Many of these UDAP laws were adopted in the 1970s and early 1980s as states sought new tools to protect consumers from abusive business practices. These laws are modeled on the Federal Trade Commission Act (FTCA), which Congress passed in 1914 and makes unlawful “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.” One of the limitations of the FTCA is that it is typically only enforced by the U.S. Federal Trade Commission. Unlike the FTCA, however, many state UDAP statutes grant both consumers and state attorneys general the standing to bring actions alleging UDAP violations. UDAP laws serve a critical consumer protection function by filling in gaps in the law where other, more targeted statutes might not cover all practices that have a harmful impact on consumers. Since their inception, UDAP laws have been used to stop abusive practices in such areas as used car sales, telemarketing and even the sale of tobacco products. They have also been used to combat abusive foreclosure practices, as more fully described in this briefing paper on the subject. Once a violation of a UDAP law is found, state law enforcement officials can seek civil penalties, actual and punitive damages, and injunctions against offending parties. In its November 2010 report , the TARP Congressional Oversight Panel described the range of practices revealed in the so-called “robo-sign scandal.” The false affidavits, reckless claims and improper notarizations all violate the essence of most state UDAP laws; accordingly, the remedies available under such laws may be wielded by state attorneys general to halt abusive foreclosure practices throughout the nation. In addition, the actual damages to borrowers wrongfully foreclosed upon would seem quite substantial, especially if they lost equity in their home or were rendered homeless as a result of a faulty foreclosure. Given the high stakes at risk when deceptive practices are utilized in the foreclosure process, the prospect of substantial civil penalties and punitive damages, as well as injunctions preventing foreclosures from going ahead when tainted by robo-sign practices, is considerable. At the end of the day, however, the prospect of a resolution to such claims that minimizes the threat of stiff penalties or sweeping injunctions barring foreclosures from taking place should be enough to get lenders and servicers to the negotiating table to bring about solutions to the robo-sign scandal that are more acceptable to borrowers, lenders, servicers and investors alike. The best solution to the foreclosure crisis is mortgage principal reduction: i.e., bringing outstanding debt in line with home values. This both reduces the monthly payments borrowers must make and strengthens incentives to continue to make those payments by restoring the prospect of borrower equity in the home. The threat of significant penalties and injunctions through state UDAP laws for the abuses evident in the robo-sign scandal may be just the type of leverage needed to convince interested parties that such principal reductions are a more palatable resolution to UDAP enforcement actions than allowing such cases to drag out in the courts, where litigants may obtain more costly awards and more burdensome injunctions. Such principal write-downs would not be unprecedented in the UDAP enforcement context. In litigation filed by Massachusetts Attorney General Martha Coakley against Fremont Bank, and in the lawsuit Bank of America settled by paying $8.4 billion to resolve claims of predatory lending by its subsidiary, Countrywide, those banks faced UDAP and other claims, and ultimately resolved those cases in ways that promoted sustainable mortgage relief, including principal reductions. Getting banks to the settlement table through the pursuit of UDAP actions for robo-sign abuses could be a primary goal of UDAP actions in the wake of the robo-sign scandal. Should lenders and servicers wish to defend those actions on the merits, and risk judicial intervention that might translate into tens of thousands of dollars in penalties and punitive damages in each case, such would be their right. At the same time, a sensible response to such actions by the institutions caught up in the robo-sign scandal would be to consider more robust foreclosure mitigation strategies, including meaningful principal write-downs. State attorneys general should not hesitate to pursue UDAP remedies for robo-sign abuses. At the same time, they should be willing to discuss resolution of UDAP cases in ways that can promote mortgage principal reductions for those borrowers who might benefit from such relief.

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Lloyd Chapman: SBA Loses Legal Battle Over Crisis Management PR Contract

November 26, 2010

The Small Business Administration (SBA) has lost another Freedom of Information Act lawsuit filed by the American Small Business League (ASBL). The ASBL filed suit after the SBA refused to turn over information on potentially damaging public relations contracts awarded by the agency to APCO Worldwide Inc., an international public relations firm specializing in crisis management. The ASBL suspects the SBA has spent American tax dollars to hire consultants to help obscure the SBA’s role in diverting billions of dollars a month in federal small business contracts to Fortune 500 firms and other large businesses around the world. The ASBL believes the SBA may have launched a massive campaign to cover-up the diversion of federal small business contracts to large businesses, and to discourage the media from covering the issue. In one case, the SBA paid $30,000 for a one-day meeting with APCO executives. In winning the lawsuit, the ASBL has now forced the SBA to turn over complete copies of those contracts. Since 2003, more than a dozen federal investigations have uncovered billions of dollars a month in federal small business contracts are going to corporate giants. In Report 5-15 , the SBA’s own Office of Inspector General (IG) referred to the issue as, “One of the most important challenges facing the Small Business Administration and the entire Federal government today.” In Report 5-16 from March of 2005, the SBA IG reported that large businesses had committed fraud by misrepresenting themselves as small businesses through “false certifications,” and “improper certifications.” Another investigation from the SBA Office of Advocacy found large businesses had received federal small business contracts fraudulently through what they referred to as “vendor deception.” In recent years, the SBA has claimed the diversion of federal small business contracts to large corporations has been the result of harmless “miscoding.” In May of 2007, the SBA even went as far as to claim that it was a “myth” that large corporations received federal small business contracts. We are going to continue to sue the SBA to force the release of information that shows they have encouraged and protected firms that have committed felony contracting fraud. The proposal to combine the SBA with the Commerce Department is just the latest attempt by the government to cover up billions of dollars in abuse, while trying to further dismantle federal small business contracting programs.

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Lloyd Chapman: SBA Loses Legal Battle Over Crisis Management PR Contract

November 26, 2010

The Small Business Administration (SBA) has lost another Freedom of Information Act lawsuit filed by the American Small Business League (ASBL). The ASBL filed suit after the SBA refused to turn over information on potentially damaging public relations contracts awarded by the agency to APCO Worldwide Inc., an international public relations firm specializing in crisis management. The ASBL suspects the SBA has spent American tax dollars to hire consultants to help obscure the SBA’s role in diverting billions of dollars a month in federal small business contracts to Fortune 500 firms and other large businesses around the world. The ASBL believes the SBA may have launched a massive campaign to cover-up the diversion of federal small business contracts to large businesses, and to discourage the media from covering the issue. In one case, the SBA paid $30,000 for a one-day meeting with APCO executives. In winning the lawsuit, the ASBL has now forced the SBA to turn over complete copies of those contracts. Since 2003, more than a dozen federal investigations have uncovered billions of dollars a month in federal small business contracts are going to corporate giants. In Report 5-15 , the SBA’s own Office of Inspector General (IG) referred to the issue as, “One of the most important challenges facing the Small Business Administration and the entire Federal government today.” In Report 5-16 from March of 2005, the SBA IG reported that large businesses had committed fraud by misrepresenting themselves as small businesses through “false certifications,” and “improper certifications.” Another investigation from the SBA Office of Advocacy found large businesses had received federal small business contracts fraudulently through what they referred to as “vendor deception.” In recent years, the SBA has claimed the diversion of federal small business contracts to large corporations has been the result of harmless “miscoding.” In May of 2007, the SBA even went as far as to claim that it was a “myth” that large corporations received federal small business contracts. We are going to continue to sue the SBA to force the release of information that shows they have encouraged and protected firms that have committed felony contracting fraud. The proposal to combine the SBA with the Commerce Department is just the latest attempt by the government to cover up billions of dollars in abuse, while trying to further dismantle federal small business contracting programs.

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Wells Fargo ‘Nightmare’ For Homeowner Applying For Help Under Administration’s Anti-Foreclosure Program

November 12, 2010

WASHINGTON — Wells Fargo put an Illinois woman though a “nightmare of harassment, frustration, and relentless stress” when she tried to apply for a mortgage modification under the Obama administration’s Home Affordable Modification Program, according to a lawsuit filed in federal court this week. It’s a familiar nightmare to many lured by HAMP’s promise of reduced monthly payments. More people have been bounced from the program than have received “permanent” five-year modifications, and federal auditors say the program sometimes actually causes borrowers to lose their homes. Therese Crowley of Deerfield, Ill., facing reduced income because of health problems and less demand for her broker services, first asked for a HAMP application in April 2009. Wells Fargo allegedly dragged its feet for four months before it sent one along, then denied the application in October and gave her bogus explanations when she called to complain. In November, Wells Fargo told Crowley to apply again, then denied her again the following month. A week later she called the bank and spoke to a woman named Paula, who “determined that Wells Fargo had erroneously overstated Crowley’s income by $2,800,” the complaint alleges. “Also, the file erroneously indicated that Crowley owed $2,381.07 per month on a credit card debt which in fact had been paid off in 2002. Paula agreed that with the correct information (information that Wells Fargo had during this entire process), in her opinion Crowley qualified for a HAMP loan modification.” Crowley applied again and was denied again in March. She called to complain, and was once again told she qualified. Then Wells Fargo allegedly put her in a “special forbearance period” during which she made reduced payments for three months while continuing to pursue a HAMP modification. One day, she’d be told she didn’t qualify because of her income, another she’d be told she failed HAMP’s opaque “Net Present Value” test. In August, she allegedly received the following from a Wells Fargo executive: “As indicated, your income doesn’t have anything to do with why you were actually denied for HAMP. You were denied for Net Present Value, at the time of the denial for NPV, we had been instructed to not use that as the reason because we were not prepared to explain Net Present Value denials.” Crowley’s putative class action complaint is just one of many moving through courts across the country reflecting widespread frustration with HAMP. President Obama said the program would allow three to four million homeowners to modify their mortgages and keep their homes by 2012. So far, 466,708 are in active permanent modifications, while more than 700,000 have had their modifications canceled. Eligible borrowers are supposed to have their monthly payments reduced to 31 percent of their monthly income, usually saving $500 a month. If they make the reduced payments for three months, the modification is supposed to become permanent. Wells Fargo did not immediately respond to a request for comment from HuffPost. As for Crowley, she “hangs in limbo somewhere between loan modification and foreclosure,” according to the lawsuit. “I am not just fighting for myself,” said Crowley in a statement. “I want to make sure other people won’t have to endure the same nightmare of harassment, frustration, and relentless stress that I have suffered.”

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Antitrust Suit Against Inbev, Anheuser-Busch Falls

October 28, 2010

ST. LOUIS — The latest quest by 10 Missouri beer consumers who tried to block InBev’s $52 billion takeover of U.S. beer giant Anheuser-Busch fell flat Wednesday when an appeals court refused to resurrect their antitrust lawsuit. A three-judge panel of the 8th U.S. Circuit Court of Appeals upheld a federal judge’s decision to throw out the lawsuit last year. The suit claimed the 2008 merger of Belgium-based Inbev and St. Louis-based Anheuser-Busch – which created the world’s largest brewer – would diminish competition and raise beer prices. The panel suggested that allowing the lawsuit to go forward now could be counterproductive and fruitless. It was not immediately clear whether the plaintiffs planned more appeals. Messages left with several of their attorneys weren’t returned Wednesday. Federal regulators scrutinized the merger on antitrust grounds but ultimately signed off on it with few caveats. The deal was consummated in November 2008, two months after the group of self-described beer consumers sued. The lawsuit initially sought to block InBev’s acquisition of Anheuser-Busch, the maker of Budweiser that at the time controlled nearly half of the U.S. beer market. The suit cast the deal as a “plain violation” of federal antitrust law, among other things. If the deal went through, the lawsuit insisted, “the beer market in the United States would be controlled by absentee foreign owners (while) consumer welfare and choice and the benefits of competition would be substantially lessened and tend toward the creation of a monopoly.” The suit also claimed that “the constant threat of InBev, the largest brewer in the world, to enter the market” substantially affects the market behavior of Anheuser-Busch and other U.S. brewers. U.S. District Judge Jean Hamilton wasn’t swayed, siding with InBev and Anheuser-Busch when she tossed out the lawsuit in August 2009. In upholding Hamilton’s decision, the 8th Circuit suggested that allowing the lawsuit to go forward could be counterproductive to plaintiffs’ mission. Judge James Loken wrote in the panel’s ruling that a court degree ordering the companies to split would hurt not only employees and distributors, but “damage competition and consumers by crippling the operations of the largest domestic producer of immensely popular products.” Loken also noted that any price benefit for beer drinkers was unclear. Katherine Barrett, Anheuser-Busch Cos. Inc.’s senior associate general counsel, said the brewer welcomed Wednesday’s ruling against “this meritless lawsuit” bearing claims that were “unsupported and speculative.” The deal, in passing regulatory muster, followed the Justice Department’s demand that InBev sell Labatt USA, which sold its Canadian beer in the U.S. “The merger did not increase concentration or adversely affect competition in the U.S. market, and was in full compliance with (federal antitrust law),” Barrett said in a statement. The lawsuit and the deal it sought to scuttle came against the backdrop of an already consolidating U.S. brewing sector. In mid-2008, London-based SABMiller PLC and Molson Coors Brewing Co., based in Denver, combined their U.S. and Puerto Rico operations into MillerCoors, a month after the Justice Department concluded the joint venture wouldn’t reduce competition. In the months before its merger, InBev insisted that what ultimately became Anheuser-Busch InBev would not violate antitrust laws because it would combine breweries that operate in different geographic markets.

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Al Norman: Wal-Mart’s Infant Formula Scam

October 20, 2010

Wal-Mart Moms are not going to like this story. The world’s largest retailer was sued by the state of New Jersey two years ago for selling infant formula and over-the-counter drugs after the product expiration date. On top of that, Wal-Mart was selling items on sale that scanned in the cash register at incorrect prices. To settle the case and get it out of the headlines, Wal-Mart signed a Consent Order on October 19, 2010, in which it agrees to pay $775,000. This lawsuit has been going on since 2008. The same lawsuit included Target as a defendant, along with a third retailer that has since gone out of business. Target settled their case a year ago, and paid $375,000 to the state. Most of Wal-Mart’s money ($500,000) will be civil penalties. Another $160,000 will go to pay the legal bills of the state of New Jersey, and $40,000 for the cost of state investigations into the case. The final $75,000 will go into a new consumer education initiative, which may consist of: donations by Wal-Mart to selected New Jersey consumer education programs; placement of media advertisements by Wal-Mart; and donations by Wal-Mart to selected New Jersey elementary and secondary schools for consumer education. According to New Jersey Attorney General Paula T. Dow, Wal-Mart sold or offered to sell expired infant formula and non-prescription drugs to consumers. A court ruled last August that the Attorney General and New Jersey Division of Consumer Affairs had proven four of the eight counts in their lawsuit. It appears that Wal-Mart’s settlement offer was timed to shut down a trial that was about to begin in Hudson County, New York over other counts that the AG had leveled at the retailer — what Dow referred to as “various instances of unconscionable business practices.” No details on the “unconscionable” practices were spelled out in the AG’s press release announcing the settlement. As part of the agreement, Wal-Mart will have to periodically inspect its over-the-counter drugs and infant formula, and make sure its products are sold at their posted price at the point of check out. According to the settlement, Wal-Mart agreed to check the expiration dates on non-prescription drugs on a monthly basis, with all products’ expiration dates checked twice a year, and verify monthly online that each stores has completed its expired non-prescription drug check. Wal-Mart also agreed that its store managers will use a first-in, first-out method for the sale of infant formula and non-prescription drugs, and department managers will verify expiration dates on shelved infant formula containers when they restock such merchandise. The retailer agreed to remove infant formula from its shelves one month prior to the date of expiration; and remove non-prescription drugs from shelves at least three months prior to the date of expiration. The company will also follow uniform practices for destroying or returning to the manufacturing any OTC drugs or infant formula that are removed from shelves. Wal-Mart also has to guarantee the price accuracy of its products to ensure that merchandise is not “displayed, offered for sale and/or sold at a price that exceeds the price posted at the point of display or otherwise.” Wal-Mart says it will operate a “Pricing Credibility Program,” which authorizes cashiers to give consumers the lower of the scanned or advertised price on merchandise when a scanning or pricing error is discovered at checkout. Department managers are required to conduct an investigation of the error to make sure that it can be investigated and the shelf label can be corrected. Within the next month, all store managers at New Jersey Wal-Mart stores will be briefed on the summary of the Consent Order. Wal-Mart also is required to post “through a conspicuous link on its internal website for managers and associates” in each Wal-Mart store a summary of the Order. “This settlement puts the onus on Wal-Mart to check expiration dates when stocking its shelves, to periodically recheck stocked items, and then remove from sale any infant formula or non-prescription drugs that are past expiration,” said Attorney General Dow in a press release. “A responsible retailer should do no less and we expect full compliance at Wal-Mart’s 54 New Jersey stores.” But if Wal-Mart was a responsible retailer, this lawsuit would never have been filed in the first place. As is customary in such out-of-court settlements, Wal-Mart admitted no wrongdoing. But Wal-Mart settles cases it knows it is likely to lose. This case is similar to one six years ago in New Jersey in which Wal-Mart entered into a Consent Order regarding infant formula that had expired and over-the-counter drugs. For its part, a chastised Wal-Mart had little to say after the Final Consent Judgment. “Our customers depend on us to provide a good shopping experience with products and prices they can trust,” a company spokesman said, “so we’re committed to doing even more to make sure correct prices are posted and to remove products from our shelves well before their expiration dates. We also will conduct random price accuracy checks in stores throughout the state.” Wal-Mart has to be extremely careful of the trust relationship it maintains with its customers. If Wal-Mart Moms feel they have to carefully check the price and expiration date of each product they put into their cart, it undermines that trust. The fact that Wal-Mart was selling out-of-date infant formula is about the worst product you could pick to sow doubt among the Wal-Mart Moms. Wal-Mart is relying on the hope that its shoppers will have a much shorter memory than the Attorney General of New Jersey. But the “infant formula scam” is a sloppy operations error for a company that prides itself on flawless execution. That’s why it was worth $775,000 to shorten this story’s shelf-life, Al Norman is the founder of Sprawl-Busters. He has been helping communities fight big box sprawl for 17 years. His book “Slam Dunking Wal-Mart” is a grassroots classic on how to battle the giant retailers.

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Marty Robins: Conservatives: Do the Right Thing on Proxy Rules!

October 6, 2010

I’m a conservative because I feel that it is best for the greater good when government gets out of the way of the people, lets them make their own decisions and keep hold of their own earnings. I’ve been quite troubled by the activist, anti-business agenda which our current administration has pursued and feel that it has suppressed economic recovery — witness all economic statistics from unemployment to home sales to capital investment. A genuine conservative agenda — emphasizing personal responsibility instead of more programs, taxes and regulation — is an essential antidote. But when I read about the legal challenge to the new SEC proxy access rules which have caused a stay of the application of such rules, I wonder about the motives of my fellow conservatives. As a bit of background, the rules are intended to improve corporate governance by making it easier to remove poorly-performing corporate directors who fail to supervise management. In particular, the rules are intended to allow the names of candidates opposing the management slate of directors to go directly on management’s proxy card next to those of the management slate allowing dissatisfied minority holders to avoid costly proxy fights. Far from authorizing candidacies by fringe groups with trivial stock positions, the rules require a 3% holding for three years, which in many cases such as Apple, GE and other companies of the same size, will require over a billion dollars of stock. They also do not guarantee anyone a board seat, but only a spot on a ballot. Reading the papers filed by the Business Roundtable and U.S. Chamber of Commerce in their lawsuit made me wonder whether I had inadvertently been transported back 100 years to a wood-paneled private club where portly industrialists railed against “commonists” between sips from their brandy snifters and puffs on their cigars. Specifically, the papers which were filed dwell on the likelihood that the new rules will bolster the influence of “union funds,” “union interests,” “labor unions,” and “union pension funds” as reasons why its adoption was “arbitrary and capricious”. Reasonable arguments have been made by many, including institutional investors for institutional investors, and against the new rules. Only time will tell whether they will be sustained in court and if so, if they can facilitate the avoidance of the debacles we have seen far too frequently during the last decade, as corporate managements did stupid and/or dishonest things in the absence of any oversight from boards of directors. However, this sort of union baiting is hardly a legitimate argument. Anyone with a given stock position in a company should have the same rights, irrespective of their nature or affiliation. I feel that the labor laws are too heavily weighted toward labor, especially public employees, and that mandating card check to replace secret ballot in organizing drives would be a disaster for the economy. But saying that something is bad only because it bolster the voice of unions undermines the conservative movement. Invoking the specter of union domination suggests that far from principled opposition to a public policy, the supposedly mainstream Roundtable and Chamber may not care much about investors as a whole but care more about their “class” avoiding challenges to their authority. I sincerely hope that this is not the case and that other business organizations and conservatives will disavow these anachronistic sentiments and recognize that many business practices need to change in order to facilitate recovery and avoid future disasters . To facilitate the election of genuine conservatives, it is essential to demonstrate that this would serve the interest of the country as a whole and is not a movement limited to the privileged. For example, if we don’t want a Consumer Financial Protection Bureau taking steps which will reduce consumer lending and borrowing at a time when this would be disastrous for the economy, we need lenders to demonstrate that they have learned from recent debacles annd will behave responsibly on their own. In order to avoid and roll back the burdensome, counterproductive policies of the present administration, conservatives need to demonstrate that they are serious about individual responsibility, And that starts in the boardroom.

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Video: Boies Says U.S. Lawsuit Against AmEx `Doesn’t Fit’ Facts: Video

October 4, 2010

Oct. 4 (Bloomberg) — David Boies, chairman of Boies Schiller & Flexner LLP, talks about the U.S. Justice Department’s antitrust lawsuit against American Express Co. American Express vowed to fight the lawsuit while Visa Inc. and MasterCard Inc. reached a settlement with the government. AmEx is hiring Boies to handle its defense. Boies talks with Pimm Fox on Bloomberg Television’s “Taking Stock.” (Source: Bloomberg)

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Goldman Sachs Sued for Sex Discrimination

September 15, 2010

UPDATE : The lawsuit documents have been added below (hat tip to the WSJ .) Three former Goldman Sachs employees filed a gender bias lawsuit against the firm today, lamenting an “outdated corporate culture” run by, and catering to, men. Plaintiff H. Christina Chen-Oster, a former vice president in convertible bonds, joined Shanna Orlich, a former associate in trading, and Lisa Parisi, a former managing director in asset management, in filing the suit in Federal Court in Manhattan. According to the New York Times and Reuters , they’re taking action on behalf of all female managing directors, vice presidents and associate employees in the last six years. But that’s not as many people as it might seem. According to the NYT , the suit says women comprise only 17 percent of managing directors and 29 percent of vice presidents at Goldman. (Never mind partners, of which women are reportedly only 14 percent.) The suit claims that Goldman pays women less than men, denies them promotions, gives them unfairly harsh feedback, blocks business opportunities and, according to the Wall Street Journal ‘s summary, refuses to adequately train them. It gets worse. Chen-Oster, says the WSJ , claims in the suit that a male colleague groped her after an office party at a topless bar in 1997. Reporting the harassment, she says, hurt her status at the company. Orlich, who, the WSJ notes , holds a combined JD/MBA from Columbia and played on her high school’s varsity golf team, says in the suit that a male senior analyst assigned her the demeaning tasks of setting up his Blackberry and fielding calls from his wife. When she wanted to go golfing with the firm, the boys said no. A Goldman Sachs spokesperson told the WSJ that the suit is without merit. As of this writing, the lawsuit is not yet available on the Public Access to Electronic Court Records website. READ the summons: Goldmansummonses091510

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David Isenberg: ABC J’accuse MEP: There is no there there

