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Goldman Sachs Cleared in Collapse of Dragon Systems Sale

January 24, 2013 by Leave a Comment

The jury cleared Goldman of claims of negligence, intentional misrepresentation and breach of fiduciary duty and other claims in the civil case, according to the verdict, announced in Federal District Court in Boston.

Dragon’s founders, Jim and Janet Baker, pioneers in speech recognition software, accused Goldman investment bankers of being negligent in the 2000 sale of their company to Lernout Hauspie of Belgium, which collapsed in a huge accounting fraud. The Bakers and two early Dragon employees sought several hundred million dollars in damages.

“We are pleased the jury rejected these claims. We fulfilled all our advisory duties to Dragon Systems,” a Goldman spokeswoman, Tiffany Galvin, said.

John Donovan, Goldman’s lead lawyer on the case, declined to comment.

The Bakers were not available for comment. Before the verdict was read, the couple sat closely together, as they had throughout the 23-day trial.

Their lawyers portrayed Goldman’s investment bankers as a “bottom of the barrel” team that failed to properly vet concerns about Lernout Hauspie’s claims of soaring sales in Asia.

But lawyers for Goldman said it was not the investment bank’s job to figure out the accounting fraud that ultimately doomed Lernout Hauspie and made the remaining stock held by the Bakers worthless. In fact, Goldman said Dragon rushed into the sale and brushed aside advice to hire outside accountants to examine Lernout Hauspie’s books in more detail.

The Bakers owned 51 percent of the company, but were able to sell only a few million dollars’ worth of the Lernout Hauspie shares they received in the all-stock deal before the company collapsed.

Article source: http://www.nytimes.com/2013/01/24/business/goldman-sachs-cleared-in-collapse-of-dragon-systems-sale.html?partner=rss&emc=rss

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DealBook: Ex-Citigroup Manager Cleared in Suit

July 31, 2012 by Leave a Comment

Robert Khuzami, director of the S.E.C.'s Division of Enforcement, said, We respect the jury's verdict and will continue to aggressively pursue misconduct arising out of the financial crisis.Cliff Owen/Associated PressRobert Khuzami, director of the S.E.C.’s Division of Enforcement, said, “We respect the jury’s verdict and will continue to aggressively pursue misconduct arising out of the financial crisis.”

A jury on Tuesday cleared a former Citigroup executive of wrongdoing connected to the bank’s sale of risky mortgage-related investments at the peak of the housing boom, dealing a blow to the government’s effort to hold Wall Street executives accountable for their conduct during the financial crisis.

In addition to handing up its verdict, the federal jury also issued an unusual statement addressed to the Securities and Exchange Commission, the government agency that brought the civil case.

“This verdict should not deter the S.E.C. from investigating the financial industry and current regulations and modify existing regulations as necessary,” said the statement, which was read aloud in the courtroom by Judge Jed S. Rakoff, who presided over the trial.

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The trial of Brian Stoker, a former mid-level Citigroup executive, served as a referendum on a questionable practice that became common in the years leading up to the financial crisis: Selling clients complex securities tied to the housing market while simultaneously betting against those same securities.

The S.E.C. did not accuse Mr. Stoker of committing securities fraud. Instead, it accused him of negligence in preparing sales materials for a complex mortgage-related investment called a collateralized debt obligation, or C.D.O.s. The government claimed that Mr. Stoker knew or should have known that he was misleading investors by not disclosing that Citigroup helped select the underlying mortgage securities in the C.D.O. and then placed a large bet against it.

Judge Jed S. Rakoff, who presided over the federal jury trial.Justin Maxon/The New York TimesJudge Jed S. Rakoff, who presided over the federal jury trial.

The S.E.C separately sued Citigroup, but Mr. Stoker was the only bank executive charged in the case. None of Citigroup’s senior management was named by the commission.

As Mr. Stoker prepared for trial, his former employer, Citigroup, agreed to pay $285 million to settle a civil complaint brought by the S.E.C. related to the same deal. But Judge Rakoff, who presided over the trial of Mr. Stoker, rejected that settlement. Both the commission and Citigroup have appealed the rejection of the settlement.

