Tuesday, June 29, 2010

Russian Agents Infiltrated US Society, Charge Says

Associated Press

They sometimes worked in pairs and pretended to be married so they could blend in as the couple next door while working as spies in a throwback to the Cold War, complete with fake identities, invisible ink, coded radio transmissions and encrypted data to avoid detection, authorities say.

Assistant U.S. Attorney Michael Farbiarz, speaking Monday in federal court in Manhattan, called the allegations against 10 people living in the Northeast "the tip of the iceberg" of a conspiracy of Russia's intelligence service, the SVR, to collect inside U.S. information, the biggest such bust in recent years.

Each of the 10 was charged with conspiracy to act as an agent of a foreign government without notifying the U.S. attorney general, which carries a maximum penalty of five years in prison upon conviction. Two criminal complaints outlining the charges were filed in U.S. District Court in New York.

Police in Cyprus said Tuesday that an 11th defendant, a Canadian citizen wanted by U.S. authorities on suspicion of espionage and money laundering, was arrested in the morning at Larnaca airport while trying to fly to Budapest, Hungary.

Russia angrily denounced the U.S. arrests as an unjustified throwback to the Cold War, and senior lawmakers said some in the U.S. government may be trying to undercut President Barack Obama's warming relations with Moscow.

"These actions are unfounded and pursue unseemly goals," the Russian Foreign Ministry said in a statement. "We don't understand the reasons which prompted the U.S. Department of Justice to make a public statement in the spirit of Cold War-era spy stories."

Intelligence on Obama's foreign policy, particularly toward Russia, appears to have been a top priority for the Russian agents, prosecutors said.

The papers allege the defendants' spying has been going on for years.

One defendant was a reporter and editor for a prominent Spanish-language newspaper videotaped by the FBI contacting a Russian official in 2000 in Latin America, prosecutors said.

And in spring 2009, court documents say, conspirators Richard and Cynthia Murphy, who lived in New Jersey, were asked for information about Obama's impending trip to Russia that summer, the U.S. negotiating position on the START arms reduction treaty, Afghanistan and the approach Washington would take in dealing with Iran's suspect nuclear program. They also were asked to send background on U.S. officials traveling with Obama or involved in foreign policy, the documents say.

"Try to outline their views and most important Obama's goals (sic) which he expects to achieve during summit in July and how does his team plan to do it (arguments, provisions, means of persuasion to 'lure' (Russia) into cooperation in US interests," Moscow asked, according to the documents.

Moscow wanted reports that "should reflect approaches and ideas of" four sub-Cabinet U.S. foreign policy officials, they say.

One intercepted message said Cynthia Murphy "had several work-related personal meetings with" a man the court papers describe as a prominent New York-based financier active in politics.

In response, Moscow Center described the man as a very interesting target and urged the defendants to "try to build up little by little relations. ... Maybe he can provide" Murphy "with remarks re US foreign policy, 'roumors' about White house internal 'kitchen,' invite her to venues (to major political party HQ in NYC, for instance. ... In short, consider carefully all options in regard" to the financier.

The Murphys lived as husband and wife in suburban New Jersey, first Hoboken, then Montclair, with Richard Murphy carrying a fake birth certificate saying he was born in Philadelphia, authorities said.

One defendant in Massachusetts made contact in 2004 with an unidentified man who worked at a U.S. government research facility.

"He works on issues of strategic planning related to nuclear weapon development," the defendant's intelligence report said.

The defendant "had conversations with him about research programs on small yield high penetration nuclear warheads recently authorized by US Congress (nuclear 'bunker-buster' warheads)," according to the report.

One message back to Moscow from the defendants focused on turnover at the top level of the CIA and the 2008 U.S. presidential election, prosecutors said. The information was described as having been received in private conversation with, among others, a former legislative counsel for Congress. The court papers deleted the name of the counsel.

In the papers, FBI agents said the defendants communicated with Russian agents using mobile wireless transmissions between laptop computers, which has not previously been described in espionage cases brought in the U.S.: They established a short-range wireless network between laptop computers of the agents and sent encrypted messages between the computers while they were close to each other.

Aside from the Murphys, three other defendants also appeared in federal court in Manhattan - Vicky Pelaez and Juan Lazaro, who were arrested at their Yonkers, N.Y., residence, and Chapman, arrested in Manhattan on Sunday.