September 14, 2010

Last week ABC News Investigative Team, including its chief investigative correspondent Brian Ross, ran a story that seemingly confirmed much of the negative coverage one sees in the media about private military contractor issues. On Sep, 8 it reported that Paul Funk, a former employee of Mission Essential Personnel (MEP), a major provider of translation service, interpreters and cultural advisors to the U.S. government, charged that more than one quarter, 28 percent to be precise, of the translators hired by the firm between November 2007 and June 2008 to work alongside American soldiers in Afghanistan failed language proficiency exams but were sent onto the battlefield anyway. [Click here for video interview excerpts.] Funk, who worked as Director of MEP’s Pre-Deployment Processing Center in Linthicum, Maryland, outlined his claims in a whistleblower lawsuit unsealed earlier this year against MEP, and co-defendants Language Learning Enterprises, Inc. and Ceiba Enterprises, Inc. dba Gracor Language Services Inc. , saying the company turned a blind eye to cheating on language exams taken over the phone and hired applicants even though they failed to meet the language standards set by the Army and spelled out in the company’s contract. Basically Funk is modifying the famous line from the classic move Cool Hand Luke; what we have here is a deliberate failure to communicate. Essentially Funk is claiming MEP committed Fraud. The relevant part of his complaint, filed April 1, states: MEP, LLE, and Gracor fraudulently presented and/or caused to present claims to the United States and received therefrom payment for services that were not rendered under an MEP contract with the United States military. MEP fraudulently presented claims to the United States and received reimbursement of per diem amounts that were not allotable under an MEP contract with the United States military. If these charges are true it would be enormously serious. Anyone familiar with U.S. military operations in Iraq and Afghanistan understand that without qualified translators and interpreters U.S. military success, however you define it, is virtually impossible. After all, it doesn’t take a rocket scientist to understand that you can’t win the hearts and minds of the local populace if you can’t understand what they are saying. There is only one problem with the ABC story. The more you look into it the shakier it looks. It seems similar to what Gertrude Stein famously said about Oakland, California, “There is no there there.” I will detail the reasons for doubting the ABC story in a moment but first some necessary background about the False Claims Act. The Act, also called the “Lincoln Law” due to its earliest incarnation first being passed back during the American Civil War) is an American federal law that allows people who are not affiliated with the government to file actions against federal contractors they accuse of committing claims fraud against the government. The False Claims Act, passed by Congress on March 2, 1863, was an effort by the USA to respond to entrenched fraud where the official Justice Department was reluctant to prosecute fraud cases. A reward was offered in what is called the “qui tam” provision, which permits citizens to sue on behalf of the government and be paid a percentage of the recovery. Qui tam is short for the Latin phrase “qui tam pro domino rege quam pro se ipso in hac parte sequitur”, which means, “he who brings a case on behalf of our lord the King, as well as for himself.” In a qui tam action, the citizen filing suit is called a “relator”. As an exception to the general legal rule for standing (law) of a party, courts have held that qui tam relators are “partially assigned” a portion of the government’s legal injury, thereby allowing relators to proceed with their suits. Persons filing under the Act stand to receive a portion (usually about 15-25 percent) of any recovered damages. The Act provides a legal tool to counteract fraudulent billings turned in to the Federal Government. The Act establishes liability when any person or entity improperly receives from or avoids payment to the Federal government–tax fraud excepted. Let’s acknowledge that this is a big contract (number W911W4-07-D-0010) for MEP). MEP’s contract, as initially awarded in September 2007 by the U.S. Army Intelligence and Security Command (INSCOM), included a 5-year ordering period (through September 2012) with a total ordering ceiling of $703 million. At the time of award, the agency estimated that it would need approximately 3,000 linguists to support the military’s operations in Afghanistan. Because MEP’s contract was imminently reaching its $703 million contract dollar ceiling, on March 18, INSCOM modified the contract to increase the ceiling amount by $78.5 million. INSCOM awarded MEP another $679 million dollars, on May 7. This second modification increased the dollar ceiling under MEP’s contract to $1.460 billion. Note that earlier in the year another firm, WorldWide Language Resources, Inc., protested the decision by INSCOM to modify its contract with MEP. WLR contended that the modification violates the competition requirements of the Competition in Contracting Act of 1984. But last month the Government Accountability Office, denied WRL’s protest, noting “the record shows that the agency reasonably concluded that the incumbent contractor was the only firm capable of meeting the agency’s interim need for the services.” In the years subsequent to MEP’s award, the military’s need for linguists has exceeded the numbers estimated by INSCOM. Presently, MEP’s contract supports approximately 6,826 linguists at up to 200 locations in Afghanistan. The increase was driven by the August 2009 review of the U.S. Afghanistan strategy directed by President Obama. Based on this review, the estimated requirement increased to 5,000 linguists per year in anticipation of greater U.S. involvement in Afghanistan. The second event was the “surge” decision of December 2009, which provided for sending an additional 30,000 U.S. forces to Afghanistan by the end of the summer in 2010. This surge has driven the need for linguists to their current levels since they are an integral component of the expanding U.S. combat operations in Afghanistan. Thus, MEP has an obvious self-interest in denying Funk’s claims. Let’s also note that the Defense Department Inspector General is investigating the case , per below; although that is standard procedure when a False Claims act is filed: Implementation of Security Provisions of a U.S. Army Intelligence and Security Command Contract for Linguist Support (D2010-D000JA-0165.001) The DoD OIG is determining whether the security provisions of a U.S. Army Intelligence and Security Command contract for linguist support in Afghanistan (W911W4-07-D-0010) were implemented effectively. This project is one in a series of reviews regarding linguist support in Afghanistan. Report D-2010-079 addresses whether a contract for linguist support in Afghanistan (W911W4-07-D-0010) included appropriate security provisions. The DoD OIG began this project during the 3rd Quarter of FY 2010. Although what the IG is investigating is whether the MEP translators were properly screened and vetted. This, by the way, is a U.S. government responsibility, not one of MEP. Let’s also acknowledge that one reason people may be inclined to believe Funk’s charges is that there have been real problems in the past with companies providing translators to the U.S. government. As RFE/RL reported two years ago: One problem has been for the U.S. military to get qualified Dari and Pashto translators who also meet the Pentagon’s security criteria. For years, the Pentagon required that its translators be American citizens and also have top secret military security clearance. That was the case through 2005 when translations for U.S. forces in Afghanistan were provided by the private U.S. firm Titan as part of a $4.65 billion contract with the U.S. Defense Department. Former Titan employees tell RFE/RL the company had great difficulties meeting the demand for Afghan translators with the necessary security clearance. As a result, former employees say Titan appeared to overlook the language deficiencies of many of the translators it provided. A firm called L-3 Communications Holdings inherited Titan’s translation contract when it bought Titan in 2005. [By year's end, with numerous complaints on file about Titan translators, L-3 lost the contract for interpreters in Iraq. A new five-year deal for U.S. military translations in Iraq was awarded in February to Global Linguistics Solutions, a joint venture of DynCorp International and McNeil Technologies.] One can find detailed background on U.S. military use of contractor linguists in this Defense Industry Daily roundup . All that said, there are several reasons to be skeptical of Funk’s claims Why should people doubt the ABC story? First, consider the source. ABC News, in recent years has not had a good record when it comes to breaking investigative stories. Brian Ross, in particular, has been wrong on multiple stories, as this Salon article recently detailed. In 2007, Ross ran an exclusive interview with former CIA officer Jon Kiriakou about, among other things, the efficacy of waterboarding. That story, hyped uncritically by ABC, was picked up in other media and informed the public debate about waterboarding for years — until, of course, it turned out to be bogus. Last November, Ross reported that the Fort Hood shooter, Maj. Nidal Malik Hasan, had attempted to make contact with “people” associated with al-Qaida. That turned out to be not true. In December, he reported that a released Guantánamo detainee was a mastermind of the attempted Christmas Day bombing. As it turned out, the detainee in question had actually been in the hands of Saudi authorities for months and had no role in the plot. That didn’t stop myriad media outlets from picking up the inaccurate story. Given his recent record if Ross were Treasury Secretary the country would be in a full-blown depression. Second, the way ABC dealt with MEP when getting its side of the story smacks of a setup. Keep in mind the timeline. ABC’s story ran Sep. 8. But it did not contact MEP until Sep. 1 and then only to say they were doing a story on translators without providing any specifics. It was not until the next day they asked about the allegations made by Funk. MEP officials asked for a meeting so they could rebut the allegations but they did not meet with ABC News until Sep. 7, the day before the piece ran. That smacks more of gotcha accusations, rather than serious journalism. Having done some writing for television myself in the past I know that if one is sure of one’s facts one does not do an interview with a company one suspects of wrongdoing less than a week before your story airs. Even so, according to a statement MEP released, “Prior to airing this erroneous story, MEP provided ABC extensive information on the record – both in-person and in writing. With willful disregard, ABC chose to ignore the facts, doing a grave disservice to the public, and to many good people in the field.” Third, and fairly important, Charles Miller, a Justice Department spokesman, who I reached by phone last Friday, said, that the Justice Department “has not joined the suit by the relator [Funk]. Now that is not to say it couldn’t do so later on. Still, if Justice thought Funk had a slam dunk case it likely would have already joined in the suit. Fourth, a hearing is expected to take place on September 23 where a judge will consider the motion by MEP attorneys to dismiss the case. Speaking on background, sources close to Funk’s legal team acknowledge that they may have to replead their suit and add more specificity to the charges, tacitly acknowledging that they understand the motion to dismiss will likely succeed. Thus, this would mean that Funk’s lawyers are asking for a third chance to amend their complaint, after failing two times in the past. Fifth, the ABC piece uses weak, secondary sources. ABC used a video clip depicting an interpreter doing a bad job, from the British Guardian, but that interpreter was not an MEP employee. ABC cited several other sources to bolster the claim that MEP linguists are flawed. One source is a former military Pashto linguist who says she witnessed bad translation. But her online bio says she was wounded and sent home in 2006, the year before MEP won its Afghanistan contract. Hence, she never worked with MEP linguists. The next source is an Afghan politician who says he has seen examples of poor Army translators. His comments are general and vague and there’s no indication he has ever worked with MEP linguists. In its online version , ABC quotes a British journalist saying he believes unskilled translators take the jobs because they are lucrative, referring to a linguist who became “the rock star of his village.” This reference makes clear the journalist is referencing linguists who are Afghan locals, not the US-hires discussed in the lawsuit. Sixth, ABC seems not to understand basic contract types. ABC suggested MEP is motivated to fill positions with weak linguists because “The more they recruit, the more they make.” But MEP’s contract is cost plus award fee, meaning MEP is reimbursed for its costs. MEP’s profit comes from its award fee which is tied to its performance rating from the Army. Award fee is based on the number of qualified linguists, as well as the quality of the linguists deployed. If MEP provided poor linguists, its rating, and therefore its profitability, would decline. Finally, in his complaint Funk says the defendants conducted Oral Proficiency Interview (OPI) testing of linguist candidates over the telephone, rather than in person, which is the industry standard and the only way to prevent fraud by the person being tested. But he fails to note that this was just the first of a three prong system MEP employs, the other two being a written test and an integrity test that occurs by video conference or in person, which MEP put in, above and beyond the terms of the contract. The phone tests and written tests are catalogued and saved for review by the military. It is worth noting that MEP’s contract with INSCOM does not actually call for doing in person interviews. Thus, at the time Funk worked for MEP translator candidates would undergo an OPI and written test. Later, after MEP instituted its integrity test, the candidate, if he passed the other two tests, would have to do an interview with a MEP employee who is a native speaker of the required language, such as Dari or Pashto. The standards for these language tests are set by the U.S. Government and are based on the Department of Defense’s Inter-Agency Language Roundtable (ILR) standards. MEP’s language testing programs were audited in 2008 and 2010. Back when Funk worked at MEP the OPI and the written test were the assessment tools used. Since then, MEP added the integrity test, a final assessment, which includes an in person or video teleconference interview with a native speaker who is an MEP employee. As noted earlier there has never been anything in MEP’s contract with INSCOM specifying the means by which it is supposed to test its interpreters. To the extent that this is a real concern government can easily solve it by specifying in its contracts the means for doing so, just as it specifies the means by which private security firms must confirm the qualifications of those they hire. Finally, the people in the best position to judge, MEP’s client, seem satisfied with its performance. At a July 26 hearing of the Commission on Wartime Contracting, MEP CEO Chris Taylor noted MEP has received ratings of “outstanding” from the US Government for the last eight quarters.”

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Irena Medavoy: Botox Bullet

September 14, 2010

Five years after the end of my lawsuit against Allergan — which I believe was the first lawsuit of its kind seeking damages for off-label use and misbranding of Botox — it is interesting to see that company finally agree to pay the federal government hundreds of millions of dollars to settle criminal accusations. Like many plaintiffs who have attempted to obtain justice in the courts against pharmaceutical companies, I did not succeed at trial — including in my claims that close financial and professional ties between my doctor and Allergan should have been disclosed to me. I famously (or perhaps infamously) lost at trial when a divided jury ruled against me on my claims regarding the physical harms I alleged and the trial court judge refused to hear my claims regarding alleged illegal marketing of Botox. But I now take comfort in the hope that my lawsuit may have played a role in raising public awareness about, and ultimately federal government attention to, Allergan’s practices in marketing Botox. According to the Department of Justice’s full press release about the settlement, if the settlement is approved, then Allergan must post on its website information about payments to doctors, such as honoraria, travel or lodging, in order to increase the transparency of Allergan’s interactions with physicians. This basic issue of disclosure is a matter of great importance to me, and should be for all members of the public. The federal government’s settlement with Allergan is an important step in the right direction, but it is not a complete solution. Wholly apart from whether Allergan in particular must now disclose such information about the doctors that it compensates is the far greater issue of why all doctors and pharmaceutical companies do not disclose such information regarding any drug or treatment being prescribed. In my opinion, it is important for patients to know such information, and there should be a legal right for patients to know such information, if such a right does not already exist under laws governing fair business practices. When I brought my lawsuit against Allergan alleging that I had been seriously and life-alteringly harmed by the spread of Botox throughout my body, my claims were met in some circles with disbelief and ridicule — and in other circles with full belief in their validity. Just a few years later, on July 31, 2009, according to information still available on the website of the Federal Drug Administration , the FDA “approved the following revisions to the prescribing information of Botox/Botox Cosmetic . . .: A Boxed Warning highlighting the possibility of experiencing potentially life-threatening distant spread of toxin effect from the injection site after local injection.” In my lawsuit, I also argued that Allergan’s promotion of off-label uses of Botox was against the law. Now, according to the Department of Justice press release, Allergan has been the subject of a criminal FBI investigation for its marketing practices. That investigation surely was an ugly experience for Allergan that must have caused its executives to experience headaches that could not be cured by Botox. Even though Allergan has had some success in beating back litigation by private plaintiffs like myself, finally, in the face of criminal charges by the federal government, Allergan has agreed to pay hundreds of millions of dollars based on charges similar to those that I alleged and that others like me alleged. Other plaintiffs now have their own lawsuits pending against Allergan regarding Botox. My hope is that those other plaintiffs, with the recent history of federal regulatory action against Allergan, will find success in the courts and that in the future potential patients will be adequately informed and protected from harm.

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David Isenberg: Strike Two on "Just Following Orders" Defense

September 9, 2010

To paraphrase Yogi Berra it’s déjà vu all over again for KBR. In my Aug. 31 post I wrote about a significant pro-veteran ruling in the Oregon KBR Qarmat Ali litigation. This is the case where Oregon National Guard troops allege KBR’s liability for negligence and for fraud arising out of plaintiffs’ exposure to sodium dichromate and resultanthexavalent chromium poisoning while assigned to duty at the Qarmat Ali water plant in 2003. Paul Papak, the federal district judge rejected the motion by KBR and co-defendants to dismiss the suit for lack of subject-matter jurisdiction and rejected it. I noted that the end result was that the “we were just following orders” defense is looking even lamer than ever. Now it turns out another judge, ruling on another KBR issue, its running of burn pits in Iraq and Afghanistan, has ruled the same way. Sick soldiers deployed in Iraq and Afghanistan filed claims against the corporations because of “alleged failures of the military contractors to treat water and dispose of waste in a manner required” by their contract with the US military. Today federal court judge Roger W. Titus ordered that claims against military contractors, KBR (Kellogg Brown and Root) and Halliburton, may proceed. In his 41-page opinion Judge Titus dismissed the jurisdictions of the defendants and is allowing limited discovery to go forward. In its ruling the Court stated, “In tension with the exercise of caution supported by these legal defenses is the legitimate concern that the judiciary may prematurely close courtroom doors to soldiers and civilians injured from wartime logistical activities performed by hired hands allegedly acting contrary to military-defined strictures. Courts must be prepared to adjudicate cases that ultimately expose defense contractors to appropriate liability where it is demonstrated that they acted outside the parameters established by the military and, as a result, failed to exercise proper care in minimizing risk to service members and civilians.” The judge notes the defendant’s objections to proceeding with the case based on 1) that Plaintiffs’ claims are nonjusticiable under the political question; 2) they are entitled to “derivative sovereign immunity” based on the “discretionary function” exception to the federal government’s waiver of immunity in the Federal Torts Claims Act and 3) are preempted by the “combatant activities” exception in the FTCA. But he then writes: In tension with the exercise of caution supported by these legal defenses is the legitimate concern that the judiciary may prematurely close courtroom doors to soldiers and civilians injured from wartime logistical activities performed by hired hands allegedly acting contrary to military-defined strictures. Courts must be prepared to adjudicate cases that ultimately expose defense contractors to appropriate liability where it is demonstrated that they acted outside the parameters established by the military and, as a result, failed to exercise proper care in minimizing risk to service members and civilians. These rival considerations drive Plaintiffs’ opposition to Defendants’ motion. Plaintiffs emphasize the preliminary nature of this lawsuit and the narrow tailoring of their tort claims to wartime logistical activities negligently performed by Defendants in breach of their duties under LOGCAP III. They argue that discovery relating to their claims is necessary and can be limited so as to avoid separation of powers and competency concerns and to minimize any potential interference with, and detraction from, the war efforts. For the reasons provided below, the Court agrees with Plaintiffs that their claims, based on their as yet unproven factual allegations, may be justiciable at this time. An initial phase of carefully limited discovery is therefore appropriate in order to frame the issue with sufficient facts so that the Court may make an informed decision. Now, this should not be taken that the Oregon National Guardsman will ultimately win in court. It is far too soon to be making such a prediction. For example, in explaining his decision the judge refers to various “Baker” factors. The Baker factor refers to a 1962 case in which the Supreme Court set forth six independent guidelines to aid a court in identifying a political question. 1. A textually demonstrable constitutional commitment of the issue to a coordinate political department; or 2. A lack of judicially discoverable and manageable standards for resolving it; or 3. The impossibility of deciding without an initial policy determination of a kind clearly for nonjudicial discretion; or 4. The impossibility of a court’s undertaking independent resolution without expressing lack of the respect due coordinate branches of government; or 5. An unusual need for unquestioning adherence to a political decision already made; or 6. The potentiality of embarrassment from multifarious pronouncements by various departments on one question For example, in regard to the first factor the judge is not ruling on whether the plaintiffs can meet their burden of proof motion. Rather he is asking whether the key inquiry posed by the first Baker factor of the political question doctrine is whether the Court can adjudicate this case without second-guessing the reasonableness of the military’s operations and decisions. Judge Titus says that “Based on Plaintiffs’ narrowly tailored claims, the Court believes it can, albeit with significant restrictions on the scope of the inquiry.” In regard to second Baker factor the judge wrote: The negligence standard is very flexible and depends heavily on the circumstances in each case. As of now, the Court does not know the precise nature of Defendants’ allegedly negligent actions nor their attendant circumstances. Only after discovery develops the facts surrounding any unauthorized acts by Defendants can the Court evaluate whether workable standards exist. Accordingly, the second Baker factor does not exclude this lawsuit from judicial review at this time. In looking at the fourth and sixth factors the judge wrote: Again, because Plaintiffs’ allegations pertain only to Defendants’ allegedly unauthorized performance of waste disposal and water treatment services, it is doubtful that the exercise of jurisdiction by this Court will somehow disrespect or embarrass the executive or legislative branches. In fact, subjecting defense contractors to potential tort liability for actions not approved by the military arguably expresses respect for the executive branch. [My emphasis] In a rulemaking to implement policy regarding contractor personnel authorized to accompany U.S. Armed Forces deployed outside the United States, the Department of Defense (“DoD”) explicitly advised military contractors that they could be subjected “to prosecution or civil liability under the laws of the United States and the host nation” for the “inappropriate use of force.” Defense Federal Acquisition Regulation Supplement; Contractor Personnel Authorized to Accompany U.S. Armed Forces, 73 Fed. Reg. 16,764, 16,767 (Mar. 31, 2008). When contractors expressed concern about their defenses in tort litigation, DoD made clear that it thought the rule “adequately allocates risks, allows for equitable adjustments, and permits contractors to defend against potential third-party claims.” Id. at 16,768. The DoD explained: [T]he clause retains the current rule of law, holding contractors accountable for the negligent or willful actions of their employees, officers, and subcontractors. . . . Contractors will still be able to defend themselves when injuries to third parties are caused by the actions or decisions of the Government. However, to the extent contractors are currently seeking to avoid accountability to third parties for their own actions by raising defenses based on the sovereignty of the United States, this rule should not send a signal that would invite courts to shift the risk of loss to innocent third parties. Consistent with the DoD’s position, the Court will not, at this early stage, allow contractors “to avoid accountability to third parties for their own actions” based on the political question doctrine, or as discussed below, based on the sovereignty of the United States. Id. (emphasis added). But perhaps the most intriguing part of the opinion comes when the judge discusses the Derivative Sovereign Immunity defense. As a general matter, the United States as a sovereign is immune from suit except under those limited circumstances in which it has waived that immunity. Judge Titus writes: The costs, however, of blanketing government contractors with the sovereign’s cloak of immunity at this early stage of the litigation are significant. In this case, Plaintiffs seek compensation for injuries resulting from exposure to burn pit emissions and contaminated water, which they allegedly would not have suffered absent what they claim were the Defendants’ decisions to breach LOGCAP III without the necessary military permission and to otherwise disobey military directives. Assuming the truth of these allegations, refusing such victims compensation and allowing Defendants’ allegedly unauthorized conduct to go unredressed would be contrary to the most fundamental tenets of our legal system. See Westfall, 484 U.S. at 295. In addition to shifting the risk of loss onto innocent plaintiffs, inappropriately extending official immunity to defendants would discourage them from properly assessing the risks involved in their actions and taking proper precautions. See 73 Fed. Reg. at 16,768 (“However, to the extent contractors are currently seeking to avoid accountability to third parties for their own actions by raising defenses based on the sovereignty of the United States, this rule should not send a signal that would invite courts to shift the risk of loss to innocent third parties. The language in the clause is intended to encourage contractors to properly assess the risks involved and take proper precautions.”). Thus, the costs of immunity to the hundreds of named Plaintiffs and to future government-defense contractor relationships are obviously considerable. Based on this preliminary balancing of interests, it cannot be said at this juncture that the public interest demands that the Westfall absolute immunity protect Defendants to the same extent it protects federal officials. Plaintiffs contend, and the Court agrees, that this case can proceed while “insulat[ing] the decisionmaking process from the harassment of prospective litigation.” See Westfall, 484 U.S. at 295. So long as the military’s decisionmaking process remains insulated and the government is freed from the “costs of vexatious and often frivolous damages suits,” id., the benefits to government efficiency are outweighed by the interests of the Plaintiffs in securing compensation for injuries resulting from Defendants’ allegedly unauthorized acts and of the public in holding Defendants accountable for any such wrongful conduct that may be proven.

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Judge: Video Game Addiction Lawsuit Can Proceed

August 29, 2010

HONOLULU — A federal judge has ruled that a man who says he’s psychologically dependent and addicted to an online video game can proceed with some of his lawsuit against the game’s South Korean manufacturer. Craig Smallwood says “Lineage II” left him unable to function independently in daily activities, such as getting dressed, bathing or communicating with family and friends. Smallwood says he’s spent more than 20,000 hours playing the multiplayer online role-playing game since 2004. The 51-year-old says NCSoft Corp. never warned him about the danger of game addiction. A Honolulu law firm that represents the company had urged that the case be dismissed, but U.S. District Judge Alan Kay in his Aug. 4 ruling allowed half of the eight counts to continue. ___ Information from: Honolulu Star-Advertiser, http://www.staradvertiser.com

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Naomi Wolf: Banks Siding Against the Customer in Fraud Cases

August 23, 2010

Like most consumers, I had always assumed that banks and customers are united in wanting to curtail bank fraud. Unfortunately, I have learned that in fact bank fraud is a big and profitable business — for the banks themselves; and that changes in electronic banking, combined with the power of lobbyists to sustain the status quo that is stacked against ordinary account holders, mean that if consumers’ accounts are corrupted, they can face systemic stonewalling by the banks themselves — and have little recourse. In 2005 I started to notice irregularities in a checking account I held with WaMu; but the irregularities were ambiguous. I sought at various times over the course of the next two years to go over all my statements — but had trouble getting all my records from both online banking and from my branch itself. A busy working parent, I was certainly not as proactive as I should have been — and, like many consumers of bank services, since we had family accounts and two mortgages at WaMu for many years, and had good relationships with our local branch, I also made the mistake of trusting the bank. I noticed eventually that checkbooks were missing from my home, and finally my accountant got enough of the records to see an unmistakable pattern of fraud, and called my attention to it. I filed a police report and alerted WaMu to the fraud. For months thereafter, as you can see in the lawsuit that attorney David Fish and I have filed against J P Morgan Chase, now owner of WaMu, that is up on TheSmokingGun.com , I complied with what the WaMu bank officials directed me to do — which was to leave the accounts open so they could investigate, they said, the fraud. If the fraud is reported within six months of confirmation of fraud, it is liable for the loss. Then the same officials who had directed me to keep the accounts open, disappeared — systematically, for just over six months. When I sought to talk to the fraud department, I still could not get records — including my own missing bank statements — even to see the full extent of my losses. The bank officials who had directed me to keep my accounts open were unavailable at the branch — over the course of many attempts to speak with them. The police at the Sixth Precinct needed to see the missing documents, but even they could not force WaMu to hand over their — my — records. (WaMu’s own internal emails cite a $300,000 figure for my loss from fraud — I still did not have enough of my records to identify the loss. It is illegal, by the way, to withhold from an account holder his or her own records). At eight months after the fraud discovery was confirmed — eight months of trying to communicate with officials and a fraud department who were oddly unavailable or unresponsive — I received a form letter from the WaMu Fraud Department advising me that according to the regulations, I had had a six month window for taking action; and (since WaMu had played out the clock for eight months) the letter asserted that I had waited ‘too long’ and my case was closed. Inadvertently, subsequent to that, a WaMu bank official handed me the wrong file — wrong from his point of view; illuminating from mine, and from any consumer’s. It contained emails, some of which you can see at TheSmokingGun.com , from WaMu bank officials to one another — and including emails from and to their counsel, PR department and and the fraud department — that take as given that stonewalling a client with a fraud claim on the bank is standard practice; and yet one freaked-out bank official in the emails warns his colleagues that if their mechanisms in this regard became known, their practices would be all over the newspapers. I was stunned by what seemed from the emails to be a systemic practice. Why would a bank want to perpetuate bank fraud rather than fight it? As I researched the issue and spoke to other consumer bank account holders whose accounts had been corrupted by fraud, and to consumer advocates, I learned how systemic experiences such as mine — and worse experiences — are becoming. I heard from consumers across the country from all walks of life who had also been misdirected by their banks, or told that for various technical reasons their corrupted accounts could not be closed, and then faced difficulty reaching fraud departments or officials once the fraud was confirmed. As Geoff Kischuck, an actuary in California whose business account was corrupted by fraud, and who then had to go daily to Bank of America for four months before he could successfully close the account, explained, there is a great deal of profit being made by banks with this situation. ‘The shift from paper checks clearing physically, to electronic bank transactions, benefits the banking industry immensely,’ he notes. The reason? It generates interest on the ‘float time’ that is still reckoned by the time that paper takes physically to clear, even while the electronic transaction is instantaneous; so it is in the interest of the banking industry to have as much electronic banking as possible. But electronic banking is much easier to hack — and identity theft and bank fraud have skyrocketed accordingly; but the bank benefits a second time with every case of bank fraud and identity theft — because of the immense fees — overdraft fees, bad check fees, that can amount to hundreds or even thousands of dollars with each corrupted account — racked up by the corrupted accounts. The longer it takes to close the corrupted account, the more difficult it is for the customer to have accountability with the bank’s fraud department — the more revenue for the bank. The bank freezes your ability to address the roblem — but continues to charge you fees for the corrupted account. `Because of the fees that get drained out of an account, banks actually profit from bank fraud,’ explains Kischuk.’ Multiply this by the number of times across the country a consumer account faces identity theft or bank fraud — and you see a mini-industry. Customers assume that banking regulation and Congressional oversight means that if they find fraud on their checking accounts, there is accountability — which is not in fact the case; strong bank lobbyists translate into weak protections for consumers and, as you can see from the emails, the bank’s reasonable assumption that most customers in this situation will not be able to hold them accountable. And indeed, since legal action is time-consuming and expensive, most defrauded bank customers do eventually give up and go away. I am certainly shocked by my own experience — but even more disturbed after learning that such things and even worse have happened and continue to happen to people from all walks of life — immigrants, retirees, people on disability — who have experienced loss of savings, retirement accounts, college fees, mortgage payments and so on through bank fraud — and who do all the things their banks direct them to do, only to find they have no actual recourse. They do not understand — as I did not — that a bank’s fraud investigation department is actually likely fraudulently representing itself as the customer’s, rather than solely the bank’s, advocate. Banks such as WaMu — and now Chase, which bought WaMu — expect such people to simply go away. They — and we — should, rather, reach out to our elected representatives for wholesale reform — and put each and every such case online, so consumers can see the worst offenders for themselves, and, with the power of the internet and their own consumer choices, protect themselves and demand accountability.