Mr. Stoker’s lawyer, John Keker, had depicted his client as a scapegoat for the industry’s sins. While decrying the “high-stakes, high level gambling” that banks engaged had in during the housing boom, Mr. Keker urged the jury to set aside any distaste that it had for Wall Street’s questionable behavior and the mind numbingly complex mortgage securities that it concocted.

“It’s not the bank or the transaction that’s on trial here,” said Mr. Keker in his closing argument. “It’s Brian Stoker.”

Mr. Stoker’s lawyers argued that Credit Suisse, the bank that Citigroup brought in to serve as a manager of the C.D.O., did its own homework on the underlying securities.

“We’re grateful that justice was done and Brian Stoker can get back to his life,” Mr. Keker said outside the courtroom shortly after the verdict came down.

Robert Khuzami, director of the S.E.C.’s Division of Enforcement, said, “We respect the jury’s verdict and will continue to aggressively pursue misconduct arising out of the financial crisis.”

The allegations against Citigroup and Mr. Stoker parallel those brought by the S.E.C. in a more high-profile case against Goldman Sachs and Fabrice Tourre, a relatively junior Goldman executive.

In April 2010, the S.E.C. claimed that Goldman and Mr. Tourre deceived investors in a C.D.O. that the bank had created called Abacus. Mr. Tourre, the government said, failed to disclose that the hedge fund manager John Paulson helped select the underlying assets. Mr. Paulson profited by betting against the C.D.O.

Goldman quickly settled the case in July 2010 for $550 million, but Mr. Tourre, who has left the bank, is fighting the civil charges. Unlike the case against Mr. Stoker, which proceeded to trial quickly, Mr. Tourre’s case has moved at glacial speed and no trial date has been set.

Article source: http://dealbook.nytimes.com/2012/07/31/former-citigroup-manager-cleared-in-mortgage-securities-case/?partner=rss&emc=rss

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DealBook: TCW Settles Suit With Its Former Star Investor

December 30, 2011 by Leave a Comment

One of the year’s most contentious white-collar employment disputes came to an end Thursday, as Trust Company of the West, the California-based mutual fund, announced that it had settled a lawsuit with its former star investor, Jeffrey E. Gundlach.

The settlement, announced in two separate statements by TCW, as Trust Company of the West is known, and DoubleLine Capital, Mr. Gundlach’s new fund, capped a bitter and protracted dispute that turned the normally anodyne mutual fund world into a heated legal battleground. The terms of the settlement were not disclosed, and the firms said in statements that they would not discuss it further.

TCW sued Mr. Gundlach, its former chief investment officer, in 2010 for hundreds of millions of dollars in damages, accusing him and several associates of stealing trade secrets and breaching their fiduciary duty in order to set up a competing firm after he was fired from TCW in 2009.

Mr. Gundlach countersued, arguing that he was entitled to hundreds of millions of dollars in lost fees from the funds he oversaw at TCW. More than 40 TCW employees eventually followed Mr. Gundlach to DoubleLine.

A six-week trial ensued this summer, during which attorneys for TCW tried to paint Mr. Gundlach, a closely watched figure in fixed-income investing who has referred to himself as “the Pope” and “the Godfather,” as a self-centered renegade who was bent on sabotaging the firm. DoubleLine’s legal team tried to show that Mr. Gundlach’s ouster was the result of a long-held vendetta by Marc Stern, the firm’s chief executive, and other firm officials.

In September, a Los Angeles jury gave a mixed verdict in the civil case that awarded Mr. Gundlach and three associates $66.7 million in damages in the countersuit, while finding them liable for breaching their fiduciary duty to TCW and misappropriating trade secrets.

Thursday’s settlement will essentially override the jury’s verdict, which had yet to be finalized by a judge. The judge, Carl J. West, had yet to rule on an outstanding dispute over whether TCW was owed millions of dollars in “reasonable royalties” for the jury’s trade secrets finding.

TCW, a unit of the French bank Societe Generale, has been the target of speculation in recent weeks. After reports surfaced that the bank, which has been trying to raise capital by selling non-core assets, was planning to sell the mutual fund manager, it batted down the rumors.

With a settlement with Mr. Gundlach and DoubleLine now behind it, TCW will have one fewer worry going into the new year.