Behind the scenes, they were known as "illegals" - short for illegal Russian agents - and were believed to have fake back stories known as "legends."

Aside from fake identities, authorities say, they used Cold War spycraft - invisible ink, coded radio transmissions, encrypted data - to avoid detection. The court papers described a new high-tech spy-to-spy communications system used by the defendants: short-range wireless communications between laptop computers - a modern supplement for the old-style dead drop in a remote area, high-speed burst radio transmission or the hollowed-out nickels used by captured Soviet Col. Rudolf Abel in the 1950s to conceal and deliver microfilm.

The FBI said it intercepted a message from SVR's headquarters, Moscow Center, to two of the 10 defendants describing their main mission as "to search and develop ties in policymaking circles in US." Intercepted messages showed they were asked to learn about a wide range of topics, including nuclear weapons, U.S. arms control positions, Iran, White House rumors, CIA leadership turnover, the last presidential election, Congress and the political parties, prosecutors said.

"The FBI did an extraordinary job in this investigation," U.S. Attorney Preet Bharara said in a statement.

On Saturday, an undercover FBI agent in New York and another in Washington, both posing as Russian agents, met with two of the defendants, Anna Chapman at a New York restaurant and Mikhail Semenko on a Washington street corner blocks from the White House, prosecutors said. The FBI undercover agents gave each an espionage-related delivery to make. Court papers indicated Semenko made the delivery as instructed but apparently Chapman didn't.

The timing of the arrests was notable, given the efforts by Presidents Barack Obama and Dmitry Medvedev to reset U.S.-Russia relations. The two leaders met last week at the White House after Medvedev visited high-tech firms in California's Silicon Valley, and both attended the G-8 and G-20 meetings over the weekend in Canada.

Oleg Gordievsky, a former deputy head of the KGB in London who defected in 1985, said Medvedev would know the number of so-called illegal operatives in each country.

The 71-year-old ex-double agent told The Associated Press that, based on his experience and career in Russian intelligence, he estimates Moscow likely has about 40 to 50 couples operating under deep cover in the U.S.

The Murphys, Lazaro, Pelaez and Chapman were held without bail but didn't enter a plea. Another hearing was set for Thursday.

Pelaez is a Peruvian-born reporter and editor and worked for several years for El Diario/La Prensa, one of the country's best-known Spanish-language newspapers. She is best known for her opinion columns, which often criticize the U.S. government.

In January 2000, Pelaez was videotaped meeting with a Russian government official at a public park in the South American nation, where she received a bag from the official, according to one complaint.

Pelaez was born in Cusco, southeast of Lima, and Lazaro discussed plans to pass covert messages with invisible ink to Russian officials during another trip Pelaez took to South America, a complaint said.

The complaint alleges authorities overheard an unguarded Lazaro once saying in his home, "We moved to Siberia ... as soon as the war started."

Waldo Mariscal, Pelaez's son, said his mother was innocent. "This is a farce," he said.

Robert Krakow, an attorney for Lazaro, said after the court hearing that his client was innocent and that the information in the complaint "had no value".

An attorney for Chapman, Robert Baum, argued the allegations were exaggerated and his client deserved bail. Prosecutors countered that Chapman was a flight risk, calling her a highly trained "Russian agent" who is "a practiced deceiver."

Two other defendants, Michael Zottoli and Patricia Mills, were arrested at their Arlington, Va., residence. Also arrested at an Arlington residence was Semenko.

Zottoli, Mills and Semenko appeared before U.S. Magistrate Theresa Buchanan on Monday in Alexandria, Va. The hearing was closed because the case had not yet been unsealed in New York. The three did not have attorneys at the hearing, U.S. attorney spokesman Peter Carr said.

Two defendants known as Donald Howard Heathfield and Tracey Lee Ann Foley were arrested at their Cambridge, Mass., residence Sunday. They appeared briefly in Boston federal court Monday. A detention hearing was set for Thursday. Lawyers could not be found or did not return calls.

Spokesman Michalis Katsounotos said 54-year-old Christopher Robert Metsos was arrested early Tuesday based on an Interpol arrest warrant. Metsos appeared in a Larnaca court, which ordered Metsos released on $24,700 bail after surrendering his travel documents. The court also ordered Metsos to report to a Larnaca police station once a day.

Katsounotos says Metsos will remain on the island for one month until extradition proceedings begin.