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Donald Bren, Billionaire Real Estate Tycoon, SUED By His Illegitimate Kids (VIDEO)

August 20, 2010

LOS ANGELES — Billionaire real estate mogul Donald Bren testified Thursday in the child support case brought by his two adult children, saying he was shocked when his then-lover told him decades ago that she was pregnant with their first child. Bren, one of the nation’s richest men, has an estimated net worth of $12 billion and has spent a lifetime protecting his privacy. Twenty-two-year-old Christie Bren and 18-year-old David Bren have sued him for $400,000 a month in child support retroactive to the time they were born. That comes to about $100 million. WATCH: The 78-year-old Irvine Co. chairman told a courtroom that he suggested to Jennifer McKay Gold that they create a legal agreement to provide for child care. He said they never talked about marriage or having a family. Four contracts were created involving child support entered into by Gold each time she became pregnant and after the children were born. The accords, beginning in 1988, rose from $3,500 a month to $18,000 a month between 1992 and 2002. Bren recounted that he and Gold dated in the mid-1980s but she never slept over at his home and the two would see each less frequently as the years passed. Bren said he was surprised that Gold became pregnant twice because he was under the impression she was using birth control. “I felt I was betrayed in that she promised me she would be protected and she wasn’t,” he said while under questioning by his lawyer, John Quinn. Bren said he saw both children after they were born a handful of times and sent them toys. He also said he paid for their college expenses. “I felt an education at the university level, at the graduate level is perhaps the best gift a parent can give a child,” he said. Gold gave an entirely different account of the pair’s 13-year relationship, saying she and Bren loved one another and saw each other regularly. She portrayed Bren as a jilted lover when she said she broke off the courtship in 1997 because she wanted a full-time partner. “He was not very happy about that,” Gold told jurors. “He said I would pay for that. He said he would punish me.” On cross-examination, however, Gold testified Bren never withheld child support payments from her after the split. She also confirmed that she received about $3 million in child support from Bren between 1988 and 2002. The payments were her only source of income for a majority of that time, she said. While her children had many amenities growing up, Gold attempted to tell jurors why she filed the lawsuit against Bren in 2003 on behalf of her kids. “I would have liked my children to have more in the lifestyle as their father,” said Gold, adding that Bren wasn’t keeping his promise to be involved in the kids’ lives. Earlier, the children’s attorney Hillel Chodos pointed out to Bren that none of the legal agreements limited the amount of support payments the billionaire could make. Bren noted that Gold could have sought to increase the child support through a court order. “She always had the right to appeal to the court,” he said. But Gold said Bren didn’t want her to seek additional child support because of the undue attention he would receive. “He wanted to preserve his privacy,” she said. “He was adamant about that.” Chodos portrayed Bren during his opening statement Wednesday as a high-living executive who has two California homes, a New York apartment, a Sun Valley ranch, two yachts and five private jets. Gold said Bren told her he spent $3 million to $5 million a month on personal expenses. Bren, wearing a black blazer, gray pants and a powder blue shirt, remained composed during his testimony and rarely elaborated on his answers. He could be recalled to testify on Monday.

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Alabama Sues BP Over Gulf Oil Spill

August 12, 2010

MONTGOMERY, Ala. — Alabama’s attorney general is suing BP and others over the Gulf oil spill because he says the oil company has broken too many promises about accepting responsibility for the disaster. Attorney General Troy King filed two lawsuits in federal court in Montgomery late Thursday afternoon on behalf of the state. The lawsuits – one against BP and the other against Transocean, Haliburton and other companies associated with the spill – seek economic and punitive damages. No specific amount was listed. The lawsuit accuses them of damaging Alabama’s coast and economy through “negligent or wanton failure to adhere to recognized industry standards.” BP spokesman Justin Saia said the company had not seen the lawsuit and had no comment. At least 300 federal lawsuits have been filed in 12 states against BP and the other three main companies involved in the April 20 explosion aboard the Deepwater Horizon drill rig, which triggered the disaster. King sued against the wishes of fellow Republican, Gov. Bob Riley, who hopes to reach an out-of-court settlement with the companies. BP was leasing the rig Deepwater Horizon from owner-operator Transocean Ltd. when it exploded and sank, killing 11 workers. Halliburton Energy Services Inc., had been working to cap the well that ended up leaking with cement prior to the explosion. The broken well spewed some 200 million gallons of oil into the Gulf for three months before it was plugged. Riley spokesman Todd Stacy said the governor had not seen the lawsuits. He said the state is still compiling a list of economic damages that it will submit to BP soon. If the company doesn’t provide fair and fast compensation, then the state would have a dispute. “When there is a dispute, then a lawsuit is appropriate,” he said. King said his move is not premature. “As Alabama’s lawyer, I say that, if anything, based on BP’s broken promises, their history of saying one thing and doing another, and now, new information that they have been secretly working to gain a legal advance, further delay can only further damage our people,” King said. He said BP is retaining the best expert witnesses to keep the other side from using them to testify against BP and is selling assets perhaps to keep an American court from reaching them to satisfy a judgment. Riley appointed King as attorney general in 2004. But since then, they have become adversaries. Riley created the task force on gambling because King wouldn’t take action against electronic bingo games at casinos. They’ve been battling it out in the courts over whether the task force has the authority to raid the casinos and seize the games. As for the spill, a team of economic experts is still trying to put a figure on the state’s economic losses. King will be out of office before the lawsuit makes much progress in court. He lost the Republican primary June 1 to Birmingham lawyer Luther Strange. Strange said King should have consulted with the governor and Gulf coast mayors to make sure the litigation doesn’t hurt ongoing negotiations with BP. The Democratic nominee for attorney general, Montgomery lawyer James Anderson, said King may have had a stronger case if he brought in Alabama cities and counties affected by the spill and possibly even other Gulf states. He said BP has already lined up some of the top lawyers in the state, and the attorney general’s office will have to bring in outside lawyers with experience in this type of litigation if it hopes to win. “We’ve got plenty of time to add on attorneys,” said Chris Bence, the attorney general’s chief of staff.

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Texas Sues Obama Administration Over ‘Unjustified’ Deepwater Drilling Moratorium

August 11, 2010

HOUSTON — The Texas attorney general sued the Obama administration Wendesday over its new deep-water offshore drilling moratorium, claiming it is unjustified and federal officials did not contact the state before issuing the ban. Attorney General Greg Abbott filed the 18-page suit in federal court in Houston against Department of the Interior Secretary Ken Salazar. The ban halted the approval of any new permits for deep-water projects and shut down drilling at 33 exploratory ocean wells in the wake of the BP spill in the Gulf of Mexico. In his lawsuit, Abbott called the ban “an unjustified, arbitrary and capricious policy that will inflict harm upon coastal communities.” Also, the suit said, federal officials did not coordinate with the state or consider the economic impacts before issuing the moratorium. Texas is one of the nation’s most active oil refinery states. State figures show there were 86,900 jobs in oil and natural gas extraction in April and an additional 107,800 in support industries. Interior Department spokeswoman Kendra Barkoff defended the ban but declined to comment specifically on the Texas lawsuit. “The Deepwater Horizon/BP oil disaster has made it clear that we need better health, safety and environmental standards for drilling operations,” Barkoff said in an e-mailed statement. “The temporary pause on deep-water drilling that Secretary Salazar has put in place is simply common sense, and we continue to stand behind it.” The current moratorium replaced one that was blocked by the courts. The Interior Department says it’s meant to give to give oil and gas companies time to implement adequate safety measures. The ban is in effect until Nov. 30, unless federal officials determine deep-water drilling operations have gotten safer. Also Wednesday, the Justice Department asked a federal judge who overturned the initial moratorium to throw out that court challenge filed by several offshore service companies, arguing that it is moot now that the new ban is in place. Company lawyers, however, claim the second moratorium is a “carbon copy” of the first and is a sham designed to circumvent U.S. District Judge Martin Feldman’s earlier order by prolonging the court challenge. The new ban does not seem to deviate much from the original moratorium in that it still targets deep-water drilling operators while defining them in a different way. ESNCO Offshore Co. has filed a separate lawsuit challenging the new moratorium. Feldman also is presiding over that case. Meanwhile, the Interior Department is hosting eight forums – including a Houston session in September – to gather information from experts and federal, state and local leaders about drilling safety reform, well containment and oil spill response. With that information, officials plan to consider whether to continue, end, reduce or expand the moratorium. ___ Associated Press Writer Michael Kunzelman in New Orleans contributed to this report.

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SEC Accuses Sam And Charles Wyly, Billionaire Dallas Investors, Of Insider Trading Yielding $550 MILLION

July 29, 2010

DALLAS — Famed Dallas billionaire investors Sam and Charles Wyly made $550 million in undisclosed profits through 13 years of insider trading in the shares of companies on whose boards they served, according to a Securities and Exchange Commission lawsuit filed Thursday. In a 78-page complaint filed in a Manhattan federal court in New York, the SEC said the Wylys held and traded tens of millions of securities in the companies and “defrauded the investing public” by misrepresenting the Wylys’ ownership and trading of those shares. “The apparatus of the fraud was an elaborate sham system of trusts and subsidiary companies located in the Isle of Man and the Cayman Islands … created by and at the direction of the Wylys,” the SEC complaint stated. Using this offshore system, the Wylys were able to sell stock worth more than $750 million in four public companies where they served as corporate directors. They also committed an insider trading violation at one of the companies that resulted in an unlawful gain of over $31.7 million, according to the complaint. The complaint lists the four companies as Michaels Stores Inc., Sterling Software Inc., Sterling Commerce Inc. and Scottish Annuity & Life Holdings Ltd., which is now known as Scottish Re Group Ltd. “The cloak of secrecy has been lifted from the complex web of foreign structures used by the Wylys to evade the securities laws,” Lorin L. Reisner, SEC deputy director of enforcement, said in a statement Thursday. “They used these structures to conceal hundreds of millions of dollars of gains in violation of the disclosure requirements for corporate insiders.” Also named as defendants in the lawsuit are the Wylys’ investment attorney, Michael C. French of Dallas, who was accused of covering the operation “with a false cloak of legality that was essential both to its concealment and its execution. Another defendant was the Wylys’ stockbroker, Louis J. Schaufele III of Dallas, who was accused of using his position to conceal and misrepresent the Wylys’ control over the securities and making insider trades himself. The Wylys’ defense attorney, William A. Brewer III of Dallas, called the charges “without merit” and said the Wylys “intend to vigorously defend themselves – and expect to be fully vindicated.” “At worst, the claims appear to represent an after-the-fact justification for a misguided six-year investigation,” Brewer said in a statement issued by his law firm. Attorneys for French and Schaufele had no comment Thursday. In March, Forbes magazine estimated Sam Wyly’s net worth at $1 billion. He has given generously to Republican causes and candidates, including the Swift Boat campaign that helped re-elect President George W. Bush in 2004 by tarring his Democratic opponent, Sen. John Kerry.

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Justice Department Sues Oracle For FRAUD Over Software Contracts

July 29, 2010

NEW YORK — The U.S. Justice Department said Thursday it is joining a fraud lawsuit against Oracle Corp. related to software contracts worth hundreds of millions of dollars. The agency said Oracle failed to offer government customers the same discounts on its software that it offered commercial customers, as it was required to do. As a result, the lawsuit alleges, Oracle overcharged the government on a contract that ran from 1998 to 2006. Paul Frascella, Oracle’s senior director of contract services, filed the original lawsuit in May 2007 under the False Claims Act, which allows whistleblowers to sue on the government’s behalf and share in any damages recovered. Oracle did not immediately return messages for comment. “We take seriously allegations that a government contractor has dealt dishonestly with the United States,” Assistant Attorney General Tony West said in a statement. “When contractors misrepresent their business practices to the government, taxpayers suffer.”

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Video: Issa Questions Timing of SEC’s Goldman Suit, Settlement: Video

July 23, 2010

July 23 (Bloomberg) — U.S. Representative Darrell Issa talks about the timing of the Securities and Exchange Commission’s lawsuit against Goldman Sachs Group Inc. and subsequent $550 million settlement with the firm. SEC Inspector General H. David Kotz, in response to a request from Issa, said he will expand his probe on whether politics prompted the lawsuit to include the agency’s July 15 settlement accord. Issa speaks with Erik Schatzker on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

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DELL SEC Settlement: Computer Maker To Pay $100 Million Over Accounting Fraud Charges

July 22, 2010

WASHINGTON — Computer maker Dell Inc. is paying $100 million to settle civil charges that it used fraudulent accounting to meet Wall Street earnings targets, the government announced Thursday. Under the settlement with the Securities and Exchange Commission, company Chairman and CEO Michael Dell also agreed to pay a separate $4 million civil penalty. While the fine was far from the largest penalty levied by the SEC, the decision to charge a sitting chief executive of a major company and reach a seven-figure settlement with him is rare. Michael Dell is one of the most prominent figures in the technology industry, credited for revolutionizing the PC market by making the computers cheap and accessible. The SEC said the company also failed to disclose to investors large payments it received from Intel Corp. in exchange for not using equipment made by Intel’s main rival, Advanced Micro Devices Inc. Those payments enabled Dell to meet its quarterly earnings targets. After Intel stopped the payments, Dell again misled shareholders by not disclosing the real reason its profits had dropped, the SEC said. Michael Dell and four former executives falsely portrayed the means by which the company met earnings targets from 2002 through 2006, the SEC said in the lawsuit. Without the payments from Intel, the agency said, Dell would have missed analysts’ estimates in every quarter during that time. The company and Michael Dell neither admitted nor denied wrongdoing. But they did agree to refrain from future violations of the securities laws. The company also agreed to improve its disclosure process by hiring an outside consultant and expanding its training of employees. The SEC also named former Dell CEO Kevin Rollins, former Chief Financial Officer James Schneider, former regional Vice President of Finance Nicholas Dunning and former Assistant Controller Leslie Jackson in the suit. Rollins agreed to pay a $4 million civil penalty. Schneider is paying a $3 million penalty as well as $83,096 in restitution and $38,640 in interest. Dunning is paying a $50,000 penalty. The SEC said its investigation of the Dell matter and the possible role of other individuals continues. “Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws,” SEC Enforcement Director Robert Khuzami said in a statement. “Michael Dell and other senior Dell executives fell short of that standard repeatedly over many years, and today they are held accountable.”

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Raymond J. Learsy: The Goldman Sachs Settlement, the Wall Street Journal, Warren Buffett, and the White House

July 17, 2010

The timing of the Goldman Sachs settlement has raised eyebrows coming almost simultaneously to the passage of the Financial Regulations Bill and despite the fervent denials by Robert Khuzami, the SEC’s enforcement chief. The suspicion remains that the settlement was, if not politically motivated, at the very least politically timed. The answer? I don’t know. Today the Wall Street Journal reported that the “SEC Split Over Goldman Deal” voting 3-2 according to party lines to settle the lawsuit. At issue was whether the decision to abandon the strongest fraud charge was justified. The size of the fine? Well that, as everyone now knows is $550 million, trumpeted as the largest fine ever levied by the SEC. This on a transaction (the now notorious Abacus 2007-AC1 CDO) that cost two hapless European banks some $1 billion and for which they will receive a total of $250 million out of Goldman’s $550 settlement with the SEC. This on a transaction on which the Royal Bank of Scotland (now 83% owned by the British Government) lost $841 million, along with part of the settlement funds going to Germany’s IKB Bank that according to Reuter’s quoted Merck Finck analyst Konrad Becker provides “little consolation, if any, given that overall losses were much higher for IKB.” The language of the settlement will probably make it more difficult for the two European banks impacted in this instance to achieve full restitution from Goldman in that the settlement’s language averts allegations or usage in the legal sense of the term “misconduct.” It will likewise weigh on additional litigation in process that focus on other allegedly dubious financial instruments as in the Australian “Timberwolf” proceeding. Also noteworthy, according to the Wall Street Journal article, investors had been anticipating a fine of $1 billion or more. The fine actually levied at $550 represents but 2.4% of the $23 billion Goldman set aside for its 2009 bonus pool. Additionally, on Thursday as rumors of the settlement hit the market and was then announced, the stock climbed by some $13 a share, or some $7 billion in value. Clearly the settlement is a major plus for Goldman. The rush to settlement was instigated, according to the Wall Street Journal article, because the SEC had gotten wind of the fact that the WSJ was preparing an article on the “catch all settlement talks.” Really? Perhaps. But perhaps another tidbit might well be considered. Earlier this week President Obama met with Warren Buffett at the White House. Buffett’s Berkshire Hathaway Inc. had invested $5 billion in Goldman Sachs. According to the New York Times report on July 14th “the meeting covered everything under the economic sky”. Were the gathering storm clouds of the Goldman litigation part of the vista in view as well?

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Owen Thomas: Tesla Motors CEO Can’t Handle the Truth

July 9, 2010

Elon Musk, the CEO of electric-car startup Tesla Motors and rocket-launcher SpaceX, should be applauded for the mighty challenges he’s taken on and the powers of persuasion he has deployed to build his companies. But along the way, he discovered that he could stretch the truth, casually and frequently, as a shortcut to getting things done. Clad in a sheen of bubbly optimism, his mendacity nonetheless has consequences. Through Tesla’s IPO, he has now taken hundreds of millions of dollars from taxpayers and public investors who expect not just a return but square dealing from the man who is managing their company for them. So where has Musk spun the facts? Critical reporting Well, let’s go with the most recent one: He’s lied about me, and VentureBeat, apparently in retaliation for our aggressive and accurate reporting. In an article published by the Huffington Post , he calls me “Silicon Valley’s Jayson Blair .” He accused me of making errors, but never once specified them. Here’s the truth: I cited Musk’s own words from court filings, which we had paid a freelance reporter to find and copy, legally, from a courthouse in Van Nuys, Calif. I also interviewed a host of other sources. I emailed Musk questions and called his lawyer repeatedly before publishing. We went to extra lengths to nail down the facts: Before publishing, VentureBeat editor-in-chief Matt Marshall called Musk and had interviews with at least three Tesla board members. We make no apologies for seeking the truth about Tesla Motors and Elon Musk, a vital company and an iconic entrepreneur of Silicon Valley. Our reporting (here’s one example of our series) helped investors get a more truthful picture of a company that was going public and the man behind it. Musk also accused me of “collaborating” with the lawyer representing Justine Musk, his ex-wife, in their divorce case. Also false: I picked up the phone and called her lawyer, and he had the courtesy to answer my questions. Now, we should all be used to Musk insulting journalists who don’t report what they’re told to. But calling someone a “Jayson Blair” is a troubling assertion to anyone who prefers his insults to have a factual basis. When I ran fact-checking at Business 2.0 magazine, here’s what I would have asked the writer to prove before I’d let him get away with that kind of factual assertion: So, you want to compare this Owen Thomas person to one of journalism’s most infamous miscreants . Is Owen Thomas a drug addict? Is Owen Thomas mentally unstable? Has Owen Thomas plagiarized or invented facts? The answer to all of those, in case you were curious, is no. And so out comes the chief of reporters’ red pen. The one specific claim Musk made about my reputation was that I had written that he was broke. Not true. If you review the story I reported on his personal finances and their impact on Tesla , you’ll see I merely quoted Musk’s own words from his divorce filing, in which he said that he “ran out of cash.” When VentureBeat first started raising questions about Musk’s personal finances, his expensive divorce case, and the impact they might have on Tesla’s IPO, a Tesla spokesman initially said that the company had no plans to update its IPO prospectus to reflect our reporting. However, in the end, Tesla updated its SEC filings to acknowledge substantially all of the concerns we raised as potential risk factors investors should consider. That is the ultimate correction of the record, and it stands today. Musk’s personal spending There are other whoppers in Musk’s piece, such as the suggestion that of the $200,000 per month he’s spending, a mere $30,000 a month is going to his own personal household expenses, with the rest going to legal fees in his divorce case. Actually, the figure he told a court is $98,023 a month, according to filings in that case , including $50,000 a month in rent. The founding of Tesla Motors An aside to Musk: Making false statements is something the law frowns on. Oh, but wait, Musk should already know that. He and I met in San Francisco in 2008 for drinks , and over the course of the evening, he made several disparaging remarks about Tesla Motors cofounder Martin Eberhard’s management of the company before Musk had ousted him as CEO — specifically, Musk alleged, for misrepresenting the cost of making the Tesla Roadster. In 2009, Eberhard sued Musk for defamation , citing the comments Musk had made to me, among others. Musk filed a scathing response to the lawsuit, repeating many of his negative claims about Eberhard. Then it headed to mediation, and the case was settled. Eberhard’s lawyer declared himself “very pleased” with the result , and Tesla issued a press release in which Musk said that Eberhard had been “indispensable” to the company in its early days. The safety of customers’ deposits When Tesla’s finances were at their most perilous, in the winter of 2008 and spring of 2009, the company was dependent on advance reservation payments from customers for cash flow. The company’s cash balance had run down to $9 million, and the company was struggling to raise $40 million in convertible debt. (He announced that that round had closed in November 2008, while in fact, according to Tesla’s SEC filings, it did not close until March 2009.) To raise funds in the meantime, Tesla began taking deposits on the Model S sedan, even though that car was far from production, and continued taking deposits on Roadsters. Musk first told customers that he would personally guarantee the deposits they were placing, “even in the worst case of an Armageddon scenario.” Then he said that their deposits were completely at risk and they could lose all their money. One of those statements had to be false. Musk’s history as an entrepreneur In persuading other investors to back Tesla Motors, Musk has frequently traded on his past success as an entrepreneur at companies like Zip2 and PayPal. But Zip2 was so troubled that one of its venture capitalists, Derek Proudian, had to step in as acting CEO , a move rarely seen at venture-backed companies. And Musk was ousted as CEO of PayPal by his own management team. To this day, Musk tells a version of PayPal’s history that few who were there at the time agree with. Tesla’s investors Most dangerously, Musk has repeatedly made misrepresentations about Tesla’s finances. In February 2009, he sent a letter to customers saying that Tesla would start getting funds from a Department of Energy loan in four to five months. In fact, it had not received the loan at that point and there was no certainty it would get it, a point a Tesla spokeswoman had to clarify. (Tricky, that, saying your CEO had misrepresented the facts without calling him a liar .) He also said Tesla would turn profitable in 2009. Of course, it didn’t, as the company’s published financials later revealed. (Musk later claimed, using questionable accounting whose details have never been revealed, that the company had been profitable for one month of the year .) In an interview for the May 2009 issue of Car and Driver, he told that magazine’s readers that General Electric had become an investor . It hadn’t, and it never did, according to Andy Katell, a GE spokesman who spoke with me at the time. The Toyota deal After unveiling an agreement to buy the NUMMI plant in Fremont, Calif., from the Toyota-backed joint venture which owned it, Musk claimed that Tesla and Toyota planned to jointly develop several models of cars and build them at NUMMI . It’s true that he got Toyota CEO Akio Toyoda to stand next to him and make grand promises. But in fact, as the company later revealed in its SEC filings, Tesla and Toyota had no agreement to develop any cars, and there was no guarantee that they ever would. The pity of it all is this: I don’t believe Musk twists the truth out of malice. Rather, at this point, it may well be out of habit. He’s so used to getting his way that future possibilities just seem like present realities to him. And pragmatically, it’s worked. Whenever Tesla has been in a bind, Musk has spun his way out of trouble. It’s a character trait of which elements are found among many successful entrepreneurs: the compelling presentation of an alternate reality in the hopes that so many people will sign on to the vision that it comes true. Apple CEO Steve Jobs, for example, is so masterful at this that people speak of his reality distortion field. But Musk may have taken distortion to extremes. The question now is whether Musk’s past habits will serve him well as the CEO of a publicly traded company. Already, it seems the investors who have entrusted Musk with hundreds of millions of dollars are having doubts. With shares of Tesla having already fallen by nearly half since their post-IPO pop, perhaps Musk’s bubble is finally deflating. But those who are still sticking with the company should ask themselves this: Has Tesla adequately disclosed to investors the risk of its CEO’s curious relationship with the truth? Originally posted at VentureBeat .

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Powerful Private Equity Firm Sued Over ‘Reckless’ Mortgage Fund

July 9, 2010

The world’s second-biggest private-equity firm was sued this week over its “reckless and grossly negligent” management of a failed mortgage bond affiliate that cost investors nearly $1 billion, according to suits filed in Delaware and New York. The Carlyle Group, which oversees more than $90 billion across six continents, stands accused of paying its executives “excessive and unjustified” fees while managing its hedge fund, Carlyle Capital Corporation, into the ground, the Financial Times and Bloomberg News report, citing the two lawsuits. CCC, which invested in mortgage-backed securities and “leveraged finance assets,” collapsed in March 2008 after it “failed to meet more than $400 million of margin calls on mortgage-backed collateral,” Bloomberg reports. By the end of 2007 the fund had $21 billion in debt but just $75 million to meet margin calls, the FT reports, citing the lawsuit. Investors in the fund allege that Carlyle Group officials took more than $20 million in fees and more than $50 million in other benefits, the FT reports, citing the lawsuit, despite that within a year the failed hedge fund had unrealized losses exceeding $270 million. “In the short space of eight months, the entirety of CCC’s capital was spectacularly lost under the reckless and grossly negligent direction, supervision, management and advice of the defendants,” Bloomberg reports, citing the lawsuit. The Carlyle Group “preferred” its own “corporate interests” over that of the hedge fund, the lawsuit alleges, according to the FT. The $945 million hedge fund sought annual returns of at least 12 percent, according to the Delaware-filed suit, Bloomberg reports. While the fund called for leverage of about 19 times capital, the actual leverage exceeded 30 times capital, Bloomberg reports, citing the lawsuit. “CCC’s losses were the direct result of a determinedly reckless ‘bet the farm’ approach, brazenly pursued in the self-interests of the Carlyle Group,” Bloomberg reports, citing the lawsuit. Officials at the Carlyle Group said they would contest the claims. They also noted that their own employees lost $230 million on the failed fund, Bloomberg reports. The Carlyle Group has more than 880 employees spread over 19 countries, the firm’s website notes. It’s invested more than $60 billion of equity in 969 deals since 1987, and its current deals generate $84 billion in revenue and employ nearly 400,000 people around the world.