“We are pleased that an agreement has been reached and that this matter is now behind us,” Peter Viles, a TCW spokesman, said in an e-mail. “TCW is well positioned to continue the strong momentum and growth it has established over the past two years.”

This post has been revised to reflect the following correction:

Correction: December 30, 2011

An earlier version of the headline for this post misstated the name of the mutual fund company that settled the suit. It is TCW, not TWC.

Article source: http://feeds.nytimes.com/click.phdo?i=57636a96f20e4e891bdc238a9971944c

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High & Low Finance: Korea Clamps Down on Traders for Playing Games

August 26, 2011 by Leave a Comment

It should be something else entirely. Finance ought to provide an economy with an efficient means of allocating capital. It should provide a means of price discovery of assets, whether real or financial. It should provide a safe and reliable payments system. Financial innovations are worthwhile if, and only if, they help in those areas.

All too often, players see financial innovations as providing ways to manipulate the system and make money off less savvy traders. If the players are caught, the scheme is usually deemed too complicated and wrongdoing too hard to prove to justify any more than a civil case. That ends in a fine — sometimes a large one — but perhaps one that may be seen as a cost of doing business.

In South Korea, they seem to be adopting a different attitude.

This week prosecutors in Seoul announced indictments on market manipulation charges of a Korean affiliate of Deutsche Bank and of four Deutsche Bank employees who were blamed for intentionally causing a sudden collapse in Korean stock prices last November.

In a separate case in June, two former Credit Suisse employees were indicted by Korean prosecutors on charges of manipulating stock prices.

People could go to prison for playing market games.

The Deutsche Bank case sounds like a classic example of people knowing how to profit from a game and having no appreciation at all of the larger dimension of what they planned to do. The game caused the Korean stock market to tumble in the last few minutes of trading last Nov. 11. That happened to be the same day the leaders of the Group of 20 nations were meeting — in Seoul.

Having its market crumble for no apparent reason with world leaders and world press in town was more than a little embarrassing to the Koreans, and they began immediate investigations.

The names of the Deutsche Bank employees involved have not been publicly disclosed. But only one of them is based in Korea, with three in Hong Kong. The Koreans sent a letter to the Securities and Exchange Commission about another Deutsche employee, who is based in New York, but he was not indicted.

The traders probably paid little attention to the plans for the Group of 20 meeting. They chose Nov. 11 because it was a day when stock index options and futures expired. They had a way to make a lot of money with little if any financial risk.

The strategy did not involve taking positions based on expectations of corporate performance, or the path of the Korean economy, or interest rates, or anything that matters to the real economy. In other words, it had nothing to do with the legitimate functions of finance.

Here’s what prosecutors claim took place. The Deutsche Bank traders established a huge index-arbitrage position, and placed a huge side bet on prices falling. Then they closed out the arbitrage position in a way designed to cause prices to collapse. They cleaned up.

In the more formal language that Korean market regulators used in their report, the traders “constructed speculative derivatives positions in advance through the combination of short synthetic futures and long put options.” Then in the final 10 minutes of trading on Nov. 11, they sold $2.2 billion worth of stocks, selling every stock in the Kospi 200 index, which includes all major Korean stocks.

That selling had a huge impact. The Kospi 200 index fell 2.8 percent in those 10 minutes, providing $40.5 million in what the Koreans called “illegal profits” on the derivatives position, which settled based on the closing prices.

Ten minutes before the close, the Korean stock market was down only a very small amount from the previous day. At the close, it was the worst day in nine months.

Index arbitrage is supposed to be a neutral strategy. A trader buys stocks and sells the equivalent amount of stock index futures, taking advantage of small discrepancies in prices in the two markets. Or he sells the stocks and buys the future. Either way, at expiration, the two positions will be worth the same, and a small profit will be realized. The strategy used by Deutsche appears to have amounted to index arbitrage done in a way that local regulators might not see coming. A synthetic future uses options or forward contracts to replicate the financial position of normal futures contracts. Going synthetic can cost more, but it may also avoid margin requirements and regulatory disclosure rules on large positions.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://feeds.nytimes.com/click.phdo?i=db20a7de8cfb2b0172b7f820b45d860e

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