Saturday, June 26, 2010

Kodak Sees Fewer Patent Fights Ahead

The Wall Street Journal
Kodak Chief Perez Plans to Curtail Patent Lawsuits

Eastman Kodak Co. Chief Executive Antonio Perez said he plans to curtail the aggressive patent lawsuits that have generated cash for Kodak as it struggles to reinvent itself with a focus on making printers.

Since becoming CEO in 2005, Mr. Perez, a former Hewlett-Packard Co. printer executive, has successfully turned Kodak's patents into a lucrative sideline and key source of funding to finance its push into digital printing.

But those printing efforts haven't yet paid off and the slow pace of the company's turnaround has frustrated analysts. Meanwhile, Kodak's once-lucrative film business continues to shrink and its need to invest in printers continues.

"We need [cash flow from patents] right now because we're investing too much for the size of the company in these new businesses," he said in an interview at the company's Rochester, N.Y., headquarters.

"Film will never come back," Mr. Perez said. "Those very, very, very high gross margins that film had will never come back. I don't know of any digital businesses that will even have half of the margin that film had."

Kodak has reported only one full-year profit—in 2007—since 2004. Last year, its loss narrowed to $210 million from a loss of $442 million the prior year. But sales have continued to tumble, falling 19% last year to $7.61 billion from $9.42 billion in 2008.

Mr. Perez says his efforts to transform the 130-year-old company are making a noticeable difference. "When I came into the company [it] had a revenue profile that was 85% based on film and a profit profile that was 130% based on film," he says. Today, the company gets 70% of its sales from digital products.

In March, Kodak's movie-film business, which had remained relatively steady even as camera film sales plunged, suffered a new blow when three big movie theater chains secured financing to convert 14,000 movie screens to digital projection by 2013. The funding is expected to accelerate the digital distribution of movies, giving Kodak less time to adapt to the long-anticipated decline in its film cash cow.

Earlier in his tenure, Mr. Perez pushed aggressively to get Kodak into digital cameras, and now he is making a big bet on consumer and commercial inkjet printers. But he doesn't expect the printer businesses to be profitable until 2012.

Kodak's consumer printer business has gained some traction, with the number of households with Kodak printers doubling last year to about two million. Its printers are priced higher than rivals such as Hewlett-Packard and Seiko Epson Corp., but its ink cartridges, at $10 to $15, cost about half as much. Mr. Perez believes Kodak will finish the year with more than 5% of the consumer printer market in the U.S.

Chris Whitmore, an analyst with Deutsche Bank, says it will be difficult for Kodak to gain significant market share in consumer printers because the market is so competitive and profits come from ink, which requires lots of printer sales.

"We are somewhat skeptical they can actually get to that level [of market share] in that timeframe," Mr. Whitmore says.

In commercial printing, Mr. Perez has high hopes for a fast digital printer introduced in the first quarter called Prosper Press, aimed at publishers and catalog makers. Mr. Perez says more than 100 companies have requested the Prosper Press but so far Kodak's only shipped four of them because of manufacturing complexities. The commercial printers cost $1.4 million to $4 million each.

He says Kodak so far is incapable of making more than "a few dozen" this year. "We're desperately trying to get the technology under control so we can expand," he says.

While he has worked to build these new businesses, patent payments have provided a cash cushion for the company. In 2008, he set a goal to generate between $250 million and $350 million on average each year in intellectual property licensing—mainly its digital imaging patents—through 2011. He later extended the target for that goal to 2012 but had disclosed little on his plans afterward.

In the past year, Kodak's patent attorneys settled lawsuits with Samsung Electronics Co. and LG Electronics Inc. receiving lump sums of $550 million and $400 million respectively. In January, it filed lawsuits against Apple Inc. and Research in Motion Ltd. alleging their smart phones infringe Kodak's digital-imaging patents. Analysts say it may be difficult for Kodak to match its earlier success in the latest patent fights.

But Mr. Perez says he'll wean Kodak off the patent lawsuits once the commercial and consumer printer businesses are profitable. "We'll find more value getting into business relationships that generate revenue working with some other partner rather than asking for cash," he says.

He says he didn't want to litigate so much, but felt he had to during the downturn when he says companies using Kodak technology ignored his requests to strike licensing deals. "Going to court is expensive, it creates a lot of publicity, nobody benefits from it except law firms," he says.