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Joseph Casias: Walmart Fired Me For Using Medical Marijuana

June 29, 2010

DETROIT — A man who uses medical marijuana to treat symptoms of an inoperable brain tumor and cancer claims in a lawsuit filed Tuesday he was wrongfully fired from a Walmart store in Michigan after testing positive for the drug. Joseph Casias was fired last year after five years on the job in Battle Creek despite being legally registered with the state to use the drug, according to the lawsuit against the world’s largest retailer in state court. Casias, 30, said he didn’t use marijuana at work or come to work under the influence. Scott Michelman, a staff attorney with the American Civil Liberties Union, said the lawsuit aims to test the extent that Michigan’s law protects employees. “No patient should be forced to choose between adequate pain relief and gainful employment, and no employer should be allowed to intrude upon private medical choices made by employees in consultation with their doctors,” Michelman said. Michigan voters approved medical marijuana use in 2008. Federal law still prohibits the sale and cultivation of the drug. Bentonville, Ark.-based Wal-Mart Stores Inc. said in a statement that it is an “unfortunate situation all around.” It said it is sympathetic to Casias’ condition but said it is an issue of customer and employee safety. “The doctor prescribed treatment was not the relevant issue. The issue is about the ability of our associates to do their jobs safely,” the company said. “As more states allow this treatment, employers are left without any guidelines except the federal standard.” Casias’ drug test was given after he injured his knee at work in November, but the positive result on the urine test only indicated drug use in recent days or weeks, according to the lawsuit in Calhoun County Circuit Court. Casias said the injury had nothing to do with marijuana use; he simply stepped the wrong way. Fourteen states provide protections for patients who use marijuana as recommended by a doctor. While still illegal under federal law, U.S. Attorney General Eric Holder announced last year the Obama administration would relax prosecution guidelines. Some state courts, however, haven’t upheld employee protections. In April, the Oregon Supreme Court ruled that an employer is not required to accommodate the use of medical marijuana, saying state law is trumped by federal law. And in recent years, state supreme courts in Montana and California have ruled that medical marijuana laws don’t protect employees from being fired for using the drug. The ACLU argues, however, said Michigan’s law more explicitly protects employees from being disciplined for legally using medical marijuana. It said that includes Casias’ case, but not those who use the drug at work, for example. Casias’ cancer has been in remission for nine years, but the married father of two’s medical condition interferes with his ability to speak and causes pain. He said the use of medical marijuana, which was recommended by his oncologist after the law took effect, has decreased his pain without nausea that accompanied a previous medication. “For some people, working at Wal-Mart is just a job, but for me, it was a way of life,” Casias, of Battle Creek, said in a statement. “I came to Wal-Mart for a better opportunity for my family and I worked hard and proved myself. I just want the opportunity to continue my work.” The ACLU and its Michigan branch represent Casias along with attorney Daniel W. Grow in the lawsuit against Wal-Mart and a store manager.

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Debrahlee Lorenzana Asks Human-Rights Officials To Investigate Citibank (VIDEO)

June 28, 2010

NEW YORK (Associated Press) – It went viral as the ultimate example of being punished for circumstances beyond one’s control: a woman who said she was fired from her banking job because she complained that her male colleagues called her bodacious figure a workplace distraction. Then – after the tabloid headlines, the TV interviews, the New York Times column – came the disclosure that the buxom banker who said she couldn’t help the way she looked had, in fact, helped it a lot, through a series of cosmetic surgeries she had extolled on reality TV. When Debrahlee Lorenzana asked state human-rights officials on Monday to investigate her claims against Citibank – which the bank denies – her story had already become a crucible teeming with touchy subjects: sexual harassment, women’s workplace fashion, society’s obsession with beauty, Americans’ mixed feelings about publicity-seeking. It’s a morality play for the YouTube era. But as commentators ranging from legal analysts to comedians debate whether she’s a novel form of discrimination victim or a gold digger trying to cash in on male attention she courted, the 33-year-old single mom at the center of it all says she’s unbowed and trying to teach corporate America a lesson. She followed the bank’s dress code and tried to do her job, she says, and so what if she strove to look – in her own words – like a Playboy model? “There’s nothing wrong with that,” Lorenzana said at a news conference Monday. “One thing has nothing to do with the other.” Then she went off to work at her new job at another bank, dressed in a yellow sleeveless top, a form-fitting ecru skirt and tan stiletto peep-toe pumps. Lorenzana isn’t the first woman to take legal action over workplace dress requirements; famous examples include a Nevada casino bartender who unsuccessfully sued after she was fired for refusing to wear makeup. But many such cases revolve around claims that the woman was pushed to look more like a sex object – not less, as Lorenzana alleges. Her claim that she was dressed down by bosses who said she was too alluring to wear turtlenecks or pencil skirts seized the cultural moment because “it just sounded so sort of ‘Mad Men’-esque,” said Brenda Weber, a gender and cultural studies professor at Indiana University, referring to the AMC television series that often dwells on masculine privilege in a 1960s advertising firm. It’s no surprise the frenzy only intensified after the revelation of Lorenzana’s plastic surgery, Weber said. In a culture that cherishes ideals of genuineness and meritocracy, “there’s this sort of stripping of her authenticity that then, in an American context, we really sort of dislike,” she said, but “it doesn’t mean that we’re not fascinated.” Lorenzana began working at a Citibank branch in September 2008, in a job soliciting and opening up new accounts for businesses, according to her new complaint to the state Human Rights Division and a lawsuit she filed last fall. Managers soon began hassling her about her work wear, saying she looked “too distracting” for her male colleagues to handle, her lawsuit said. When she pointed out that some co-workers wore more revealing clothes than she, a manager told her that “your body is very different from them” and that because the others “are short or fat, it’s OK for them to dress like that,” her human-rights complaint said. She complained repeatedly to Citibank human resources officials and was transferred to another branch. After what she calls a deliberate campaign to keep her from meeting performance targets – including by giving her an out-of-the-way desk where customers couldn’t find her – she was fired in August, according to her complaints. Citibank, part of banking giant Citigroup Inc., says poor performance was the sole reason for her firing, and that the bank is confident it will prevail in the legal fights. “Her current attempts to gain personal publicity are as transparent as her legal claims,” Citibank spokeswoman Natalie Riper said in a statement Monday. The lawsuit, which seeks unspecified damages, is headed for arbitration. The human-rights complaint will trigger a separate investigation that could ultimately lead to a ruling from an administrative judge. The agency declined to comment Monday. The alternative newspaper The Village Voice first wrote about Lorenzana’s lawsuit June 1. Soon, fashion editors assessed her work wardrobe. Bloggers decocted the effects of beauty on the beholder and the holder. Newspapers from Canada to Florida weighed in, some calling the case a flashpoint for debate over workplace sexual harassment. Within days, Lorenzana made the rounds of network morning shows. Times columnist Maureen Dowd examined her case in light of studies on societal responses to people’s attractiveness. A panelist on NPR’s “Wait Wait … Don’t Tell Me!” pronounced her predicament “the most flattering way ever to get fired.” Then the Daily News disclosed that Lorenzana – who had told the paper, “I can’t help how I look” – had been featured in a 2003 Discovery Channel series called “Plastic Surgery New York Style” as she planned her fourth breast enlargement, to a size 32-DD. “I know men have a fantasy of having a Playboy Playmate – that’s what I want to be,” she says on the show, noting that she had also had a tummy tuck and liposuction. Lorenzana said Monday she was simply trying to restore her curves after breast-feeding, and that the show directed her comments. Discovery Channel representatives didn’t immediately return a call. The twist in Lorenzana’s story only sparked more dissection of whether she was standing up for women’s rights or setting them back. In one of the most curious debates, National Organization for Women President Terry O’Neill faced off against actor and radio personality Danny Bonaduce on CNN’s “The Joy Behar Show,” while Behar wondered aloud about whether women’s enduring concern for their appearance marked a failure of feminism. While Bonaduce lambasted Lorenzana as an attention-seeker, O’Neill says the banker shouldn’t have been subjected to the kind of attention Lorenzana says she got. “If a woman has breast implants, that really doesn’t justify inappropriate comments,” O’Neill said in an interview Monday. As for Lorenzana, she said Monday that the saga has left her more media-savvy but not sorry: “I don’t regret anything in life.”

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Consumer Group Threatens To Sue McDonald’s For ‘Unfairly And Deceptively’ Marketing Happy Meals To Children

June 22, 2010

WASHINGTON — Are the toys in your child’s Happy Meal making him fat? The Center for Science in the Public Interest says they are. The Washington-based consumer advocacy group threatened to file a lawsuit against McDonald’s Tuesday, charging that the fast food chain “unfairly and deceptively” markets the toys to children. “McDonald’s marketing has the effect of conscripting America’s children into an unpaid drone army of word-of-mouth marketers, causing them to nag their parents to bring them to McDonald’s,” CSPI’s Stephen Gardner wrote to the heads of the chain in a letter announcing the lawsuit. The center, which has filed dozens of lawsuits against food companies in recent years, is hoping the publicity and the threat of a lawsuit will force McDonald’s to negotiate with them on the issue. The group announced the lawsuit in the letter to McDonald’s 30 days before filing it with the hope that the company will agree to stop selling the toys before a suit is filed. McDonald’s Vice President of Communications, William Whitman, said in a statement that the company “couldn’t disagree more” with CSPI’s assertion that their toys violate any laws. He said McDonald’s restaurants offer more variety than they ever have and Happy Meals are made smaller for kids. “We are proud of our Happy Meal which gives our customers wholesome food and toys of the highest quality and safety,” Whitman said. “Getting a toy is just one part of a fun, family experience at McDonald’s.” CSPI says the suit would be filed in state court. The center has not settled on a state yet, but the group believes the toys in Happy Meals violate state consumer protection laws in Massachusetts, Texas, the District of Columbia, New Jersey and California. California’s Santa Clara County voted earlier this year to ban restaurants from giving away the toys and other freebies that often come with high-calorie meals aimed at kids. McDonald’s has fought such criticism for years, and the company made a pledge in 2007 to advertise only two types of Happy Meals to children younger than 12: one with four Chicken McNuggets, apple dippers with caramel dip and low-fat white milk, or one with a hamburger, apple dippers and milk. They both meet the company-set requirement of less than 600 calories, and no more than 35 percent of calories from fat, 10 percent of calories from saturated fat or 35 percent total sugar by weight. CSPI argues that even if those Happy Meals appear in advertisements, kids order the unhealthier meals most of the time. The group is hoping its first lawsuit against the mega-chain will have a similar effect as its 2006 lawsuit against Kellogg that prompted the company to agree to a settlement raising the nutritional value of cereals and snacks it markets to children. Still, some may accuse the group of extremism, arguing that it’s the parents’ responsibility to monitor what their children eat, not the restaurant’s. Michael Jacobson, executive director of CSPI, says it’s the parents responsibility too, but he equates the toy giveaways to a door to door salesman coming to a family’s house every day and asking to privately speak with the children. “At some point parents get worn down,” Jacobson says. “They don’t always want to be saying no to their children. We feel like an awful lot of parents would be relieved if this one pressure was removed from them.” McDonald’s also came under fire over Happy Meals earlier this year when it recalled 12 million “Shrek” drinking glasses sold with the meals. The Consumer Product Safety Commission said the levels of the carcinogen cadmium in the glasses was too high.

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UBS May Sidestep Swiss `Game of Chicken’ as Lawmakers Vote on U.S. Treaty

June 15, 2010

By Klaus Wille June 15 (Bloomberg) — UBS AG may escape a “game of chicken” played by Swiss lawmakers as the price of failure to back a tax treaty with the U.S. would be too high: the bank’s American operations and the country’s export industry. Deputies in Switzerland’s lower house may support the treaty in a second vote today after last week rejecting the handover of details of as many as 4,450 suspected tax dodgers to U.S. authorities, according to academics and analysts, including Georg Lutz of the University of Lausanne. The dispute stems from a U.S. crackdown on offshore tax evasion that led Switzerland to agree last August to give up account data. The parliament has to approve the accord, and the U.S. may opt to reopen a civil lawsuit and criminal prosecution unless the government honors the agreement. “What we’re seeing at the moment is a high-stakes game of chicken,” said Evan Stewart, a lawyer at Zuckerman Spaeder LLP in New York, in an interview. Further legal proceedings “would seriously jeopardize UBS’s business in the U.S.,” he said. The nationalist Swiss People’s Party, which voted against the deal last week in protest against a proposal to boost corporate taxes on bonuses, may back the accord today to avoid a clash with U.S. authorities. “The People’s Party will eventually recognize the importance of the question and support the treaty,” said Martin Naville , the chief executive of the Swiss-American Chamber of Commerce, a lobbying group for Swiss and American businesses. Georg Lutz, a political scientist at the University of Lausanne, said the party “will give in” eventually. UBS Chief Executive Officer Oswald Gruebel last week said he’s “confident” that parliament will approve the accord. Like Adolescents “Too much is at stake with this treaty,” This Jenny , a deputy in the upper house of parliament for the People’s Party, said June 9. “We can’t afford this posturing, and this going back and forth like adolescents. We should try to build bridges.” UBS, Switzerland’s biggest bank, avoided U.S. prosecution in February 2009 by paying $780 million, admitting it helped wealthy Americans evade U.S. taxes from 2000 to 2007, and handing over account data on more than 250 U.S. clients. The next day, the U.S. sued Zurich-based UBS, seeking data on 52,000 Swiss accounts. UBS settled that case in August, agreeing to hand over as many as 4,450 names to the Swiss government to review before passing them on to the Internal Revenue Service. Unless the Swiss disclose the names, the U.S. may extend the deferred- prosecution agreement beyond its term of 18 months and may reopen the lawsuit that sought 52,000 names. The People’s Party and the Swiss Social Democratic Party voted against the accord in the lower house after they tied their approval to conditions. In the upper house, where the two parties’ support wasn’t needed, the accord was rubberstamped. Parliamentary Deadline The Swiss legislature has until June 18, the last day of the current parliamentary session, to approve the treaty and circumvent a January court ruling that said the deal isn’t enforceable under current Swiss legal provisions. If the lower house votes down the treaty, there won’t be another ballot, while the two houses will negotiate again if the lower house supports the treaty but asks for a referendum. The People’s Party has said it will support the deal with the condition that lawmakers reject proposals to increase corporate taxes on bonuses. The Social Democrats are linking their support to a tax on bankers’ bonuses. The People’s Party is the biggest party in the lower house with 58 deputies, potentially tipping the balance after the treaty was rejected with 104 votes to 76 last week. UBS Plans John Cryan , UBS’s chief financial officer, said the bank would find it easier to recruit private bankers if the country backs the treaty, according to an analyst note from Helvea SA. The accord also would help boost the morale of clients and staff in the U.S., who seem to have been “particularly spooked” by last week’s vote, said Peter Thorne , an analyst at Helvea, after attending a meeting with Cryan in London. One face-saving option for the People’s Party is to accept the requests by all other parties to discourage “excessive” bonuses through higher taxation at the company level. Christoph Blocher, the party’s vice-president and a former member of the government, was quoted by Tages-Anzeiger on June 9 as saying politicians may be able to “find a way out.” Prosecution in the U.S. would put UBS “out of business the next day,” Robert Fink , a tax attorney at Kostelanetz & Fink LLP in New York, told Bloomberg News by telephone. “Financially, it could be catastrophic.” U.S. Business “They could shut down UBS in the U.S.,” said George M. Clarke III, a tax attorney of Miller & Chevalier in Washington. “They could forbid the bank from accessing the Federal Reserve system. It could get ugly.” Almost 37 percent of UBS’s 65,233 employees worked in the Americas at the end of 2009. UBS’s Wealth Management Americas unit managed 690 billion Swiss francs ($604 billion) at the end of the year. A rejection would have a “massive negative effect on the entire Swiss economy,” the Swiss-American Chamber of Commerce wrote in a May briefing note, and Justice Minister Eveline Widmer-Schlumpf has said the agreement had removed “an existential threat” from UBS. “Large and small Swiss companies with international business face uncertain times” regarding taxation, a potential tax haven status and possible discrimination in the U.S., the lobbying group said. “Overall, the potentially affected companies represent 35 percent of the Swiss economy with approximately 1 million jobs,” the chamber said. Plan B Should lawmakers fail to approve the accord, the government may seek renewed negotiations with the U.S. authorities. “I think Switzerland and UBS have a Plan B up their sleeves,” said Rainer Schweizer , a law professor at the University of St. Gallen. “I’m sure the government has examined some alternatives.” Lawmakers are aware of the consequences. “The Americans might not ask us whether they should implement retaliation measures,” Pirmin Bischof , a member of the lower house for the Christian Democrat People’s Party, said on June 7. “As a superpower, they will simply enact them, and we can gnash our teeth.” To contact the reporter on this story: Klaus Wille in Zurich at kwille@bloomberg.net

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David Isenberg: KBR: Private Military Cancer (PMC) Provider? Part II

June 11, 2010

Back in April I wrote about the lawsuit filed by Indiana National Guardsmen, against KBR. The suite suit alleges that KBR knowingly allowed exposure to the toxic chemical sodium dichromate, also known as hexavalent chromium. It was widely present as an orange-colored dust that soldiers assigned to guard the Qarmat Ali water treatment plant in southern Iraq could not avoid inhaling. Sodium dichromate chromium is a powerful carcinogen known to cause lung, nasal and other cancers, other severe respiratory problems and other medical problems. Yesterday, six more British Iraq vets and a former Indiana National Guardsmen sued KBR in Houston federal court over alleged toxic exposure at the Qarmat Ali site. This makes a total of 98 U.S. and U.K. vets and two families of vets who have died since serving in Iraq that have sued KBR in three cases pending in Texas, Oregon and West Virginia federal courts. The amended complaint also includes recent confirmation from the U.S. Army that Indiana National Guard Commander Jim Gentry’s death from cancer resulted from his service exposure. Here are some excerpts from the amended complaint. As outlined further below, Halliburton/KBR is apparently still withholding from the United States Army the full extent of Halliburton/KBR’s managers’ knowledge of the dangers to the soldiers and others onsite, dangers with serious consequences directly impacting their current and future health evaluations of the soldiers exposed at Qarmat Ali. Several Indiana National Guardsmen serving at Qarmat Ali have already manifested respiratory system tumors characteristically associated with hexavalent chromium exposure, two of the Tell City, Indiana Guardsmen have died as a result of sodium dichromate exposure, and many of the Tell City, Indiana Guardsmen continue to experience chemical sensitivities and rashes consistent with the impacts of hexavalent chromium poisoning. The United States Army has already confirmed that Jim Gentry’s death from cancer resulted from his service exposure. The Tell City, Indiana Guardsmen and their fellow soldiers accepted the hazards from enemy action while doing their part to assist the United States in restoring freedom to Iraq, but could not even imagine that Halliburton/KBR’s managers would act in a manner that directly and continuously exposed them to serious health impacts for the rest of their lives. As stated by Lieutenant Colonel James Gentry, commanding officer of the Tell City, Indiana Guardsmen at Qarmat Ali, before his untimely death: I understand and accept there’s danger with my line of service, in my line of service. What’s very difficult for me to accept is if I’m working for KBR and they have knowledge of hazardous chemicals on the ground that can cause cancer and not share that knowledge, then that is putting my men at risk that is not necessary. I’m very upset over this . . . I feel like they should be ashamed that they did that. The RAF Ground Regiment Gunners and the other members of the British Forces at Qarmat Ali were likewise wholly unprotected against the hazards of sodium dichromate known to Halliburton/KBR’s managers for months and months. In fact, despite the demonstrated knowledge of elevated chromium levels in the admittedly inadequate blood testing of Halliburton/KBR’s civilian employees, Halliburton/KBR’s managers apparently deliberately told British Forces exactly the opposite. Actually this makes a weird kind of perverse, corporate sense. If a company is willing to endanger the troops of its own country why would anyone expect it to care about the troops of another country? What happened to Ed Blacke, the American civilian medic at Qarmat Ali, when he tried to take action to protect the workers and soldiers in late July 2003, points to the Halliburton/KBR handling of the site contamination: As an EMT concerned that there was a health problem, I began to query all English-speaking personnel working at the facility, which included KBR, Halliburton, Iraqi Oil Company, U. S. Army National Guard and British soldiers, and all were suffering identical symptoms. The symptoms for all at the facility developed into continuous bloody noses, spitting up of blood, coughing, irritation of the nose, eyes, throat and lungs, and shortness of breath. In order to determine what might be the cause of these medical problems, I undertook a more in depth assessment of the facility with my Iraqi interpreter taking down the chemical names on the burst bags I initially noted as well as from the tanks in the Injection building. The chemical was Sodium Dichromate, which contains hexavalent chromium. I asked my Iraqi interpreter if he was aware of what the material in the bags was used for and was advised that it was injected into the water supply system for the oil fields as an anti-corrosive. He was reluctant to say more and when pressed he said he knew it was poisonous and that he was aware of many workers from the plant who were made ill by it. He said that it being a poisonous chemical was probably the reason members of the Baath party had opened the storage bags and spread their contents all over the plant as part of their sabotage efforts in the facility. That evening, on my return to my quarters, I researched sodium dichromate on the internet, finding and downloading a Material Safety Data Sheet (MSDS) for the chemical (attached). The MSDS states that sodium dichromate is a hazardous material and a carcinogen, exposure to which is to be avoided. At this time, a colleague I knew from Chad provided me with an internal memo written by a KBR Industrial Hygienist that substantiated my personal findings. I was totally taken aback to find that KBR knew as early as May, from a UN report and from their Industrial Hygienist, that they were putting not only KBR workers but our security details from the U. S. and British in harms way, without the required training or personal protective equipment. I reported my findings about the imminent danger sodium dichromate was posing to the workers at Qarmat Ali to the HSE and Project Managerin Kuwait and insisted that they take immediate action. A few days later, two representatives of the health, safety and environmental section of KBR came to Qarmat Ali to assess the situation and talk to the workers. Those individuals were Safety Manager Tommy Mornay and Medical Supervisor Ray Garcia. They held a meeting with the workers in which they told the workers that the sodium dichromate was a mild irritant at worst, that the plant had been thoroughly checked out and was safe, and that they were to get back to work. I was at the meeting and was shocked that fellow safety and medical professionals were telling such outrageous and blatant lies to the workers. I pointed out in the meeting that the NIOSH/CDC documents that I had on sodium dichromate directly contradicted their statements to the workers. At this point, Mr. Garcia, who was one of my superiors, directed me to be quiet and to leave. He then escorted me out of the meeting. Outside of the meeting, he advised me that I was being insubordinate, disruptive, and that my input was not appreciated. I was determined to pursue the complaint with higher-ups in KBR’s HSE department in Kuwait, and upon attempting to do so, it was made clear to me that my presence in Iraq and Kuwait was no longer appreciated and that I would be better off going home. As a response to my complaints, the Medical Supervisor, Ray Garcia, under direction of the KBR Project Manager, directed me to accompany him to a clinic for blood workup. I was taken to a substandard medical clinic where I refused to submit to the tests due to the unsanitary conditions and unprofessional nature of the staff. …………………………………………………………………………….. In my mind, it was criminally negligent of the KBR HSE and Project management to make a decision to continue to expose personnel to sodium dichromate poisoning at the Qarmat Ali water treatment plant when they knew of the exposure and knew of the absence of any personal protective gear whatsoever. I understand that KBR and Halliburton take the position that the air was tested at the plant and showed low levels of chromium, however, those tests were apparently done when the air was still, not during one of the frequent dust storms in which all of the materials on the ground became airborne. Furthermore, the levels of chromium from the ground samples show that the plant was a highly dangerous and unsafe and contaminated facility, and these facts were objective facts known by KBR management, in the face of which they made the conscious decision to continue to expose the American workers, the Iraqi workers, the American military personnel, and the British military personnel at the plant to these horrifically unsafe conditions. It is outrageous that American tax dollars are the source of the funding of the Iraqi operation of Halliburton and KBR when those companies have demonstrated such total and complete disregard for the health and safety of the workers for whom they are responsible. It would be interesting to hear from the various PMC trade associations and see whether they think KBR is living up to the various codes of conduct they are so proud of.

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New York City, 911 Workers Reach $712.5 Million Injury-Claims Settlement

June 10, 2010

By Henry Goldman June 10 (Bloomberg) — Lawyers for 10,000 workers claiming illnesses from rescue, recovery and debris removal after the Sept. 11 World Trade Center attack have agreed with New York City on a $712.5 million compensation fund to settle the cases. The city and its WTC Captive Insurance Co., set up with $1 billion from the federal government, joined with plaintiffs’ attorneys to present the agreement today to U.S. District Judge Alvin Hellerstein in Manhattan. The accord offers more money than an earlier proposal, and creates eligibility criteria for compensation to those suffering from diseases and injuries including asthma and terminal cancer, said Margaret Warner , Captive Insurance ’s lawyer. The agreement also caps attorney’s fees at 25 percent of awards. Each claimant will get a free cancer-insurance policy with a $100,000 benefit. “This is a settlement that is fair, provides compensation now, certainty now, and closure for these plaintiffs who have waited so long,” Warner said as she presented its terms to Hellerstein. Describing the agreement as “a very good deal,” the judge signed an order dismissing the lawsuit, and set a June 23 public hearing for claimants and their attorneys to raise any objections. At least 95 percent of the plaintiffs must consent to the agreement for it to become legally binding. The settlement, if approved, means each plaintiff will be “assured of a fair deal that puts money in their hand fast,” Hellerstein said. More Money In March, the judge rejected a previous agreement that would have paid at least $575 million and a maximum of $657 million to claimants. He told the parties to return to the negotiating table to produce a settlement with more money for the plaintiffs. While lawyers for both sides appealed that decision, disputing the judge’s power to reject the agreement, they agreed to continue negotiations. Today, each side characterized the new accord as a better deal. The agreement cuts more than $50 million from potential attorney’s fees by reducing the cap to 25 percent from 33 percent in the earlier proposal. Those claiming debilitating respiratory diseases, such as nonsmokers who contracted severe asthma within seven months of exposure to the smoke and airborne debris from the attack, may get $800,000 to $1.05 million, Captive Insurance said in a news release. Death benefits could reach as much as $1.5 million. Award Amounts Plaintiffs with no qualifying injury who claim fear of becoming sick will receive $3,250. All qualifying claimants will get special insurance policies through MetLife Inc. providing a benefit of up to $100,000 in the event they are diagnosed with certain blood and respiratory cancers while covered, Captive Insurance said. Kenneth Feinberg , an attorney who acted as special master of the federal September 11th Victim Compensation Fund awarding money to surviving families of the attack, volunteered to hear appeals of the claims awards at no cost to the fund. “This is a fair settlement of a difficult and complex case that will allow first responders and workers to feel fairly compensated for injuries suffered following their work at Ground Zero,” Mayor Michael Bloomberg said. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP. Captive Insurance was funded by the Federal Emergency Management Agency to insure the city and debris-removal contractors. The city couldn’t get adequate liability coverage in the commercial market to deal with the rescue, recovery and clean-up work at the trade-center site in lower Manhattan. To contact the reporter on this story: Henry Goldman in New York at hgoldman@bloomberg.net .

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Goldman Subpoenaed After FCIC Says Firm Slowed Probe

June 7, 2010

By Jesse Westbrook June 7 (Bloomberg) — Goldman Sachs Group Inc. was subpoenaed by the Financial Crisis Inquiry Commission after panel members said the most profitable firm in Wall Street history engaged in a document “dump” to hinder a probe. Goldman Sachs sent more than a billion pages of documents, FCIC Vice Chairman Bill Thomas said on a conference call with reporters today. Not all of the information is what the panel requested, and Goldman Sachs didn’t cooperate with requests to interview Chief Executive Officer Lloyd Blankfein , Chief Operating Officer Gary Cohn and Chief Financial Officer David Viniar , FCIC Chairman Phil Angelides said. “We did not ask them to pull up a dump truck to our offices and dump a bunch of rubbish,” said Angelides, 56, who previously served as California’s treasurer. “This has been a very deliberate effort over time to run out the clock.” The FCIC, which Congress appointed last year to investigate the causes of the worst economic slump since the Great Depression, issued the subpoena June 4. The request adds to government scrutiny of New York-based Goldman Sachs, as regulators and lawmakers examine how it packaged mortgages into securities that fueled investor losses when the housing market collapsed in 2007. “We have been and continue to be committed to providing the FCIC with the information they have requested,” Goldman Sachs spokesman Michael DuVally said in an e-mailed statement. Goldman Sachs fell $3.57, or 2.5 percent, to $138.68 at 4 p.m. in New York Stock Exchange composite trading . Searching ‘Haystack’ Thomas said the panel’s requests to Goldman Sachs go back “several months.” Information the firm turned over didn’t comply with what was asked for and has put FCIC investigators in the position of “searching through the haystack for the needle,” he said. “We expect them to provide us with the needle,” he said. Goldman Sachs agreed to schedule interviews with Blankfein, 55, and other executives after the FCIC issued the subpoena, Angelides said. The FCIC wants details on sales of collateralized debt obligations, assistance in determining the names of Goldman Sachs clients and a list of documents the firm provided to the Senate Permanent Subcommittee on Investigations , according to a statement posted on the panel’s website today. Senators grilled current and former Goldman Sachs executives in April. SEC Lawsuit FCIC staff also sought an interview with the employee most knowledgeable about a series of CDOs named Abacus, one of which triggered a Securities and Exchange Commission lawsuit against the firm. The SEC, in an April 16 complaint, said Goldman Sachs sold a CDO tied to mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities. Paulson was betting the CDO would fail, the SEC said. CDOs are securities made up of bonds backed by corporate or consumer debt. Goldman Sachs has said the SEC suit is “unfounded in law and fact.” Paulson wasn’t accused of wrongdoing. Federal prosecutors in New York have initiated their own investigation of Goldman Sachs to determine whether to bring charges, people familiar with the matter said April 29. The company hasn’t been accused of criminal misconduct. FCIC investigators sought to question the Goldman Sachs employee most knowledgeable about derivative transactions with American International Group Inc. AIG, once the world’s biggest insurer, collapsed in 2008 after it couldn’t meet collateral demands on credit-default swaps deals with banks. A $182.3 billion taxpayer bailout of AIG ensured that Goldman Sachs and other banks were repaid in full. ‘Incomplete’ Responses Attempts to get information from Goldman Sachs date back to at least January, according to the FCIC’s statement . While the firm provided documents in March and May, the responses were insufficient. The subpoena followed after another “incomplete production” on June 3 of what panel’s staff considered “the most pressing documents,” the FCIC said. The FCIC has until December to complete the probe of Goldman Sachs and other companies and report findings to Congress. The 10-member FCIC, which lawmakers appointed in July, previously issued subpoenas to Warren Buffett and Moody’s Corp. as part of its review of credit-rating companies. Buffett, the world’s third richest man, testified last week with Moody’s executives at an FCIC hearing in New York. Moody’s and other credit-rating firms have been blamed by investors and lawmakers for helping trigger the financial crisis by assigning top grades to mortgage bonds that later plunged in value. The FCIC subpoenaed Buffett, whose Berkshire Hathaway is Moody’s largest shareholder, after he turned down an invitation to testify. The panel said it had subpoenaed New York-based Moody’s in April because the company hadn’t turned over requested information quickly enough. To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net .

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Dan Solin: Madoff Victims to Hedge Funds: Show Us the Money!

May 18, 2010

In a recent blog , I gave this definition of hedge funds: “A way for fund managers to make unbelievable profits by convincing wealthy investors, pensions and trusts they have discovered a way to achieve high returns without commensurate risk. Qualifies as one of the greatest wealth transfer vehicles in modern times.” I was being too kind. Pre-Madoff, hedge funds were all the rage. These were the captains of Wall Street. They had figured out a way to make money in any market. Trillions of dollars flowed into their coffers. The hedge fund managers became the rock stars of the financial world. What a difference a big fraud makes. Now many of these funds claim they were also victims of Madoff. They want you to believe they were clueless about his machinations. That’s the justification for keeping their obscene fees for advising their clients to invest with him. The investors are wiped out. The hedge funds and banks are swimming in cash. Any wonder why investors have lost confidence in the financial system? Take Ivy Asset Management for example. This is no rinky dink operation. It is wholly owned by the Bank of New York Mellon. According to a Complaint filed by New York Attorney General Andrew M. Cuomo, (the allegations of the complaint have yet to be proven), filed in the New York State Supreme Court, Ivy scored $40 million in fees (!) by placing over $227 million of its clients’ funds with Madoff. How difficult would it have been for the Wharton and Harvard trained M.B.A’s at Ivy and other hedge funds and banks to figure out Madoff was a fraud? They were handsomely paid to perform due diligence. Cuomo alleges Ivy knew, or should have known, there weren’t enough options traded to support Madoff’s much touted “split strike conversion” strategy. A press release issued by the Attorney General references a memorandum, written in 2002, by Ivy’s Chief Investment Officer, Howard Wohl. Mr. Wohl wrote this to a subordinate who could not figure out Madoff’s sterling performance record: “Ah, Madoff, You omitted one possibility – he’s a fraud!” It’s ironic that Ivy and the other hedge funds and banks who promoted Madoff can defend these lawsuits with the interest on their fees. They have lawyered up with the finest legal minds in the country, with one goal in mind: Hanging on to their ill-gotten fees and not making restitution to the clients who were harmed by their negligence. Predictably, the lawyers (with help from Congress and the courts) are doing a fine job. One court dismissed claims against Union Bancaire Privee Asset Management and its Swiss parent Union Bancaire Privee. These firms created 11 “fund of funds” that lost over $700 million by investing with Madoff. This distinguished Swiss Bank has over $60 billion under management. According to a report on its web site “it is one of the biggest wealth-management banks in private hands.” Its real expertise is doing due diligence on hedge funds. Here’s what it states : “Research and hedge-fund selection are all driven by a due diligence process which is divided into three main strata of risk analysis: qualitative, quantitative and structural risk. This process has been developed with one of the best experts in the auditing world and allows us to make an extremely strict selection of asset managers. The process of due diligence enables us to establish a list of recommended funds that we consider to be the elite of the industry. This list is updated every month and forms the basis of our portfolio recommendations.” Wow. That’s so impressive! You have to wonder how all these experts couldn’t figure out that Bernie was running a primitive Ponzi scheme. Did the distinguished Board of Directors of Union Bancaire decide to do the right thing and make investors whole? After all, their sterling “due diligence” utterly failed. No way. They hired world class lawyers and got the investors’ claims tossed out. In a decision by U.S. District Court Judge Thomas P. Greisa in the United States District Court for the Southern District of New York (Barron v. Igolnikov, 09-Civ. 4471), the Court found the lawsuit was preempted by the Securities Litigation Uniform Standards Act (“SLUSA”), a statute that places severe limitations on certain class actions. Judge Greisa found SLUSA applicable even though it applies only to purchases of “covered securities”, which are defined generally as being securities sold on national exchanges. Hedge funds invest in “covered securities”, but are not “covered securities” themselves. At least one other Court disagrees. In a case in the same Court (Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, 05 Civ. 9016), Judge Shira A. Scheindlin held that SLUSA did not apply to investments in hedge funds because “…to hold otherwise would extend the reach of SLUSA to any investment vehicle with covered securities in its portfolio.” But I digress. Simply stated, and regardless of legal technicalities, all hedge funds and banks who recommended investments in Madoff should be required to make good on the losses. Since private parties are having difficulty achieving this result, the public sector should take action. The Attorneys General in each state should follow Cuomo’s lead. State Securities Commissioners should emulate the aggressiveness of Massachusetts Secretary of the Commonwealth, William Galvin, who entered into a Consent Order with another Madoff “feeder fund”, Fairfield Greenwich Advisors, and obtained restitution for residents of Massachusetts. The SEC, FINRA and banking regulators have all been reluctant to force disgorgement of fees and reimbursement of losses for entities under their jurisdiction. It’s time to say “enough.” Madoff investors relied on these purported financial gurus. The burden of the losses should fall on those who held themselves out as financial experts with extensive due diligence expertise. Not on individual investors who suffered the losses. Show Madoff investors the money! The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog. .

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Environmentalists Sue Regulator To Revoke Permits Of Poorly-Reviewed Oil Rigs

May 17, 2010

NEW ORLEANS — Environmentalists seeking to curb oil drilling in the Gulf of Mexico on Monday filed federal lawsuits to shut down a major BP platform and close a government loophole for new oil and gas exploration. The lawsuits, filed in Alabama and Texas, target the federal Minerals Management Service, the much-criticized agency that oversees offshore energy leases. Since a blowout on BP’s Deepwater Horizon platform last month killed 11 workers and triggered a massive spill, the agency has approved at least nine deep-water exploratory wells in the Gulf with minimal environmental reviews. The Alabama lawsuit seeks to end the practice. It would also force the agency to revoke the permits recently issued to Shell Offshore Inc., Kerr-McGee Oil & Gas Corp., Anadarko E&P and other companies. The deepest of those projects would operate at water depths of more than 9,000 feet. That’s almost twice the depth of Deepwater Horizon, which has released millions gallons of oil into the Gulf since it exploded and burned. The depth has complicated efforts to contain the leak a mile below the surface. An attorney for the plaintiffs said the spill makes it “abundantly clear” the government needs to review deep water projects more closely. “They need to be analyzed fully before given a blanket rubber stamp exclusion,” said Catherine Wannamaker with the Southern Environmental Law Center. The Texas suit seeks to shut down BP’s Atlantis platform, which has operated with incomplete and inaccurate engineering documents. Atlantis is stationed in 7,070 feet of water more than 150 miles south of New Orleans. It can produce 8.4 million gallons of oil and 180 million cubic feet of natural gas daily. In 2009, an independent firm hired by BP found that the giant petroleum company was violating its own policies by not having completed engineering documents on board the Atlantis when it began operating in 2007. BP responded Monday by saying it had made “procedural changes” related to Atlantis in response to the outside investigation. But the company said safety was never an issue. The Texas lawsuit was filed by Washington, D.C.-based Food and Water Watch and Kenneth Abbott, a former BP subcontractor. Abbott claims he was fired last year after voicing concerns over Atlantis, and says his warnings were later ignored by federal officials. “At BP I battered my head against the wall. They didn’t care. The government agencies didn’t care,” Abbott said. Citing BP documents, the lawsuit asserted that a blowout from Atlantis could be far worse than Deepwater Horizon, which already ranks as one of the worst in the nation’s history. “In two days, a blowout from the BP Atlantis would spill more oil than the Exxon Valdez,” an attorney for the plaintiffs wrote. MMS officials did not respond to several requests for comment.

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Betty Dukes, Wal-Mart Greeter, Leads Class Action Suit

May 1, 2010

PITTSBURG, Calif. — As a “greeter,” the cheerful Betty Dukes is one of the first employees customers usually see as they walk through the front doors of the Wal-Mart store here. As the first “named plaintiff” in Dukes v. Wal-Mart, the ordained Baptist minister also is the face of the largest gender bias class action lawsuit in U.S. history – one that could cost the world’s largest private employer billions. Her dual roles have turned her into a civil rights crusader for the company’s many critics, who have dubbed the legal battle “Betty v. Goliath.” It is a far cry from where Dukes expected to be when she enthusiastically accepted an offer in 1994 to work the cash registers part-time for $5 an hour. She dreamed of turning around a hard life by advancing, through work and determination, into Wal-Mart corporate management. “I was focused on Wal-Mart’s aggressive customer service,” Dukes said in an interview during her lunch break, after first saying grace over a meal of fast-food hamburgers and chicken nuggets. “I wanted to advance. I wanted to make that money.” But by 1999, her plans were in tatters. Several years of little advancement and frustration with her role culminated with an ugly spat with managers that resulted in a humiliating demotion and a pay cut, she said. That also became the genesis of the federal class action lawsuit U.S. District Court Judge Martin Jenkins called “historic” while he was handling the case. On Monday, the 9th Circuit U.S. Court of Appeals upheld Jenkins’ decision allowing the case to go to trial as a class action on behalf of as many as 1 million former and current female Wal-Mart employees. Jenkins has since stepped down from the federal bench and the case will now be handled by U.S. District Court Judge Vaughn Walker, who is also deciding another high profile case, the legality of California’s voter-approved ban of same-sex marriages. Dukes’ lawsuit alleges Wal-Mart is violating the 1964 Civil Rights Act, which made it illegal for employers to discriminate on the basis of race, creed or gender. Dukes alleges that Wal-Mart systemically pays women less than their male counterparts and promotes men to higher positions at faster rates than women. The Bentonville, Ark. retailer denies the accusations and argues that if there are any instances of discrimination they are isolated, and not an overarching company policy. Wal-Mart says any such cases should be handled as individual lawsuits, not as a class action. The retailer has fiercely fought the lawsuit since it was first filed in federal court in San Francisco in 2001 and said it would appeal the most recent decision to the U.S. Supreme Court. The incident that sparked the epic legal battle began while Dukes served as a customer service manager. Dukes, 60, needed change to make a small purchase during her break. She asked a colleague to open a cash register with a one-cent transaction, which she claims was a common practice. Nevertheless, she was demoted for misconduct. She complained to a manager that the punishment was too severe and part of a long campaign of discrimination that began almost as soon as she started working for Wal-Mart in this blue-collar city of about 100,000, some 45 miles east of San Francisco. She believed the reprimand was partially motivated by race. She’s black and the managers were white. When those complaints were ignored, Dukes sought legal advice. She ended up being represented by Brad Seligman, an attorney had who launched The Impact Fund, a legal nonprofit, in 1992. Seligman said he asked Dukes to serve as lead plaintiff in what would become a vast class action because of her strong personality. “I’m somewhat in awe of her, particularly that she has managed to work at Wal-Mart for all these years,” Seligman said. “It is extraordinary difficult to find someone who wants to risk their jobs by filing a lawsuit against their employer.” Seligman and other attorneys told Dukes that she wasn’t alone, that many other women had similar complaints. They said they would like to use her and five other former and current Wal-Mart employees to file the class action lawsuit. “My jaw fell open,” Dukes said when told of the other complaining women. “I thought I was by myself.” That was nine years ago. And with Wal-Mart insisting the lawsuit is without merit and vowing to continue its fight, it appears the litigation has more years to go. Dukes is undeterred by that prospect and sanguine about the outcome. “It’s a very courageous thing for a person to do, to stick with it over such a long period of time,” said Marcia Greenberger, founder of the Washington D.C. advocacy group National Women’s Law Center. “The individuals who step forward pay a very big price to be willing to tell their stories and to hold their records up to public scrutiny.” The center has filed a “friend of the court” brief supporting the Dukes lawsuit, as have the NAACP and Mexican American Legal Defense & Educational Fund. The U.S. Equal Employment Opportunity Commission has also filed a brief supporting the lawsuit. The U.S. Chamber of Commerce and other organizations, fearful that a ruling in Dukes’ favor will expose other companies to costly lawsuits, have filed briefs urging dismissal of the complaint. Ms. Magazine named her one of its “Women of the Year” for 2004, the same year Liz Featherstone’s book “Selling Women Short: The Landmark Battle for Workers’ Rights at Wal-Mart” was published. Featherstone has compared Dukes to Rosa Parks, the civil rights crusader. “I am very grateful that I’m on this platform,” Dukes said. “In this life, you have to stand up or be trampled.” She leans heavily on her faith, believing she has God on her side and that she’s been called upon to fight for others. Through it all, Dukes has remained humble, saying she lives with her mother because she can’t afford a place of her own on her $15.23 an hour salary. “There are times that I can’t afford my lunch,” she said, wrapping her chicken nuggets in a napkin for later. “But I’m still blessed.” She’s guarded about her past life, vaguely saying she has faced “many tsunamis.” Dukes mother moved the family from their native Louisiana to California 50 years ago. Dukes was married briefly but is single today and childless. She preaches often at her church on Sunday and said that fellow employees often approach her for spiritual counseling. She slipped into preacher mode when asked about Betty versus Goliath characterization. “David had five stones but only need one,” she said, comparing the biblical victory to the single lawsuit that she hopes will be decided in favor of Wal-Mart’s women employees. Dukes said that there have been few problems with managers and co-workers since the lawsuit was filed in 2001. She said the work atmosphere gets a “little chilly” after courtroom victories are reported in the media. Seligman, her lawyer, said her involvement in the lawsuit may even have benefited her. “It seems like that at every pivotal moment in the litigation,” Seligman said, “Betty gets a raise.”

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U.S. Stocks Rally Most in Two Months on Earnings; Motorola, Starwood Gain

April 29, 2010

By Elizabeth Stanton April 29 (Bloomberg) — U.S. stocks rallied, sending the Standard & Poor’s 500 Index to its biggest gain in almost two months, as better-than-estimated earnings at companies from Motorola Inc. to Starwood Hotels & Resorts Worldwide Inc. showed the economy is strengthening. Motorola, the largest U.S. mobile-phone maker, advanced 3.2 percent after reporting an unexpected profit, and Starwood rose 5.4 percent. Palm Inc. surged 25 percent as Hewlett-Packard Co. agreed to buy the maker of Pre phones for about $1.2 billion. BP Plc, Transocean Ltd. and Cameron International Corp. plunged after the U.S. Coast Guard said an oil well in the Gulf of Mexico is leaking five times faster than previous estimates. The S&P 500 gained 1.2 percent to 1,205.27 at 3:25 p.m. in New York, its biggest advance since March 5. The main benchmark for American equities is within 1 percent of its 19-month high last week. The Dow Jones Industrial Average rallied 120.24 points, or 1.1 percent, to 11,165.51. The gauges fell the most since February on April 27 as credit-rating downgrades of Greece and Portugal triggered a flight from risky assets. “Earnings season has been spectacular,” said Eric Green , senior money manager at Penn Capital Management in Philadelphia, which oversees about $5 billion. “The recovery has been stronger than most have expected.” Earnings Season Profit at companies in the S&P 500 surged 176 percent during the final three months of 2009, the most in Bloomberg data going back to 1998, and analysts estimate a 44 percent increase for the first quarter of 2010. Earnings estimates for companies in the index rose 9.1 percent on average in April, the largest monthly increase since at least 2006. Income for the first three months of this year is beating estimates at nearly the fastest rate ever, with 78.4 percent of the companies that have reported topping projections. That compares with 79.5 percent in the third quarter and 72.3 percent in the period before that. Companies reporting better-than-estimated results since yesterday’s close include Akamai Technologies Inc., Aetna Inc. and International Paper Co. The S&P 500 has rallied 78 percent from a 12-year low in March 2009 as earnings grew following a record nine-quarter slump and the Federal Reserve kept its benchmark interest rate at a record low to safeguard the recovery from recession. The Fed yesterday reiterated its pledge to keep its benchmark rate near zero for an “extended period” even as the labor market shows signs of improvement. Jobless Benefits A Labor Department released before exchanges opened today showed the number of Americans filing claims for unemployment benefits declined last week to a one-month low, a sign the economic rebound is lifting the labor market. European stocks also advanced, lifting the Stoxx Europe 600 Index from a six-week low, as the region’s leaders moved closer to approving a rescue plan for Greece. European Union Economic and Monetary Affairs Commissioner Olli Rehn today told reporters in Brussels that he is confident discussions on the aid package for Greece will conclude “in the next days.” Motorola gained 3.2 percent to $7.14 after posting first- quarter profit, excluding some items, of 2 cents a share. Analysts predicted a loss of 1 cent on average. The company’s forecast for second-quarter earnings beat analysts’ estimates, signaling demand for models like the Droid is helping to reverse a three-year sales slump. Starwood, Palm Starwood climbed 5.4 percent to $56.15. The owner of the St. Regis and W hotel brands said first-quarter profit surged fivefold as revenue exceeded the average analyst projection. Palm rallied 25 percent to $5.80 after agreeing to be bought by Hewlett-Packard for $5.70 a share. The deal puts Hewlett-Packard back in contention with the biggest smartphone makers, including Nokia Oyj, Apple Inc. and Research In Motion Ltd. Acquisitions are rebounding after takeovers of U.S. companies tumbled 83 percent from their 2007 peak to a six-year low of $89.2 billion in last year’s fourth quarter, according to Bloomberg data. Volume totaled $179.1 billion during the first quarter, and $71.1 billion of deals have been announced this month. BP, based in London, plunged 8.4 percent to $52.54 in U.S. trading. The company will have to pay the costs associated with an oil spill in the Gulf of Mexico after last week’s explosion of a well that is leaking as much as 5,000 barrels of crude a day, the Obama administration said today. Shrimpers Sue Transocean, which owns the oil rig, lost 6.9 percent to $79.01. Halliburton Co. retreated 7.2 percent to $30.96. Louisiana fishermen and shrimpers sued BP, Transocean and Halliburton on claims the oil spill will destroy the state’s fishing industry. Halliburton was responsible for capping the well, according to the lawsuit. Cameron International lost 13 percent to $38.67. Its gear has been used on the Deepwater Horizon rig since the vessel was commissioned, Scott Amann , a company spokesman, said in an interview. Baidu Inc., the operator of China’s biggest Internet search engine, rallied 14 percent to $711.23. First-quarter net income rose to 480.5 million yuan ($70.4 million) from 181.1 million yuan a year earlier. That exceeded the 364.6 million-yuan average of analysts’ estimates compiled by Bloomberg. Akamai, the largest supplier of software and services to make Web sites load faster, rose 19 percent to $39.42. Aetna, the third-biggest U.S. health insurer, climbed 2.8 percent to $31.35. International Paper, the world’s largest maker of white paper used in offices, increased 4.1 percent to $28.30. ‘Exceptional Condition’ “Corporations are in exceptional condition,” said Carmine Grigoli , chief investment strategist at Mizuho Securities USA Inc. in New York. “Profitability is approaching levels last seen in 2007 at the peak of the profit cycle.” Education companies retreated following a report that Robert Shireman , the U.S. undersecretary for education, criticized the panels that evaluate for-profit colleges. Apollo Group Inc. fell 6 percent, Corinthian Colleges Inc. declined 5.4 percent and ITT Educational Services dropped 7.1 percent. Inside Higher Ed reported that Shireman compared the agencies that handle accreditation of for-profit colleges to credit-ratings firms, which he said played a role in the “flawed” regulatory process that allowed Wall Street firms to contribute to the financial crisis that began in 2007. To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

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Goldman Sachs Champion Buffett Draws on 69-Year Past With Firm Under Fire

April 28, 2010

By Andrew Frye April 29 (Bloomberg) — Warren Buffett , who called Goldman Sachs Group Inc. an “exceptional institution” when he invested $5 billion in the firm, will have his biggest platform to discuss the bank after it was sued for fraud by regulators and pilloried in Congress. Buffett, who will host shareholders of his Berkshire Hathaway Inc. at the May 1 annual meeting, was a satisfied Goldman Sachs client when he extended capital and credibility to the firm during the credit crisis in 2008. Buffett has since defended the bank amid public outrage about its pay and conduct, drawing on a relationship that dates to a visit with a Goldman Sachs executive in New York at the age of 10. “That’s more than 60 years of experience with Goldman Sachs that’s talking,” said Jeff Matthews , author of “Pilgrimage to Warren Buffett’s Omaha” and founder of the hedge fund Ram Partners LP. “Buffett is not going to be turning around selling his Goldman Sachs.” Buffett said people who feel cheated by the recession have unfairly lashed out at Wall Street when regulators, mortgage lenders and politicians should share the blame. “They’re going to rewrite Genesis and have Goldman Sachs offering the apple,” Buffett said in a March 1 interview with CNBC. The billionaire has “great confidence” in his investment, according Berkshire Director Thomas Murphy , who told Bloomberg Television that he spoke with Buffett after the Securities and Exchange Commission sued Goldman Sachs on April 16. Goldman Sachs Chief Executive Officer Lloyd Blankfein said he also spoke privately with Buffett after the lawsuit. Shareholder Questions Buffett will take about five hours of shareholder questions at the meeting and, according to Murphy, should expect inquiries about Goldman Sachs, which was accused of misleading clients on the sale of mortgage-related investments. About 35,000 people attended last year’s meeting at Omaha’s Qwest Center arena. Buffett’s comments from the gathering and subsequent press conference are read throughout the world. Buffett, a critic of Wall Street greed and corruption, has supported a firm that’s been a lightning rod for criticism. Public regard for Goldman Sachs plunged in the year and a half since Buffett, Berkshire’s chairman and chief executive officer, bought preferred securities paying 10 percent interest. Berkshire makes $500 million a year in interest on the Goldman Sachs perpetual preferred stock, which the bank may call at any time by paying a 10 percent premium. The warrants Buffett negotiated as part of the deal give Berkshire the option to buy $5 billion of common stock for $115 a share. Berkshire’s paper profit on the warrants was about $1.8 billion as of yesterday, down from $3 billion before the SEC lawsuit was announced. Goldman Shares Goldman Sachs advanced $3.97, or 2.6 percent, to $157.01 yesterday in New York trading. The bank closed at $184.27 on April 15. Berkshire rose $675 to $115,625. The transaction is reminiscent of a 1987 deal with Salomon Inc. in which Buffett invested $700 million. Buffett was named interim chairman of Salomon in 1991 after the firm was accused of misconduct in the Treasury debt auction market, and he worked with regulators to restore the company’s credibility. In testimony to Congress, he summarized his message for Salomon employees: “Lose money for the firm, and I will be understanding,” Buffett said. “Lose a shred of reputation for the firm, and I will be ruthless.” Senate Hearing Goldman Sachs executives endured more than 10 hours of grilling before the Senate’s Permanent Subcommittee on Investigations on April 27 about their duty to clients and the ethics of betting against the housing market as the bank sold mortgage-linked securities. Michigan Democrat Carl Levin said he was “troubled” that the company doesn’t seem to understand conflicts of interest. Goldman Sachs has said the SEC suit is unfounded. “What clients or customers are buying is they are buying an exposure,” Blankfein told the committee. “The thing we are selling to them is supposed to give them the risk they want. They are not coming to us to represent what our views are.” Goldman Sachs posted a record $13.4 billion profit in 2009, a year after receiving $10 billion in a taxpayer bailout. It repaid the funds with interest in June. Buffett told television interviewer Charlie Rose in November that the bank didn’t need the bailout. As politicians railed about bonuses, Buffett, the world’s third-richest person, praised Blankfein and said, “I don’t mind paying for performance.” Finding a Target “You’ve got to expect vilification of banks,” Buffett said in a January interview. “If I lost my job I’d be mad at somebody, I’d probably be mad at everybody. And that’s human nature. And it sometimes gets fanned by people to whom it’s to their advantage to have a target.” The Goldman Sachs case is the SEC’s first contested lawsuit against a major investment bank in more than a decade, and comes as the regulator seeks to restore a reputation tarnished by its failure to detect Bernard Madoff ’s Ponzi scheme. Buffett, who has ridiculed investment bankers for the size of their fees, relied on Goldman Sachs for some of his biggest deals, including the $4.5 billion acquisition of Marmon Holdings Inc. in 2008 and the $1.45 billion takeover of McLane Co. Those deals were facilitated by Byron Trott , the former Goldman Sachs managing director of whom Buffett said “I trust him completely.” An Investing Icon At last year’s meeting, Buffett praised Wells Fargo & Co. and dismissed the importance of government analysts who were reviewing banks in an industrywide stress test. The San Francisco-based bank jumped 44 percent the following week. “Warren Buffett is certainly an icon in terms of picking the right companies and investing with a long-term strategy,” said Jeff Resnick of Opinion Research Corp., a specialist in brand and reputation consulting. A good reputation “will give you a reservoir of goodwill among your most important stakeholders.” Berkshire rose to first place this month in Harris Interactive’s annual survey of corporate reputations. Goldman Sachs came in 56th out of 60. “He’s an important client as well as an investor,” Blankfein said of Buffett in the April 27 Bloomberg Television interview. “I can’t speak for Warren.” Buffett said last year in Omaha that almost everyone associated with finance, from bankers to regulators to insurers, contributed to the crisis. “Some of it stemmed from greed, some from stupidity, some from people saying the other guy was doing it,” Buffett said. To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

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Bankers Would Say `Anything’ to Get High Rating, Former S&P Analyst Says

April 26, 2010

By Elliot Blair Smith April 26 (Bloomberg) — Just past midnight on May 3, 2005, Standard & Poor’s analyst Chui Ng e-mailed co-workers to broker a solution to demands by Goldman Sachs Group Inc. bankers that he said violated two or more of the ratings company’s internal guidelines. Goldman Sachs was adding $200 million in debt at the “last minute” to a $1.5 billion bond pool called Adirondack Ltd., Ng wrote. That meant the New York investment bank would originate 13 percent of the pool itself, two-and-a-half times the 5 percent limit set by S&P. Goldman Sachs also balked at Ng’s request to pay in advance for an insurance policy known as a credit default swap, which was being used to create the additional debt obligation. The e-mails from Ng, who negotiated a compromise on Goldman Sachs’s requests, provide a rare window into the back-and-forth between the bank and a rating company assessing the risks in a financial product linked to subprime mortgages . The exchange was among 581 pages of private communications released last week by Senate investigators. Ng, who no longer works in the rating business, said in a telephone interview April 23 that while the Senate documents contain an “incomplete record,” they show how banks pressured credit raters to lower standards as they created collateralized debt obligations, or CDOs, during the housing boom. ‘Strong-Arm’ “The bankers would say anything to get what they needed into their deals,” Ng, 47, said. “Goldman is very good at looking at every deal; every CDO that’s ever been issued.” Ng said the perception among professionals in the ratings business was that the bank had a team that would look for “inconsistencies across different deals and use that to strong- arm Moody’s, Fitch and S&P to change their criteria.” Asked about Ng’s comments, Goldman Sachs spokesman Michael DuVally said in an e-mail, “Goldman Sachs and others relied upon the rating agencies to supply independent analysis and ratings.” He declined to elaborate. S&P spokesman Chris Atkins declined to comment for this story. Moody’s Corp, Fitch Inc., a unit of Paris-based Fimalac S.A., and S&P, a unit of McGraw-Hill Cos., are the three largest rating firms in global debt markets. Senator Carl Levin , a Michigan Democrat who is chairman of the Senate Permanent Subcommittee on Investigations, said at a panel hearing April 23 that the raters compromised “their analysis, their independence and their reputation for reliability. And they did it for money.” Abacus The SEC sued Goldman Sachs on April 16, alleging it had defrauded investors when selling debt tied to mortgages on another deal known as Abacus 2007-AC1. The SEC alleges that Goldman Sachs and executive director Fabrice Tourre failed to inform investors that a hedge fund led by billionaire John Paulson played a role in choosing Abacus securities that Paulson was betting would fail. Goldman Sachs denies wrongdoing. Paulson isn’t a defendant in the lawsuit. Goldman Sachs Chief Executive Officer Lloyd Blankfein , 55, along with Tourre and five current and former employees are set to appear before Levin’s panel Tuesday. Ng rated several previous Abacus deals before resigning from S&P in March 2006. Two days after his first e-mail on Adirondack to fellow members of an S&P criteria panel, Ng wrote that the firm’s modeling now accommodated Goldman’s demands. In return, the bank would put up more collateral, or find a replacement guarantor, if its own credit rating were downgraded, he wrote. Compromise Wins Ng’s compromise carried by a 4-3 vote while provoking sharp dissent, in part because the only one speaking up for the proposal in the released e-mails was Ng himself, Senate documents show. “I would vote NO on this one,” wrote Lapo Guadagnuolo, a senior director of S&P’s structured finance office in London. Kenneth Cheng, then a director in S&P’s CDO group, wrote that the compromise “opens up abuse of our criteria, devoiding it of much meaning.” Michael Drexler , an S&P analyst in New York, also objected. “Ignoring for a moment my stupid (and arrogant!) irritation that the correct side lost, in my mind this is a great example of how the criteria process is NOT supposed to work. Being outvoted is one thing (and a good thing, in my view) but being out-voted by mystery voters with no ‘logic trail’ to refer to is another. How can we possibly reconstruct the argument of the winning side for our future deals if it does not exist in writing for general reference?” Drexler wrote. ‘Backroom Decision’ “This is exactly the kind of backroom decision-making that leads to inconsistent criteria, confused analysts and pissed-off clients,” he added. Reached by telephone Friday, Drexler said, “That’s exactly the kind of thing a young analyst shouldn’t put in writing. Thank God I was right.” Ng, in the interview, defended his work on the Adirondack CDO, which S&P downgraded from AAA to AA in October 2008 and further reduced to BB+, below investment grade, in June 2009. He denied that he had led “mystery voters” to support the compromise. He said that votes on criteria often were made without identifying names to avoid pressuring ratings panelists. “There were a lot of these one-off deals, different team leaders, different managers,” Ng said. “If they got approved, you can’t keep that a secret. After you issue it, bankers can reverse engineer the deals and everybody would ask for it.” Among the e-mails published by the Senate committee was one from Moody’s CEO Raymond McDaniel , who ruminated about banker- rater tension in a memorandum he sent to himself shortly before midnight on Oct. 21, 2007. “Analysts and MDs” managing directors “are continually ‘pitched’ by bankers, issuers, investors — all with reasonable arguments — whose views can color credit judgment, sometimes improving it, other times degrading it (we ‘drink the kool- aid’),” McDaniel wrote, incorporating remarks that he’d heard from some of his employees in recent weeks. “Coupled with strong internal emphasis on market share & margin focus, this does constitute a ‘risk’ to ratings quality.” To contact the reporter on this story: Elliot Blair Smith in Washington at esmith29@bloomberg.net .

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Wall Street Journal Revs Up New York Times Rivalry

April 24, 2010

NEW YORK — It might be the last great American newspaper war. And Rupert Murdoch intends to win it. He has made a career of grabbing readers and advertisers from competing newspapers, and now he is racheting up the challenge his Wall Street Journal poses to The New York Times. On Monday, the Journal is launching a metro section that will vie for readers and advertisers on the Times’ turf. Although the new section will be available only in the New York City area, collateral damage could spread around the country. Both newspapers are jostling with each other, USA Today and regional dailies for readers. By dramatically lowering advertising rates in New York to undercut the Times, Murdoch’s assault could leave both newspapers with fewer resources for other expansion plans. “The Times has a lot of readers and a lot of them are very loyal, long-standing folks. It’s not going to be easy to peel off the Times’ core constituency,” says Dean Starkman, a former Journal reporter who writes for the Columbia Journalism Review. “As a business proposition, I think I’m with the majority of skeptics who think that this could ultimately damage both papers.” Luxury retailer Bergdorf Goodman, a longtime prominent advertiser in the Times, plans to advertise in the new Journal section. “We’re going to try it and see,” spokeswoman Ginger Reeder says. “We always look for new ways to reach our customers.” It’s not yet clear whether Bergdorf will reduce its advertising in the Times. Times President and General Manager Scott Heekin-Canedy says several prominent advertisers have assured him that their promotions in the Journal’s new section will not come at the expense of the Times. He declined to name the advertisers. “We won’t get in a pricing war,” he says. News Corp. said Murdoch, 79, was not available for an interview. But he has been open about his goal of using his media properties to challenge what he considers a left-leaning news establishment in the U.S. And he took a swipe at the Times in a speech to New York real estate executives last month. “We believe that in its pursuit of journalism prizes and a national reputation, a certain other New York daily has essentially stopped covering the city the way it once did,” he said. Times Co. CEO Janet Robinson fired back Thursday. “When you’re the lead dog, people are constantly going to go after you,” she told financial analysts. But she argued that the Times has a better case to make with advertisers. “They are aware of the fact certainly that we have a larger female audience. They are aware of the fact that there’s more time spent with our newspaper and website than the Wall Street Journal,” she said. Going after the Times is the fight Murdoch had in mind when News Corp. bought the Journal and its parent Dow Jones & Co. for $5 billion in 2007. Since then, he has tried to broaden the newspaper’s appeal by remaking the Journal’s front page. Last year it surpassed USA Today as the nation’s most widely circulated newspaper. The new Journal splashes color photos in place of its customary small, black-and-white renderings and includes more coverage of topics outside of business and finance. One recent edition carried a photo of the volcanic eruption in Iceland across the top of the page. To fill its new metro section, the Journal has hired several former staffers of The New York Sun. The Sun, a feisty upstart that – like the Journal – had conservative opinion pages, spent six years trying to rival the Times with aggressive local coverage before going out of business in 2008. John Seeley, the Sun’s former deputy managing editor, will lead the Journal’s new metro section. Pia Catton, the Sun’s former culture editor, has been named the section’s lead arts and leisure reporter. “They are hiring people trained to compete with the Times,” says one former Sun contributor who was approached about a job with the new section. He spoke on condition of anonymity because his discussions with the Journal were supposed to be confidential. Murdoch has relished similar competitions. After buying the Times of London in 1981, he grabbed circulation from The Daily Telegraph by slashing subscription prices and introducing coupon promotions and prize raffles. As the owner of the Telegraph, Conrad Black battled Murdoch before Black was convicted of defrauding his own company in 2007. The Telegraph survived, but in an e-mail from prison Black wrote that if his experience is any guide, The New York Times could struggle to “absorb the kind of price-cutting and profligate expenses Murdoch will pour on.” As owner of The New York Post, Murdoch has been willing to cut newsstand prices and lose tens of millions of dollars in his bid to outsell the New York Daily News. In 2000, the Post sold about 435,000 copies on an average weekday, compared with 714,000 for the Daily News. By 2009, the Post was up to roughly 530,000 copies while the Daily News had sunk to 570,000. And Murdoch’s underlings have been accused of using rougher tactics than just price cutting or promotions. News Corp. subsidiary News America, which prints coupons and grocery store ads and is led by New York Post publisher Paul Carlucci, agreed in January to pay $500 million to settle a lawsuit with rival Valassis Communications. Valassis had accused News America of using its market clout to demand that customers advertise exclusively with News America. It likened Carlucci to the gangster Al Capone beating his enemies with a baseball bat in the film “The Untouchables.” News Corp. would not make Carlucci available for comment. In a statement, the company said it settled the lawsuit because “significant risks were developing in presenting this case to a jury.” So far, competition between the Journal and the Times has taken a less cinematic course. The newspapers have shadowed each other’s moves across the country over the past year by opening sections devoted to local issues for readers in San Francisco and Chicago. But those new sections are running once or twice a week. The Journal has shuffled resources to staff its sections and hasn’t done any hiring. The Times has sought partnerships with local media rather than add staff. By contrast, the Journal is hiring about 35 reporters for its New York section, which will run about 10 pages every day. It will include color – a critical feature for advertisers who want to stand out. And it will mimic the wide range of coverage offered by the Times, including stories on local politics, culture and sports. Murdoch is willing to put $30 million into the section over the next two fiscal years, according to a person familiar with the Journal’s finances who was given anonymity to speak about internal company figures. The Times has countered with an ad campaign boasting that twice as many business professionals in the New York market read the Times as the Journal, based on surveys by the research group Scarborough. The Journal sells almost 2 million copies a day nationwide, and the Times sells about 900,000. But the advantage is reversed in the New York market, which includes the city and parts of New Jersey, Connecticut and Pennsylvania. The Times sold an average of 406,000 copies in the area on weekdays and the Journal sold 294,000 in the year that ended Sept. 30, based on Audit Bureau of Circulations figures. Even so, Murdoch still could reshape the local ad market. News Corp. is offering a discount for advertising in both the Journal and the Post and could package ads with other outlets it owns, such as the local Fox TV station. The Times essentially just has itself. Roberta Garfinkle, who heads print advertising strategy at the New York ad firm TargetCast, called Murdoch’s plan a “smart move” because it will offer advertisers a cheaper way to target wealthy New Yorkers than having to pay for ads that run nationally. For instance, a full-page black-and-white ad in the Journal’s national edition costs about $223,000 per day, while the same ad in the eastern edition – delivered from Alabama to Maine – costs about $102,000. (Both figures assume no volume discounts.) An ad that runs just in the New York market will cost even less. Materials prepared for one advertiser by the Journal and reviewed by The Associated Press offer a full-page ad in the New York section of the Journal – plus a full-page ad in the Post – for less than $20,000. Dow Jones says such promotions have been offered to a small number of advertisers. A comparable ad running in the New York regional edition of the Times could cost about $50,000, although rates vary by category of advertiser. The heightened competition for ad dollars comes as nearly every newspaper has lost advertising to the Internet. The newspapers’ own websites haven’t yielded the same kind of income that printed newspapers are used to. The Times Co. unit that includes its flagship newspaper lost more than 25 percent of its overall ad revenue last year and might not see it come back. News Corp. doesn’t disclose the Journal’s advertising figures or profits. But there are clear signs the newspaper has been struggling financially. It cut staff last year. According to the person knowledgeable about its finances, the Journal lost more than $80 million in the fiscal year that ended June 30. Journal spokeswoman Emily Edmonds would not confirm or deny the figure. However, if it comes down to who can hold his breath longer while the ad slump continues, Murdoch would appear to have the odds. News Corp. has more flexibility. Some of its businesses, such as Fox News and other cable channels, are larger than the entire Times Co. Analysts expect the movie “Avatar” alone will earn News Corp. as much as $400 million in operating profit. The Times Co. had an operating profit of just $74 million last year. As Starkman, the former Journal reporter, put it, “The Times is a cork bobbing in a pretty big ocean.”

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Obama to Target `Risky Decisions’ by Wall Street That Led to Credit Crisis

April 22, 2010

By Roger Runningen and Edwin Chen April 22 (Bloomberg) — President Barack Obama will say today that the U.S. risks dooming itself to a repeat of the economic crisis unless tougher financial industry regulations are enacted by Congress. The U.S. was almost dragged into a second Great Depression by “a failure of responsibility — from Wall Street to Washington,” Obama will say later this morning in a speech at Cooper Union in New York, according to excerpts released by the White House. “I believe in the power of the free market,” Obama will tell his audience, echoing the speech he gave at the same site two years ago amid the presidential campaign. “But a free market was never meant to be a free license to take whatever you can get, however you can get it.” Obama’s drive to get the legislation through Congress in the coming weeks may get a boost as Republican opposition softens following negotiations with Democratic Senator Christopher Dodd , chairman of the banking committee, lobbying by administration officials and last week’s announcement by the Securities and Exchange Commission that it is suing Goldman Sachs Group Inc. for fraud linked to derivatives. In his remarks, scheduled to be delivered at 11:55 a.m. New York time, Obama again criticizes “the furious efforts of industry lobbyists” to weaken the proposed regulatory regime. He will say the pending legislation is “in the end, not only in the best interest of our country, but in the best interest of our financial sector.” Senate Legislation The legislation sponsored by Dodd, which may come to the Senate floor as soon as next week, would create an independent regulator within the Federal Reserve that would guard consumers against abuse and deception in such instruments as mortgages, credit cards or loans. It would also create the mechanism to unwind systemically important financial firms when they fail and strengthen oversight of derivatives and hedge funds. The Senate Agriculture Committee yesterday approved a separate measure that would require U.S. lenders such as JPMorgan Chase & Co . and Bank of America Corp . to spin off their swaps trading desks as part of rules governing derivatives markets. The House has already passed its version of the regulatory overhaul legislation. Obama also will discuss in his remarks key elements that he wants to see in a final bill. Volcker Rule These include the so-called Volcker Rule, proposed by former Federal Reserve Chairman Paul Volcker , which sets limits on the size of banks and the risks that banking institutions may take; new transparency requirements to bring derivatives and other complex financial instruments “out of the dark;” additional consumer protections; and a stronger role for investors and pension holders in determining who manages the companies in which their savings are placed. “It is essential that we learn the lessons of this crisis, so we don’t doom ourselves to repeat it,” Obama will say, according to the excerpts. “And make no mistake, that is exactly what will happen if we allow this moment to pass — an outcome that is unacceptable to me and to the American people.” Obama’s speech is primarily a vehicle for his campaign for the legislation, said Brian Gardner , senior vice president for Washington research at Keefe Bruyette & Woods Inc. “I don’t think Wall Street is expecting any kind of olive branch on the substance of the legislation, but I think folks on the street would like to see cooler rhetoric,” Gardner said. The excerpts don’t address the case against Goldman Sachs. No SEC Influence Obama said yesterday the White House had no influence on the SEC’s decision to sue Goldman. Any notion that the administration knew ahead of time about the lawsuit or consulted with the independent agency is “completely false,” the president said in an interview with CNBC . The president is returning to the site where, during the 2008 campaign, he outlined his proposals for a new regulatory regime. Obama blamed a lack of effective regulation for failing to stem the worst financial crisis since the Great Depression. It eventually brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc . and prompted a $700 billion bailout of the financial industry. “I take no satisfaction in noting that my comments have largely been borne out by the events that followed,” Obama will say today. Negotiations All 41 Senate Republicans signed a letter last week vowing to oppose Dodd’s legislation as it stood after passing the banking panel. Negotiating points including whether to drop a $50 billion industry-supported fund the government would use to break apart failed, systemically important firms. The fund has been a focal point of Republican objections, and administration officials have said it wasn’t part of Obama’s original proposal, suggesting they wouldn’t fight its elimination. “I have an awful lot of Republicans who are willing” to vote for the regulatory bill, Dodd said yesterday in an interview with Bloomberg Television. “The question is whether the leadership will allow them to do it.” Senator Richard Shelby of Alabama, the ranking Republican on the banking panel, said he and Dodd are close to an agreement on the legislation. To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net Edwin Chen in Washington at Echen32@bloomberg.net

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Blankfein Proving Inferior to Dimon in Swaps: Credit Markets

April 20, 2010

By Shannon D. Harrington, Kate Haywood and John Detrixhe April 20 (Bloomberg) — The cost to protect Goldman Sachs Group Inc. bonds from losses rose to the highest level in two months compared with JPMorgan Chase & Co. after regulators accused Wall Street’s most profitable firm of fraud. Credit-default swaps on Goldman Sachs jumped the most in more than a year in the past two trading sessions, rising 39.4 basis points since April 15 to 130.5 basis points, according to CMA DataVision. Goldman Sachs swaps are now 57.9 basis points higher than JPMorgan’s, up from 34.7 basis points on April 15, the day before the lawsuit was made public, and the most since Feb. 15. The wider gap shows debt investors are increasingly skittish that a U.S. Securities and Exchange Commission lawsuit will curb Goldman Sachs’s revenue, and pushed the cost of its derivatives above Bank of America Corp.’s. Goldman Sachs default swaps had been moving closer to JPMorgan’s before the SEC’s allegations signaled the more aggressive regulatory stance. “Goldman Sachs is the one that potentially has more to lose on the side of regulatory reform,” said Jon Duensing , a senior portfolio manager at Smith Breeden Associates in Boulder, Colorado, which has more than $22 billion of assets under management. “It has more of the businesses that are going to be caught in the crosshairs of financial reforms.” Hedge Against Losses Goldman Sachs credit swaps, used to speculate on creditworthiness or to hedge against losses, are now trading 7.3 basis points wider than those from Charlotte, North Carolina- based Bank of America. Goldman Sachs is set to report first- quarter earnings today. Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt was unchanged yesterday at 143 basis points, or 1.43 percentage point, the lowest since November 2007 and down from a record 511 basis points in March 2009, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 3.914 percent. Ford Motor Co., the only major U.S. automaker to avoid a government-assisted bankruptcy last year, plans to sell $1.09 billion of bonds backed by payments on consumer auto loans, according to a person familiar with the offering. JPMorgan, Morgan Stanley and Royal Bank of Scotland Plc are managing the sale, said the person, who declined to be identified because terms aren’t public. Ford, based in Dearborn, Michigan, is among companies selling bonds backed by consumer and business loans after the Federal Reserve’s Term Asset Backed Securities Loan Facility ended last month, a sign that demand for the debt has returned. Daimler AG, Bayerische Motoren Werke AG and Deere & Co. all had sales last week, according to data compiled by Bloomberg. Unsecured Bonds Banks in Europe are increasing the use of unsecured bonds as collateral for loans after policy makers tightened the criteria on pledging asset-backed securities, according to the European Central Bank. Financial firms in Europe put up about 570 billion euros ($768 billion) of banks’ unsecured debt to get central bank funding last year, overtaking notes backed by mortgages and consumer debt as the biggest collateral pool, the ECB said in its annual report. Sankaty Advisors LLC, Bain Capital LLC’s debt-investment affiliate, has raised about $900 million to lend to medium-sized companies. The Sankaty Middle Market Opportunities Fund LP has investors including Pennsylvania’s Public School Employees Retirement System, according to people familiar with the matter, who declined to be identified because the information is private. Sankaty spokeswoman Charlyn Lusk declined to comment. Asia Bond Risk The cost of protecting Asia-Pacific corporate and sovereign bonds from default declined, after Citigroup Inc. said profit more than doubled as the global economic rebound trimmed costs for bad loans and the value of subprime mortgage bonds rose. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 3 basis points to 94 basis points, while the Markit iTraxx Australia index retreated by 3 basis points to 81.5, Deutsche Bank AG prices show. In emerging markets, the extra yield investors demand to own bonds instead of Treasuries fell 0.02 percentage point to 2.37 percentage points, according to the JPMorgan Emerging Market Bond Index. The gap this year had widened to as much as 3.23 percentage points on Feb. 8. Brazilian local-currency government bonds will outperform stocks in 2010 after trailing equities for four of the past five years as interest rates jump and shares get more expensive, according to the country’s fourth-largest pension fund. Banco Panamericano SA sold $500 million of 10-year bonds. Brazil’s Bonds “There is more upside in fixed income,” said Jorge Simino , who oversees 16.5 billion reais ($9.3 billion) in assets as investment director at Fundacao Cesp, the retirement fund for employees of utility Cia Energetica de Sao Paulo . “There is some exaggeration in stock prices.” Brazil’s real-denominated bonds returned 2.4 percent in local currency terms this year, beating the average return of 1 percent for emerging markets, according to JPMorgan’s ELMI+ indexes. The benchmark Bovespa stock index is up 0.74 percent this year. Brazilian bonds gained 11 percent last year, while the Bovespa stock index soared 83 percent. The SEC said April 16 that Goldman Sachs sold collateralized debt obligations linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle. “You live or die on your reputation, and if that’s in doubt, you’ve got some problems,” said Brian Yelvington , the head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut. Goldman Sachs said in a statement that the allegations are “completely unfounded.” CDOs pool bonds, loans and other fixed-income assets into securities of varying risk and return. ‘Game Changer’ The suit could be a “game changer” because it shows the SEC is seeking to redeem itself after regulatory failures and may foreshadow other litigation, said David Kotok , chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey. “When you have the 500-pound gorilla known as the Securities and Exchange Commission attacking, investigating and alleging fraud, it is highly unlikely that it is a single, one- off event,” Kotok said. “This is a big action that took a lot of development.” U.K. Prime Minister Gordon Brown on April 18 called for the Financial Services Authority to follow the SEC and start a probe, and German Chancellor Angela Merkel said her nation’s financial regulator asked the commission for details on its Goldman Sachs suit. Hold Accountable Lawmakers who want to hold Wall Street firms accountable for the financial crisis that sparked the worst recession since the Great Depression may be emboldened, said John Anderson , head of credit at Gartmore Investment Management in London. Bank of America and Merrill Lynch & Co. led Credit Suisse AG’s “CDO litigation risk” list after offering $16.85 billion of collateralized debt obligations similar to the one that prompted a fraud suit against Goldman Sachs . The tally of lead underwriters of CDOs with “salient characteristics” of the disputed deal between 2005 and 2008 may help investors gauge the risk that lawsuits will spread to other firms, Credit Suisse said in a report yesterday. Bank of America, the largest U.S. bank, acquired New York-based Merrill Lynch in January 2009. Widening Spreads      Goldman Sachs’s 5.375 percent bonds due in 2020 were the most-traded U.S. corporate notes yesterday, falling 1.21 cents on the dollar to 98.38 cents to yield 1.79 percentage points more than similar-maturity Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Spreads for the firm, with Chief Executive Officer Lloyd Blankfein at the helm, compare with 1.91 percentage points for all financial corporate credit, according to Bank of America Merrill Lynch’s U.S. Financial Corporate Index. The index widened 0.03 percentage point on April 16, after five straight days of tightening. Credit swaps protecting Goldman Sachs debt for five years jumped 5.1 basis points yesterday after 34.3 on April 16, according to CMA prices. Michael DuVally , a Goldman Sachs spokesman, declined to comment. JPMorgan spokesman Brian Marchiony couldn’t immediately be reached for comment. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Contracts on JPMorgan, run by CEO Jamie Dimon , rose 5 basis points to 72.6 basis points, CMA prices show. Swaps on Citigroup rose 8.5 basis points to 145.6, Morgan Stanley climbed 6.6 to 145.1 and Bank of America rose 7.7 to 123.2, CMA prices show. To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net ; Kate Haywood in London at khaywood@bloomberg.net ; John Detrixhe in New York at jdetrixhe1@bloomberg.net

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`Adversarial Shot’ at Goldman Sachs Raises Stakes for SEC Enforcement Unit

April 19, 2010

By David Scheer, Joshua Gallu and Jesse Westbrook April 20 (Bloomberg) — Robert Khuzami , shortly after becoming the Securities and Exchange Commission’s enforcement chief last year, told Congress the agency must be willing to fight big cases to show it poses a “credible threat.” Targeting Goldman Sachs Group Inc., the most profitable company in Wall Street history, in the SEC’s first contested lawsuit against a major investment bank in more than a decade reflects the enforcement unit’s new combative approach. The stakes for the SEC are high. While winning high-profile cases may help the agency restore its image after being battered by the financial crisis and its failure to detect frauds including Bernard Madoff ’s Ponzi scheme, losing may tarnish the SEC’s reputation. Goldman Sachs said it will “vigorously” fight the case, which hinges on whether information withheld by the firm should’ve been disclosed to investors. The lawsuit says: “We’re willing to file big cases, we’re willing to file against the biggest firms, and we’re willing to file about the most complicated stuff,” said Mark Radke , a former SEC official now at Dewey & LeBoeuf LLP in Washington. “With this adversarial shot across Goldman’s bow, other banks will feel immense pressure to avoid being cast in a similar light,” said Charles Clark , a former SEC enforcement lawyer who works at Kirkland & Ellis LLP in Washington. Firms “may go to extraordinary lengths to avoid a similar fate.” Sophisticated Investors SEC Chairman Mary Schapiro , 54, is expanding protection of so-called sophisticated investors such as pension funds, insurance companies and banks after financial companies worldwide lost more than $1.78 trillion since the start of 2007 in the worst economic crisis since World War II. “The days of ‘buyer beware’ may be changing,” said Todd Henderson , a law professor at the University of Chicago. “In light of the financial crisis and the fact that sophisticated investors aren’t just losing their own money but taxpayers’ money, the interest of regulators is higher.” The SEC on April 16 accused Goldman Sachs of creating and selling collateralized debt obligations in 2007 tied to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities. Goldman Sachs also didn’t disclose to investors that Paulson was betting against the securities, the SEC said. The SEC’s Republican commissioners, Kathleen Casey and Troy Paredes, opposed the lawsuit against Goldman Sachs, which was approved in a 3-2 vote, two people with knowledge of the matter said yesterday. The allegations are “completely unfounded in law and fact,” Goldman Sachs said in a statement after the suit was announced. The company said it will fight the claims and “defend the firm and its reputation.” After Madoff Khuzami, 53, took the enforcement unit’s helm in March 2009 as lawmakers questioned the agency’s vigilance and debated its future after Madoff’s fraud and the collapses of Lehman Brothers Holdings Inc. and Bear Stearns Cos. In May, he told the Senate Banking Committee the agency needed to beef up its trial unit to maintain its courtroom clout and credibility. “We must convey to all defendants in SEC actions that not only do we assemble winning cases against them, but also we are prepared to go to trial and we will win,” he said. For decades, the SEC brought almost all claims against Wall Street’s biggest investment banks as settled cases. The arrangements let firms avoid legal battles that could damage their businesses. The last time the SEC “went to war” against a major investment bank was against Drexel Burnham Lambert, though there may have been smaller cases in the decade that followed, said Dewey & LeBoeuf’s Radke. Drexel initially fought the SEC’s 1988 lawsuit, which stemmed from an insider-trading probe, by meeting the agency’s lawyers at the courthouse to voice objections. The firm settled the following year. Grassley The Goldman Sachs case may show lawmakers that the SEC is willing to be more confrontational after U.S. Senator Charles Grassley , an Iowa Republican, said the agency showed too much deference to Wall Street, said Peter Henning , a former SEC attorney who teaches at Wayne State University Law School in Detroit. Grassley faulted the SEC after an agency official discussed potential enforcement cases against Bear Stearns with JPMorgan Chase & Co. in March 2008 as the government pushed JPMorgan to buy the failing investment bank. The senator also criticized SEC officials for discussing an investigation into Morgan Stanley Chairman John Mack with the firm’s lawyer in 2005 when the company was considering naming him chief executive officer. Mack, who stepped down as CEO in January, wasn’t accused of wrongdoing by the SEC. No Warning     Although the agency warned Goldman Sachs last year that it was investigating and might eventually file a complaint over its dealings in collateralized debt obligations, the SEC didn’t alert the firm before it filed the suit on April 16, according to a person close to the company. People within Goldman Sachs interpreted the absence of a warning as a sign that the SEC has become more confrontational, the person said. “The SEC picked a fight with the biggest kid on the block,” said Henning. “That may be part of the message the commission wanted to send. It may help re-establish their reputation.” An effort to demonstrate the SEC’s renewed vigor backfired in September when a federal judge rejected a $33 million proposed settlement with Bank of America Corp. The agency later broadened its claims, forced the bank to overhaul its corporate governance and pay a $150 million fine. That stumble and the agency’s failures in the Lehman, Bear Stearns and Madoff cases may have emboldened firms, making them more likely to challenge findings by agency investigators, said Jacob Frenkel , a former SEC lawyer now in private practice at Shulman Rogers Gandal Pordy & Ecker in Potomac, Maryland. “The level of deference the agency has received historically to its cases is a deference it has lost,” Frenkel said. “It can only be reestablished through a chain of more successful enforcement cases.” To contact the reporters on this story: David Scheer in New York at dscheer@bloomberg.net ; Jesse Westbrook in Washington at jwestbrook1@bloomberg.net ; Joshua Gallu in Washington at jgallu@bloomberg.net .

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Blankfein Proving Inferior to Dimon in Default Swaps Trade: Credit Markets

April 19, 2010

By Shannon D. Harrington, Kate Haywood and John Detrixhe April 19 (Bloomberg) — The cost to protect Goldman Sachs Group Inc. bonds from losses rose to the highest level in two months compared with JPMorgan Chase & Co. after regulators accused Wall Street’s most profitable firm of fraud. Credit-default swaps on Goldman Sachs jumped the most in more than a year in the past two trading sessions, rising 39.4 basis points since April 15 to 130.5 basis points, according to CMA DataVision. Goldman Sachs swaps are now 57.9 basis points higher than JPMorgan’s, up from 34.7 basis points on April 15, the day before the lawsuit was made public, and the most since Feb. 15. The wider gap shows debt investors are increasingly skittish that a U.S. Securities and Exchange Commission lawsuit will curb Goldman Sachs’s revenue, and pushed the cost of its derivatives above Bank of America Corp.’s. Goldman Sachs default swaps had been moving closer to JPMorgan’s before the SEC’s allegations signaled the more aggressive regulatory stance. “Goldman Sachs is the one that potentially has more to lose on the side of regulatory reform,” said Jon Duensing , a senior portfolio manager at Smith Breeden Associates in Boulder, Colorado, which has more than $22 billion of assets under management. “It has more of the businesses that are going to be caught in the crosshairs of financial reforms.” Ford’s Offering Goldman Sachs credit swaps, used to speculate on creditworthiness or to hedge against losses, are now trading 7.3 basis points wider than those from Charlotte, North Carolina- based Bank of America. Goldman Sachs is set to report first- quarter earnings tomorrow. Elsewhere in credit markets, Ford Motor Co. plans to sell $1.09 billion of bonds backed by auto loans. Sankaty Advisors LLC, Bain Capital LLC’s debt-investment affiliate, has raised about $900 million to lend to medium-sized companies. Banks in Europe are boosting the use of unsecured bonds as collateral for loans after policy makers tightened the criteria on pledging asset-backed securities, according to the European Central Bank. Ford, the only major U.S. automaker to avoid a government- assisted bankruptcy last year, may issue bonds backed by payments on consumer auto loans through its finance arm, according to a person familiar with the offering. JPMorgan, Morgan Stanley and Royal Bank of Scotland Plc are managing the sale, said the person, who declined to be identified because terms aren’t public. Sankaty Ford, based in Dearborn, Michigan, is among companies selling bonds backed by consumer and business loans after the Federal Reserve’s Term Asset Backed Securities Loan Facility ended last month, a sign that demand for the debt has returned. Daimler AG, Bayerische Motoren Werke AG and Deere & Co. all had sales last week, according to data compiled by Bloomberg. The Sankaty Middle Market Opportunities Fund LP has investors including Pennsylvania’s Public School Employees Retirement System, according to people familiar with the matter who declined to be identified because the information is private. Sankaty spokeswoman Charlyn Lusk declined to comment. European banks are increasing the use of unsecured bonds as collateral for loans after policy makers tightened the criteria on pledging asset-backed securities. Financial firms in Europe put up about 570 billion euros ($768 billion) of banks’ unsecured debt to get central bank funding last year, overtaking notes backed by mortgages and consumer debt as the biggest collateral pool, the ECB said in its annual report. Brazil Bonds In emerging markets, the extra yield investors demand to own bonds instead of Treasuries fell 0.02 percentage point to 2.37 percentage points, according to the JPMorgan Emerging Market Bond Index. The gap this year had widened to as much as 3.23 percentage points on Feb. 8. Brazilian local-currency government bonds will outperform stocks in 2010 after trailing equities for four of the past five years as interest rates jump and shares get more expensive, according to the country’s fourth-largest pension fund. Banco Panamericano SA sold $500 million of 10-year bonds. “There is more upside in fixed income,” said Jorge Simino , who oversees 16.5 billion reais ($9.3 billion) in assets as investment director at Fundacao Cesp, the retirement fund for employees of utility Cia Energetica de Sao Paulo . “There is some exaggeration in stock prices.” Brazil’s real-denominated bonds returned 2.4 percent in local currency terms this year, beating the average return of 1 percent for emerging markets, according to JPMorgan’s ELMI+ indexes. The benchmark Bovespa stock index is up 0.74 percent this year. Brazilian bonds gained 11 percent last year, while the Bovespa stock index soared 83 percent. ‘Reputation’ The SEC said April 16 that Goldman Sachs sold collateralized debt obligations linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle. “You live or die on your reputation, and if that’s in doubt, you’ve got some problems,” said Brian Yelvington , the head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut. Goldman Sachs said in a statement that the allegations are “completely unfounded.” CDOs pool bonds, loans and other fixed-income assets into securities of varying risk and return. The suit could be a “game changer” because it shows the SEC is seeking to redeem itself after regulatory failures and may foreshadow other litigation, said David Kotok , chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey. ‘500-Pound Gorilla’ “When you have the 500-pound gorilla known as the Securities and Exchange Commission attacking, investigating and alleging fraud, it is highly unlikely that it is a single, one- off event,” Kotok said. “This is a big action that took a lot of development.” U.K. Prime Minister Gordon Brown yesterday called for the Financial Services Authority to follow the U.S. Securities Exchange Commission and start a probe, and German Chancellor Angela Merkel said her nation’s financial regulator asked the SEC for details on its Goldman Sachs suit. Lawmakers who want to hold Wall Street firms accountable for the financial crisis that sparked the worst recession since the Great Depression may be emboldened, said John Anderson , head of credit at Gartmore Investment Management in London. Bank of America and Merrill Lynch & Co. led Credit Suisse AG’s “CDO litigation risk” list after offering $16.85 billion of collateralized debt obligations similar to the one that prompted a fraud suit against Goldman Sachs . The tally of lead underwriters of CDOs with “salient characteristics” of the disputed deal between 2005 and 2008 may help investors gauge the risk that lawsuits will spread to other firms, Credit Suisse said in a report today. Bank of America, the largest U.S. bank, acquired New York-based Merrill Lynch in January 2009. Widening Spreads      Goldman Sachs’s 5.375 percent bonds due in 2020 were the most-traded U.S. corporate notes today, falling 1.21 cents on the dollar to 98.38 cents to yield 1.79 percentage points more than similar-maturity Treasuries, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority data show. Spreads for the firm, with Chief Executive Officer Lloyd Blankfein at the helm, compare with 1.91 percentage points for all financial corporate credit, according to Bank of America Merrill Lynch’s U.S. Financial Corporate Index. The index widened 0.03 percentage point on April 16, after five straight days of tightening. Credit swaps protecting Goldman Sachs debt for five years jumped 5.1 basis points today after 34.3 on April 16, according to CMA DataVision prices. Bondholder Protection Michael DuVally , a Goldman Sachs spokesman, declined to comment. JPMorgan spokesman Brian Marchiony couldn’t immediately be reached for comment. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Contracts on JPMorgan, run by CEO Jamie Dimon , rose 5 basis points to 72.6 basis points, CMA prices show. Swaps on Citigroup Inc. rose 8.5 basis points to 145.6, Morgan Stanley climbed 6.6 to 145.1 and Bank of America rose 7.7 to 123.2, CMA prices show. To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net ; Kate Haywood in London at khaywood@bloomberg.net ; John Detrixhe in New York at jdetrixhe1@bloomberg.net

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Don McNay: Goldman Sachs: Too Big For Jail?

April 18, 2010

When happily ever after fails And we’ve been poisoned by these fairy tails Lawyers clean up small details Since daddy had to fly -Don Henley and Bruce Hornsby The Securities and Exchange Commission is receiving media kudos after filing a lawsuit that accuses Goldman Sachs of fraud. A Los Angeles Times headline trumpeted, “Goldman Sachs case could help Obama shift voter anger.” A McClatchy news service headline blares, “Message to Wall Street: SEC is back on the job.” Before I join the chorus of media cheerleaders, I ask the Peggy Lee question, “Is that all there is?” I’m not a lawyer but my understanding is this, the SEC filed a civil lawsuit. It’s a lawsuit, not a criminal action. No one is going to jail. No one is going to be dragged off in handcuffs. Just because the SEC filed a lawsuit, it doesn’t mean they will win. Goldman Sachs could easily prevail. The Wall Street Journal noted how the government might have a difficult time at trial. Before we start breaking out the champagne, let’s look at what is actually going on. The SEC went from doing absolutely nothing to doing something. A good first step. The agency had gotten so bad under Bush appointee Christopher Cox that they look like a public relations ambassador for Wall Street. After missing the financial meltdown and screwing up big time on the Bernie Madoff scandal, we knew the SEC was going to make an example out of someone To their credit, they didn’t hit a bunch of “easy to catch” small timers. They went after the biggest and baddest firm on Wall Street. No one has more clout in Washington and on Wall Street than Goldman Sachs. Suing Goldman Sachs will definitely attract mainstream media cheerleaders. As Wilt Chamberlain aptly noted, “no one ever rooted for Goliath.” Especially if Goliath is a Wall Street firm that took taxpayer bailout money and paid themselves million dollar bonuses. I don’t have any problems with the SEC going after Goldman Sachs. I just wonder if they are going after the right people and the right situation. The SEC lawsuit is based on the actions of Fabrice Tourre, a 31 year old Goldman Vice President. As Peter Huang, a securities law professor at Temple University told the Wall Street Journal, “The SEC has the tricky job of showing that Goldman was reckless in deceiving investors.” In short, the lawsuit is not a slam dunk. When you start looking at Goldman Sachs, there are a lot of high level decisions that need to be completely investigated. Many related to the bailout money they took. I’ve been opposed to the Wall Street bailouts from day one. I looked at the cast of characters and decided that the American people were going to get taken, while Wall Street and Washington insiders would make out like bandits. I called that one correctly. As Ronald Ricker pointed out in a Huffington Post piece, Goldman was given $12 billion in taxpayer bailout money in 2008. A year later, they paid out $19 billion in bonuses to their employees. Sounds like a great place to be on the payroll. The Goldman story gets worse. One of the most unusual moves during the whole bailout fiasco was the bailout of AIG. AIG is an insurance company. Insurances companies are regulated by states, not the federal government and certainly not by the Federal Reserve Board. On September 16, 2008 The Federal Reserve, an organization designed to provide liquidity for banks, announced that the Federal Reserve Bank of New York was giving AIG an $85 billion line of credit. AIG has gotten billions more since then. The Secretary of the Treasury at that time was Henry “Hank” Paulson. His previous job had been head of Goldman Sachs. The Federal Reserve Bank of New York was headed by Timothy Geithner. He took Paulson’s place as Secretary of the Treasury. Shortly before the AIG bailout, Paulson let Lehman Brothers, one of Goldman’s biggest rivals, go into bankruptcy. There was no bailout money for Lehman. There was not even a shot gun marriage/merger like Paulson arranged with Morgan Stanley and JP Morgan Chase. When all the dust settled, Paulson’s former rivals at Lehman, and a chief competitor of Goldman, was out of the game. While AIG stayed in. It gets even worse than that. A very complicated part of the bailout was related to companies that were “counterparties” to AIG. Counterparties were financial institutions that AIG owed money to. Goldman Sachs and other companies that had gotten money from bailouts got even more government money as it was funneled back to pay AIG’s claims 100 cents on the dollar. Taxpayers put up all the money and got none of the rewards. It was multi billion dollar windfall for Goldman and the other AIG counterparties. In his days on Wall Street, I can’t imagine that Paulson ever cut a deal as one sided. If he had, he would never have lasted as head of Goldman Sachs. Even Federal Reserve Chairman Ben Bernanke said the move hurt the taxpayers. “If a federal agency had on September 16, 2008 , they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now.” It was the biggest scandal related to the bailout. And swept under a rug. I don’t see them dragging anyone off in handcuffs over the AIG saga. I have not even seen a civil charge. Geithner is now President Obama’s top dog at Treasury. His former boss Bernanke was re-appointed by President Obama for another term. Paulson is out promoting his new book. The civil suit by the SEC allows the government to pretend they are more like Elliott Ness than Barney Fife. They can put all their firepower into getting a positive result out of the lawsuit. It’s easier to go after a 31 year old Vice President than the current and former Secretary of the Treasury. The current suit will have little impact on Goldman in the long run. Goldman will still keep racking up hefty profits, still keep paying the employees multi million dollar bonuses and still finding a way for its friends and alumni to work for the government agencies regulating it. It could be that Henry Paulson, and Geithner are truly innocent guys just doing their jobs. It could be that Ben Bernanke is really a genius and deserved to have his picture slapped on the cover of Time Magazine as “Man of The Year.” It could be that everything wrong at Goldman was contained to a 31 year old Vice President. The could be that moon is made out of green cheese. Just don’t ask me to believe it. I’m a skeptical of what Washington and Wall Street are doing. After a lifetime of hearing government statements like “Watergate was a third rate burglary,” “Oswald acted alone,” “Iraq has weapons of mass destruction” and “I did not have sex with that woman,” I have a right to be. We’ve been told that Goldman Sachs is too big to fail. Now I wonder if they are too big for jail.

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Simon Johnson On ‘Real Time’ (VIDEO): Broken System If Goldman Conspirator John Paulson Is Not Charged

April 17, 2010

Economist Simon Johnson appeared on Bill Maher’s “Real Time” panel Friday alongside GRITtv host Laura Flanders and New Yorker editor David Remnick. The panel covered the tea party movement and the Securities and Exchange Commission’s decision to charge Goldman Sachs with fraud. While explaining how Goldman made billions by selling bad securities, Johnson mentioned investor John Paulson. Johnson: “They designed something intentionally complex that’s basically a mechanism of transferring money from you to John Paulson. John Paulson, it is true, has not been charged with anything. But he was involved in designing the the security.” Paulson, who was named in the SEC’s civil fraud lawsuit against Goldman Sachs, conspired with Goldman and Deutsche bank to sell investments made up of bad loans. The New York Times reports that Paulson personally made $1 billion off of the deals. Johnson told Maher that if Paulson avoids charges similar to Goldman, it will show how broken our system is. “For all we know right now, it was probably [Paulson's] idea,” Johnson said. “If he walks away without being charged, that just tells you there’s something even more profoundly broken…” Johnson said that Goldman would fight the lawsuit “tooth and nail” because it could open the doors for customers to file a class-action lawsuit against the firm. WATCH:

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`Jerk’ Insurance Soothes Reluctant Sellers Amid Signs of Property Recovery

April 15, 2010

By John Gittelsohn April 15 (Bloomberg) — When private-equity investor Tony Avila negotiated a purchase of empty lots in Las Vegas in March, he persuaded the selling bank to accept 30 cents on the dollar by pledging to share profits from developing the land. When developer Donald Trump sold apartment buildings in Brooklyn and Queens, he says he demanded terms that restricted the buyers from reselling within five years. “I don’t want to look like a jerk,” he said. Sweeteners to protect one side in a transaction from looking like a loser have been used by hedge-fund managers William Ackman and Carl Icahn and the Federal Deposit Insurance Corp. They’re helping seal deals amid signs that the worst real estate crisis in 80 years may be easing, said Woody Heller , an executive managing director at Studley, a New York-based commercial broker. Avila, Trump, Ackman and Icahn call the practice “schmuck insurance,” derived from a vulgar Yiddish word that has come to mean “jerk,” “fool,” or “easy mark.” “No one worries about schmuck insurance when the market is in decline,” said Heller, who has worked in New York real estate since 1981 and said the expression has been around for decades. “That this is a topic anyone is thinking about or talking about is an affirmation that the market is in recovery.” Median U.S. home prices have dropped 28 percent since their peak in July 2006, while offices, stores and warehouses are down 40 percent since the top in October 2007. Higher Asking Prices “Things have fallen so far, if someone needs to sell, they don’t want to be hitting the low bid,” said Neal Elkin , president of Real Estate Analytics LLC, a New York firm that provides commercial property data. As a sign of recovery, Heller pointed to the prices for Manhattan office buildings at 340 Madison Avenue, which he expected to fetch $700 a square foot, and 600 Lexington Avenue, which is being bought by SL Green Realty Corp. for about that price. Last year, a comparable tower at 1540 Broadway sold for $392 a square foot, Heller said. Another positive sign: Manhattan commercial property sales tripled in value in the first quarter from the same period a year earlier, brokerage Cushman & Wakefield reported April 6. Beyond New York, the S&P/Case-Shiller index of home prices in 20 U.S. cities rose unexpectedly in January, the most recent month available. Trump’s Rationale Trump said he has designed deals to prevent people who buy his properties from flipping them for a profit big enough to hurt his reputation. “I view schmuck insurance as having a covenant that you can’t sell for a five-year period or greater,” the 63-year-old developer-cum-reality television star said in a telephone interview. The need to protect his image is driven in part by the scrutiny that comes with being host of the “ The Celebrity Apprentice ” on the NBC television network and chairman of companies that run casinos, hotels and golf courses, Trump said. “In my case, it gets magnified,” said Trump, who this week won control of Trump Entertainment Resorts Inc. in bankruptcy court. An example of a seller that should have used some protection is New York Times Co. , Trump said. The newspaper publisher sold its headquarters building at 229 West 43rd Street for $175 million in 2004 to Tishman Speyer Properties LP. Africa Israel Investments Ltd. , Israeli billionaire Lev Leviev ’s real estate company, bought the 15-story tower three years later for $525 million. Abbe Serphos , a spokeswoman for Times Co., declined to comment. Shifting Meaning “Not everyone will agree to it,” Trump said. Schmuck, also spelled shmuck, is a coarse Yiddish word for penis, said Paul Glasser , associate dean of the YIVO Institute for Jewish Research in New York. (Shmo is a gentler, Americanized variation, according to Leo Rosten’s book “The Joys of Yiddish.”) The meaning has shifted in English usage from being an aggressor to being a fool or loser, Glasser said in a telephone interview. “The insurance is you won’t be a victim,” he said. The concept is more universal than Yiddish, a language with roots in German and used by Eastern European Jews and, with diminished frequency, their descendants. The British equivalent is “anti-embarrassment clause,” said Camille Douglas , an adjunct associate professor at the Columbia Business School in New York and a specialist in international real estate finance. See ‘Chump Tax’ “I used to call it a chump tax,” said Robert L. Freedman , chairman of New York property broker FirstService Williams. “If I sold too early in the cycle, I wanted some participation in the third party’s upside.” It’s also more than a New York phenomenon. Avila, the private-equity fund manager, offered the bank 20 percent of any price above $100 per square foot he gets for homes built on the Las Vegas lots. “To get them over that nervousness and make sure they’re comfortable, there’s this insurance — schmuck insurance,” said Avila, the 44-year-old managing principal of the $100 million Encore Housing Opportunity Fund in San Francisco. “That way, they don’t look like a schmuck for selling too cheaply.” The FDIC, the Washington-based federal bank regulator run by Chairman Sheila Bair , built a variation of the insurance into sales of $15.2 billion of assets of failed lenders, said Richard Gaudet, principal at GlassRatner Advisory & Capital Group LLC , an Atlanta-based firm that has worked with the FDIC. In these structured sales with investors such as Barry Sternlicht ’s Starwood Capital Group LLC and Lennar Corp. , the agency’s share of proceeds increases when the buyers’ internal rates of return surpass thresholds, he said. FDIC Euphemism “It’s a new paradigm the FDIC has brought,” Gaudet said. “We’ll allow you to participate, but you’re not going to get a windfall.” In the cases of five banks that failed since December and were acquired by other lenders, the FDIC demanded future cash payments, similar to warrants, to share the acquiring bank’s gains, said Andrew Gray , an FDIC spokesman. “We use the term ‘equity-appreciation instrument,’ ” Gray said in a telephone interview. The five failed banks were AmTrust Bank in Cleveland; Evergreen Bank in Seattle; Premier American Bank in Miami; Florida Community Bank in Immokalee, Florida; and the Park Avenue Bank in New York. They accounted for $2.55 billion of the insurance fund’s $43 billion in losses since Jan. 1, 2009. “It’s a way to do a hedge in an illiquid market where values are uncertain,” said Steven M. Friedman, national director of homebuilding services for Ernst & Young LLP in Washington. Ackman v. Icahn The FDIC’s advantage is that it can afford to wait for a payoff since its cost of money is lower than private investors, Friedman said. One problem with such agreements is they can bind rival parties together after a transaction, Friedman said. A dispute between fund managers Icahn and Ackman led to a lawsuit, now in its sixth year. In 2003, Ackman’s Gotham Partners LP sold Icahn a limited partnership participation in Hallwood Realty Partners LP for $18.8 million, or $80 a unit, according to court papers. The deal included an “additional purchase price” clause if Icahn resold the partnership at a profit within three years. In July 2004, Hallwood announced it was merging with its general partner for $136.39 a unit. Icahn considers the transaction a merger that didn’t obligate him to pay Ackman, as a sale would. Ackman sued in August 2004, demanding more than $5 million. Award, Appeal “He proposed a concept which he called schmuck insurance, which was to protect us from looking foolish,” Ackman, 43, said in a deposition for the lawsuit. “This would be a way for us to participate if something great were to happen quickly.” In June 2009, New York State Supreme Court judge Eileen Bransten awarded $7.68 million to Ackman, including interest and attorney fees. Icahn has appealed. “There’s no way in the world I would have even done this deal if I thought I had to give away any profit, to give him schmuck insurance, in the situation of a merger,” Icahn, 74, said in telephone interview. “This deal simply wasn’t that good.” To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net .

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Swiss Lawmakers Bow to Bankers Urging Support for Tax Settlement With U.S.

April 14, 2010

By Klaus Wille April 14 (Bloomberg) — Swiss lawmakers, bowing to pressure from bankers representing 7.6 percent of the nation’s gross domestic product , are poised to back the government’s settlement with the U.S. over tax evasion resulting from a tradition of bank secrecy. Three of Switzerland’s four largest political parties are likely to support the deal involving UBS AG when it comes to a vote in June, giving the government a majority in parliament, according to interviews with party leaders. The government is seeking parliamentary approval for the agreement, which requires Switzerland to turn over details on as many as 4,450 UBS accounts to the Internal Revenue Service, to circumvent a court ruling that the deal violated Swiss law. Failure to get lawmakers’ backing may reopen the lawsuit against UBS and threaten the Zurich-based bank’s operations in the U.S. as the IRS seeks to crack down on tax evasion. “It is unthinkable what would happen if parliament doesn’t approve the deal, and lawmakers know that,” said Daniel Kuebler, a political science professor at the University of Zurich. “If parliament doesn’t approve it, the U.S. could threaten to withdraw UBS ’s banking license.” The Christian Democrat People’s Party backs the deal, said leader Christophe Darbellay in an interview on March 17. While the Swiss Social Democratic Party has linked their support to a tax on bankers’ bonuses, Micheline Calmy-Rey , the party’s foreign minister, has said a settlement is “crucial.” The FDP.The Liberals probably will approve the settlement, said party Secretary General Stefan Brupbacher. 108 Votes “Our party hasn’t officially decided yet, but most probably we will approve the deal,” he said yesterday in an interview. “If the deal was rejected, it would not only hurt the banks, but also the country . And when voting, we will keep that in mind.” The three parties control 108 seats in the 200-member National Council, the lower house of parliament. In the upper chamber, the Council of States, the Christian Democrats and Liberals together hold a majority. The settlement faces opposition from the Swiss People’s Party, the biggest in the National Council, with 58 seats. “Our fraction is unanimously against the deal,” Hans Kaufmann , a People’s Party lawmaker who sits on the Economic Affairs and Taxation Committee, said yesterday. “The agreement goes against banking secrecy and it retroactively changes Swiss law. We are resolutely against the deal and we will fight it by every means.” Swiss bank secrecy is under attack as the U.S., France and Germany target tax evaders to close burgeoning budget deficits. Support for Secrecy The majority of voters in Switzerland, which manages more than 25 percent of the world’s foreign-held private wealth, support banking secrecy, according to a survey published last month by the Swiss Bankers Association in Basel. The poll of 1,004 voters showed that 73 percent want to keep secrecy laws, compared with 78 percent in 2009. The government decided to submit the UBS settlement to lawmakers after the Federal Administrative Court ruled in January that the deal wasn’t fully enforceable because it defined tax fraud too broadly in violation of Swiss law. The accord required UBS to hand over data on clients engaged in “tax fraud and the like.” While Swiss law permits the government to breach banking secrecy in cases of tax fraud, a criminal offense, tax evasion is considered a civil matter. The failure of U.S. citizens to complete certain tax forms or declare income is tax evasion under Swiss law, the court ruled in a decision published Jan. 22. ‘Critical Situation’ Tax attorneys said at the time that the ruling could prompt the U.S. to revive its lawsuit against UBS . “The accord leads Switzerland out of this critical situation and minimizes damage to our country,” said Darbellay of the Christian Democrats . “We will approve the agreement.” Switzerland agreed to pass on the account details after the U.S. sued UBS on Feb. 19, 2009, for information on as many as 52,000 clients. That came the day after the bank agreed to pay $780 million to avoid prosecution for helping wealthy Americans evade taxes. “We know that Switzerland’s economy and labor market would suffer on a large scale if UBS’s license were withdrawn in the U.S. and the bank would go bankrupt,” Swiss Justice Minister Eveline Widmer-Schlumpf told the Lausanne-based newspaper Le Matin Dimanche on Jan. 31. ‘Considerable’ Risks Almost 37 percent of UBS’s 65,233 employees were in the Americas at the end of 2009. UBS’s Wealth Management Americas unit had assets of 690 billion Swiss francs ($652 million), 31 percent of the bank’s total. UBS said last month the failure of parliament to approve the deal could affect 20 Swiss banks that have cross-border business with U.S. clients. “The risks for the Swiss financial market and the economy are considerable,” UBS said in a document sent to Swiss lawmakers in March. “The danger in case of non-approval that Switzerland will be not only seen as breaking the contract, but also termed as a tax haven and put on a special U.S. blacklist cannot be dismissed.” UBS, whose balance sheet is more than twice the size of Switzerland’s gross domestic product, posted its highest quarterly profit in almost three years April 12 after a rebound at its debt trading unit. The bank, which holds its annual shareholders’ meeting today, saw a net 373.3 billion francs of client outflows in the two years through December. Bonus Tax Christian Levrat , president of the Social Democrats , which has 42 seats in the National Council, said yesterday that he is “confident” a solution will be found and the UBS settlement will be approved. The party is seeking an 8.5 percent tax on bankers’ bonuses and tighter capital adequacy rules in return for supporting the deal. The Social Democrats may need to compromise on those demands, said Georg Lutz, a political scientist at the University of Lausanne. “If the accord isn’t approved, that would be a massive problem for UBS and for Switzerland,” Lutz said. “The Social Democrats may say they have no choice and back the agreement.” Lawmakers will vote in the next session of the Swiss parliament, which begins May 31. “In the end, there will be a narrow majority in favor of the accord,” said Rainer Schweizer , a law professor at the University of St. Gallen. “That would remove the sword of Damocles hanging over UBS.” To contact the reporter on this story: Klaus Wille in Zurich at kwille@bloomberg.net

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Health-Care Fight Will Shift to U.S. Regulators, States After Senate Vote

March 22, 2010

By Alex Nussbaum March 22 (Bloomberg) — Health legislation passed yesterday by the U.S. House changes some rules immediately on insurance coverage while leaving much of the fight over how to remake the medical system to federal regulators, states and courts. Insurers led by UnitedHealth Group Inc. and WellPoint Inc. must cover children with pre-existing health problems within the first year of the legislation and let parents keep children on their insurance plans through age 26. The insurers will also be banned from revoking coverage because of severe illness and from limiting lifetime or annual benefits. Beyond those changes, it will be up to U.S. regulators and state lawmakers to structure the marketplaces where health plans will compete, write the rules governing their profit and decide which medical benefits must be covered. While insurers may gain as many as 32 million customers, the potential for pumped-up profits remains unclear, said Sheryl Skolnick , a health-industry analyst at CRT Capital Group LLC. “There’s going to be a whole other round of uncertainty associated with the implementation of this,” she said in a telephone interview March 19. “There’ll be much, much more to fight on and much, much more to write on.” The U.S. Health and Human Services Department will have two years to set penalties on hospitals with high readmission rates and longer to test new payment systems for Franklin, Tennessee- based Community Health Systems Inc. , the largest U.S. chain, and its rivals. State Challenges At least a dozen states plan to challenge the overhaul in court. Florida Attorney General Bill McCollum said the mandate for individuals to obtain insurance is unconstitutional and that the case will be joined by Alabama, Nebraska, North Dakota, Pennsylvania, South Dakota, South Carolina, Texas, Utah and Washington. Michigan also will join the lawsuit, the state’s Attorney General Mike Cox said today in a statement . Virginia Attorney General Kenneth T. Cuccinelli also announced plans for a lawsuit, saying in a prepared statement that the legislation is an “unconstitutional overreach” of federal authority. Officials in Idaho have also promised legal challenges. The cases will be filed once President Barack Obama signs the revamp into law. Democrats must shepherd an additional package of changes through the U.S. Senate to complete the $940 billion overhaul. The bills subsidize coverage for uninsured Americans, financed by Medicare cuts to hospitals and fees or taxes on insurers, drugmakers, medical-device companies and Americans earning more than $200,000 a year. The tax on those earners begins in 2013. High-Risk Pools The subsidies and the expansion of Medicaid, the joint federal-state program for the poor, won’t kick in until 2014. The legislation initially bans insurers from barring coverage for children with pre-existing conditions, and adults won’t be protected until 2014. Until then, they’ll be eligible to join high-risk pools funded by $5 billion in federal grants. The drug industry, led by New York-based Pfizer Inc. , will begin offering discounted drugs to elderly Medicare patients next year, part of $80 billion in concessions agreed to by pharmaceutical companies. Generic copies of biotechnology drugs will be allowed for the first time, though the Food and Drug Administration must draft rules governing the process. Insurers also will have to reveal how much of members’ premiums they spend on medical care, as opposed to executive salaries or other administrative costs. Next year, they’ll owe a rebate to customers if the insurers spend less than 80 percent on benefits for people in individual or small-group plans. Agency Power How heavy a burden that imposes on industry will depend on the health and human services department, said Carl McDonald , an Oppenheimer & Co. analyst in New York, in a March 17 note to clients. The cap will be easier to meet if it’s applied companywide rather than to individual lines of business, he said. The agency also will set formulas for Medicare payments, define the “essential benefits” that insurers must provide and draft rules on how carriers verify claims and pay doctors. Health and Human Services Secretary Kathleen Sebelius , who has spent weeks criticizing insurers’ “jaw-dropping” rate increases, will have the final verdict, McDonald said. “Over the next couple of years, HHS will be consistently churning out regulations and documents explaining exactly how health reform will be implemented,” he said. “Given the stance of this administration toward health insurers over the past year, it’s hard to see how much of this will be favorable.” Out of Spotlight Insurers may benefit by exiting the spotlight of the current political debate, said Len Nichols , a health economist at George Mason University in Fairfax, Virginia. Their arguments that premiums are rising because medical costs are outpacing inflation may hold more sway with government actuaries, he said in a telephone interview. “It’ll get out of the blatantly political and into the hands of folks who are more used to dealing with these issues,” he said. “It will move the conversation from the headlines to the arena of the actuarial gladiators, which is probably where it should be.” Health insurance company shares have gained 71 percent in the past 12 months, as measured by the six-member Standard & Poor’s 500 Managed-Care Index , led by the 124 percent increase for Coventry Health Care Inc. of Bethesda, Maryland. WellPoint, based in Indianapolis, is the biggest U.S. health plan by enrollment, and its shares have gained 80 percent. UnitedHealth , of Minnetonka, Minnesota, is second. Its shares have gained 61 percent over 12 months. Insurance Exchanges Starting in 2014, states have their say. The legislation leaves it to them to set up and run the online marketplaces, known as exchanges, where customers will comparison-shop for coverage. Among other powers, the exchanges will be able to banish plans for premium increases deemed to be unjustified. Lawmakers may merge exchanges with neighboring states, exposing carriers to more competition. They could set up government-run insurance plans for low-income buyers ineligible for Medicaid to pool their bargaining power or apply for federal waivers to impose stricter rules on insurers. The legislation also creates an Independent Payment Advisory Board to suggest cuts in spending by Medicare, the government health program for the elderly and disabled, that could threaten payments for drug and device-makers. Starting in 2014, the panel’s recommendations would take effect unless federal lawmakers substitute their own reductions. A tax on high-cost “Cadillac” policies offered by health plans begins in 2018. The industry also faces about $60 billion in additional fees under the health bill through 2018, and more beyond, though it was able to postpone the levy until 2014. “We suspect that over time, the industry lobby may find ways to chip away at those payments,” said Dave Shove , a BMO Capital Markets analyst, in a March 19 note. “For now, we consider this a successful exercise in kicking the can further down the road.” To contact the reporter on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net .

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Health-Care Fight Shifts to States, Agencies

March 22, 2010

By Alex Nussbaum March 22 (Bloomberg) — Health legislation passed yesterday by the U.S. House changes some rules immediately on insurance coverage while leaving much of the fight over how to remake the medical system to federal regulators, states and courts. Insurers led by UnitedHealth Group Inc. and WellPoint Inc. must cover children with pre-existing health problems within the first year of the legislation and let parents keep children on their insurance plans through age 26. The insurers will also be banned from revoking coverage because of severe illness and from limiting lifetime or annual benefits. Beyond those changes, it will be up to U.S. regulators and state lawmakers to structure the marketplaces where health plans will compete, write the rules governing their profit and decide which medical benefits must be covered. While insurers may gain as many as 32 million customers, the potential for pumped-up profits remains unclear, said Sheryl Skolnick , a health-industry analyst at CRT Capital Group LLC. “There’s going to be a whole other round of uncertainty associated with the implementation of this,” she said in a telephone interview March 19. “There’ll be much, much more to fight on and much, much more to write on.” The U.S. Health and Human Services Department will have two years to set penalties on hospitals with high readmission rates and longer to test new payment systems for Franklin, Tennessee- based Community Health Systems Inc. , the largest U.S. chain, and its rivals. State Challenges At least a dozen states plan to challenge the overhaul in court. Florida Attorney General Bill McCollum said the mandate for individuals to obtain insurance is unconstitutional and that the case will be joined by Alabama, Nebraska, North Dakota, Pennsylvania, South Dakota, South Carolina, Texas, Utah and Washington. Michigan also will join the lawsuit, the state’s Attorney General Mike Cox said today in a statement . Virginia Attorney General Kenneth T. Cuccinelli also announced plans for a lawsuit, saying in a prepared statement that the legislation is an “unconstitutional overreach” of federal authority. Officials in Idaho have also promised legal challenges. The cases will be filed once President Barack Obama signs the revamp into law. Democrats must shepherd an additional package of changes through the U.S. Senate to complete the $940 billion overhaul. The bills subsidize coverage for uninsured Americans, financed by Medicare cuts to hospitals and fees or taxes on insurers, drugmakers, medical-device companies and Americans earning more than $200,000 a year. The tax on those earners begins in 2013. High-Risk Pools The subsidies and the expansion of Medicaid, the joint federal-state program for the poor, won’t kick in until 2014. The legislation initially bans insurers from barring coverage for children with pre-existing conditions, and adults won’t be protected until 2014. Until then, they’ll be eligible to join high-risk pools funded by $5 billion in federal grants. The drug industry, led by New York-based Pfizer Inc. , will begin offering discounted drugs to elderly Medicare patients next year, part of $80 billion in concessions agreed to by pharmaceutical companies. Generic copies of biotechnology drugs will be allowed for the first time, though the Food and Drug Administration must draft rules governing the process. Insurers also will have to reveal how much of members’ premiums they spend on medical care, as opposed to executive salaries or other administrative costs. Next year, they’ll owe a rebate to customers if the insurers spend less than 80 percent on benefits for people in individual or small-group plans. Agency Power How heavy a burden that imposes on industry will depend on the health and human services department, said Carl McDonald , an Oppenheimer & Co. analyst in New York, in a March 17 note to clients. The cap will be easier to meet if it’s applied companywide rather than to individual lines of business, he said. The agency also will set formulas for Medicare payments, define the “essential benefits” that insurers must provide and draft rules on how carriers verify claims and pay doctors. Health and Human Services Secretary Kathleen Sebelius , who has spent weeks criticizing insurers’ “jaw-dropping” rate increases, will have the final verdict, McDonald said. “Over the next couple of years, HHS will be consistently churning out regulations and documents explaining exactly how health reform will be implemented,” he said. “Given the stance of this administration toward health insurers over the past year, it’s hard to see how much of this will be favorable.” Out of Spotlight Insurers may benefit by exiting the spotlight of the current political debate, said Len Nichols , a health economist at George Mason University in Fairfax, Virginia. Their arguments that premiums are rising because medical costs are outpacing inflation may hold more sway with government actuaries, he said in a telephone interview. “It’ll get out of the blatantly political and into the hands of folks who are more used to dealing with these issues,” he said. “It will move the conversation from the headlines to the arena of the actuarial gladiators, which is probably where it should be.” Health insurance company shares have gained 71 percent in the past 12 months, as measured by the six-member Standard & Poor’s 500 Managed-Care Index , led by the 124 percent increase for Coventry Health Care Inc. of Bethesda, Maryland. WellPoint, based in Indianapolis, is the biggest U.S. health plan by enrollment, and its shares have gained 80 percent. UnitedHealth , of Minnetonka, Minnesota, is second. Its shares have gained 61 percent over 12 months. Insurance Exchanges Starting in 2014, states have their say. The legislation leaves it to them to set up and run the online marketplaces, known as exchanges, where customers will comparison-shop for coverage. Among other powers, the exchanges will be able to banish plans for premium increases deemed to be unjustified. Lawmakers may merge exchanges with neighboring states, exposing carriers to more competition. They could set up government-run insurance plans for low-income buyers ineligible for Medicaid to pool their bargaining power or apply for federal waivers to impose stricter rules on insurers. The legislation also creates an Independent Payment Advisory Board to suggest cuts in spending by Medicare, the government health program for the elderly and disabled, that could threaten payments for drug and device-makers. Starting in 2014, the panel’s recommendations would take effect unless federal lawmakers substitute their own reductions. A tax on high-cost “Cadillac” policies offered by health plans begins in 2018. The industry also faces about $60 billion in additional fees under the health bill through 2018, and more beyond, though it was able to postpone the levy until 2014. “We suspect that over time, the industry lobby may find ways to chip away at those payments,” said Dave Shove , a BMO Capital Markets analyst, in a March 19 note. “For now, we consider this a successful exercise in kicking the can further down the road.” To contact the reporter on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net .

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Health-Care Fight Shifts to States, Agencies

March 22, 2010

By Alex Nussbaum March 22 (Bloomberg) — Health legislation passed yesterday by the U.S. House changes some rules immediately on insurance coverage while leaving much of the fight over how to remake the medical system to federal regulators, states and courts. Insurers led by UnitedHealth Group Inc. and WellPoint Inc. must cover children with pre-existing health problems within the first year of the legislation and let parents keep children on their insurance plans through age 26. The insurers will also be banned from revoking coverage because of severe illness and from limiting lifetime or annual benefits. Beyond those changes, it will be up to U.S. regulators and state lawmakers to structure the marketplaces where health plans will compete, write the rules governing their profit and decide which medical benefits must be covered. While insurers may gain as many as 32 million customers, the potential for pumped-up profits remains unclear, said Sheryl Skolnick , a health-industry analyst at CRT Capital Group LLC. “There’s going to be a whole other round of uncertainty associated with the implementation of this,” she said in a telephone interview March 19. “There’ll be much, much more to fight on and much, much more to write on.” The U.S. Health and Human Services Department will have two years to set penalties on hospitals with high readmission rates and longer to test new payment systems for Franklin, Tennessee- based Community Health Systems Inc. , the largest U.S. chain, and its rivals. State Challenges At least a dozen states plan to challenge the overhaul in court. Florida Attorney General Bill McCollum said the mandate for individuals to obtain insurance is unconstitutional and that the case will be joined by Alabama, Nebraska, North Dakota, Pennsylvania, South Dakota, South Carolina, Texas, Utah and Washington. Michigan also will join the lawsuit, the state’s Attorney General Mike Cox said today in a statement . Virginia Attorney General Kenneth T. Cuccinelli also announced plans for a lawsuit, saying in a prepared statement that the legislation is an “unconstitutional overreach” of federal authority. Officials in Idaho have also promised legal challenges. The cases will be filed once President Barack Obama signs the revamp into law. Democrats must shepherd an additional package of changes through the U.S. Senate to complete the $940 billion overhaul. The bills subsidize coverage for uninsured Americans, financed by Medicare cuts to hospitals and fees or taxes on insurers, drugmakers, medical-device companies and Americans earning more than $200,000 a year. The tax on those earners begins in 2013. High-Risk Pools The subsidies and the expansion of Medicaid, the joint federal-state program for the poor, won’t kick in until 2014. The legislation initially bans insurers from barring coverage for children with pre-existing conditions, and adults won’t be protected until 2014. Until then, they’ll be eligible to join high-risk pools funded by $5 billion in federal grants. The drug industry, led by New York-based Pfizer Inc. , will begin offering discounted drugs to elderly Medicare patients next year, part of $80 billion in concessions agreed to by pharmaceutical companies. Generic copies of biotechnology drugs will be allowed for the first time, though the Food and Drug Administration must draft rules governing the process. Insurers also will have to reveal how much of members’ premiums they spend on medical care, as opposed to executive salaries or other administrative costs. Next year, they’ll owe a rebate to customers if the insurers spend less than 80 percent on benefits for people in individual or small-group plans. Agency Power How heavy a burden that imposes on industry will depend on the health and human services department, said Carl McDonald , an Oppenheimer & Co. analyst in New York, in a March 17 note to clients. The cap will be easier to meet if it’s applied companywide rather than to individual lines of business, he said. The agency also will set formulas for Medicare payments, define the “essential benefits” that insurers must provide and draft rules on how carriers verify claims and pay doctors. Health and Human Services Secretary Kathleen Sebelius , who has spent weeks criticizing insurers’ “jaw-dropping” rate increases, will have the final verdict, McDonald said. “Over the next couple of years, HHS will be consistently churning out regulations and documents explaining exactly how health reform will be implemented,” he said. “Given the stance of this administration toward health insurers over the past year, it’s hard to see how much of this will be favorable.” Out of Spotlight Insurers may benefit by exiting the spotlight of the current political debate, said Len Nichols , a health economist at George Mason University in Fairfax, Virginia. Their arguments that premiums are rising because medical costs are outpacing inflation may hold more sway with government actuaries, he said in a telephone interview. “It’ll get out of the blatantly political and into the hands of folks who are more used to dealing with these issues,” he said. “It will move the conversation from the headlines to the arena of the actuarial gladiators, which is probably where it should be.” Health insurance company shares have gained 71 percent in the past 12 months, as measured by the six-member Standard & Poor’s 500 Managed-Care Index , led by the 124 percent increase for Coventry Health Care Inc. of Bethesda, Maryland. WellPoint, based in Indianapolis, is the biggest U.S. health plan by enrollment, and its shares have gained 80 percent. UnitedHealth , of Minnetonka, Minnesota, is second. Its shares have gained 61 percent over 12 months. Insurance Exchanges Starting in 2014, states have their say. The legislation leaves it to them to set up and run the online marketplaces, known as exchanges, where customers will comparison-shop for coverage. Among other powers, the exchanges will be able to banish plans for premium increases deemed to be unjustified. Lawmakers may merge exchanges with neighboring states, exposing carriers to more competition. They could set up government-run insurance plans for low-income buyers ineligible for Medicaid to pool their bargaining power or apply for federal waivers to impose stricter rules on insurers. The legislation also creates an Independent Payment Advisory Board to suggest cuts in spending by Medicare, the government health program for the elderly and disabled, that could threaten payments for drug and device-makers. Starting in 2014, the panel’s recommendations would take effect unless federal lawmakers substitute their own reductions. A tax on high-cost “Cadillac” policies offered by health plans begins in 2018. The industry also faces about $60 billion in additional fees under the health bill through 2018, and more beyond, though it was able to postpone the levy until 2014. “We suspect that over time, the industry lobby may find ways to chip away at those payments,” said Dave Shove , a BMO Capital Markets analyst, in a March 19 note. “For now, we consider this a successful exercise in kicking the can further down the road.” To contact the reporter on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net .

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Lady Gaga Sues Ex-Producer, Denies Claim He Deserves Fees for Finding Her

March 19, 2010

By Patricia Hurtado March 19 (Bloomberg) — Lady Gaga sued her former music producer Rob Fusari saying he shouldn’t get any share of fees he says he’s entitled to after claiming he discovered her, dated her and helped develop her sound and style. The singer sued Fusari and his business the day after he sued her production company, claiming she breached a contract that entitled him to 20 percent of some of her earnings. Fusari, Lady Gaga’s former producer, alleges in his complaint that he is her former boyfriend. He said he helped mentor the “young Italian girl,” who’s real name is Stefani Germanotta. Germanotta, 23, claims in her lawsuit, made public today in New York State Supreme Court in Manhattan, that the contract “was structured in such a way to mask its true purpose — to provide the defendants unlawful compensation for their services as unlicensed employment agents.” She said the 2006 contract she signed with Fusari was “void and unenforceable” because New York and New Jersey state laws were created “to protect employees from predatory and financially abusive practices.” Germanotta’s lawsuit names Fusari personally as a defendant. Fusari’s lawsuit named only her production company, Mermaid Music LLC. ‘Creative Filing’ “This is silly season,” Robert Meloni, a lawyer for Fusari, said today in a phone interview. “It’s one of the most ludicrous claims I’ve seen in 30 years of legal practice and it smacks of desperation. It’s a creative filing that’s going to go absolutely nowhere and has no basis in reality.” Charles Ortner , a lawyer for Lady Gaga, didn’t immediately return a voice-mail seeking comment after regular business hours. In his complaint, Fusari said he wrote and produced the hits “Papparazi” and “Boys, Boys, Boys” by Lady Gaga. He seeks more than $30 million in damages. The case is Stefani Joanne Germanotta v. Rob Fusari 650183/2010, New York State Supreme Court (Manhattan). The Fusari case is Rob Fusari v. Mermaid Music LLC, 650179/2010, New York State Supreme Court (Manhattan). To contact the reporter on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net

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