Mr. Perez expects intellectual property income to continue generating revenue for Kodak even as the number of new patent-suit filings slow. "It will be very valuable," he says.

Thursday, June 24, 2010

Tribune Bankruptcy Hung Up by Squabbles

The Wall Street Journal

Bankruptcy has been a surprising breeze for a number of companies that sought protection from creditors over the past two years.

But 18 months in, one case remains stymied in squabbling over just how the company landed in bankruptcy in the first place. That is Tribune Co., the ailing media company that was taken private in 2007 with an $8.2 billion deal by real-estate investor Sam Zell. Today, the transaction continues to haunt the company, its management and creditors.

A group of creditors holding Tribune's bank debt is threatening to upend the newspaper-and-television station owner's plans to exit from bankruptcy later this summer. Separate lender groups are deposing Mr. Zell and James B. Lee, a top banker at J.P. Morgan Chase & Co., which backed the buyout. And a court-appointed examiner probing Mr. Zell's buyout for possible fraud could give ammunition to creditors of all stripes to battle Tribune's restructuring plans.

Tribune seemed to be in the final lap of its sojourn through bankruptcy court when it reached a settlement in April with investors who hold the company's bonds. The bondholders had threatened legal action, claiming the company's banks doomed it to collapse by financing the buyout with unsustainable debt. Each side feared the outcome of a trial would be too uncertain and costly and agreed to a détente they deemed "fair and reasonable."

But instead of whisking Tribune through court, the settlement has drawn fire from a group of investors holding some of the firm's bank loans that are the first in line to be repaid. The dissident lenders, led by Oaktree Capital Management, are grousing that holders of bank debt are unfairly paying more than $400 million to bondholders, while Mr. Zell and the buyout's original backers contribute nothing. They complain that the settlement at the same time insulates Mr. Zell and his backers from litigation related to the buyout. The dissident lenders have emerged as the most significant hurdle to Tribune's efforts to exit from bankruptcy and start anew. Further litigation by Oaktree and its allies could prolong Tribune's stay in bankruptcy court, depending on their ability to forge a coalition that could vote against the company's restructuring plan.

The publisher of newspapers including the Chicago Tribune and the Los Angeles Times has languished in bankruptcy, compared with other corporate casualties of the financial crisis that have sped through court. Small-business lender CIT Group Inc. neared collapse last summer, then later filed a prepackaged bankruptcy from which it exited in 40 days. Detroit auto makers General Motors and Chrysler used bankruptcy sales to restructure in less than two months.

During Tribune's much longer slog, the company's financial performance has continued to slip. Operating cash flow fell 37% to $494 million in 2009, according to court filings. Tribune's trip through bankruptcy has left employees, advertisers and vendors in limbo. Mr. Zell himself stepped down as chief executive and has refocused on real-estate deals, leaving his ill-fated media venture behind. A Tribune representative declined to comment on the bankruptcy proceedings.

To a certain extent, the Oaktree group's fight is emblematic of bluster from creditors who typically angle for incremental gains in bankruptcy court. Whether the Oaktree lenders will succeed in blocking Tribune's restructuring is far from assured.

Investors holding some of the largest amounts of Tribune's bank debt—including J.P. Morgan, Bank of America Corp.'s Merrill Lynch, Angelo, Gordon & Co. and Avenue Capital Group—support the company's settlement and restructuring plan, leaving fewer influential creditors for Oaktree to rally to its cause. The Oaktree group's momentum has slowed recently: The dissident lenders hold about $2.3 billion of Tribune's bank debt, according to the most recent court filings, down from $3.6 billion in April.
Still, the Oaktree group, if it holds together, remains in striking distance of blocking Tribune's bankruptcy plan, holding about a quarter of Tribune's bank debt. To exit from court, Tribune needs creditors holding roughly two-thirds of its $8.7 billion in bank debt to approve the company's current deal, meaning a coalition holding one-third of the debt could scuttle the company's plans. Tribune's plan was put to creditors to a vote earlier this month.

At issue for the Oaktree group are the terms of Tribune's settlement over litigation related to Mr. Zell's leveraged buyout. The buyout ballooned Tribune's debt to about $13 billion, and bondholders led by Centerbridge Partners LP alleged the deal amounted to a "fraudulent conveyance" that rendered the company insolvent. Bondholders agreed to drop the litigation in exchange for 7.4% of Tribune's value. Bank lenders will forgive their debt for a 91% ownership stake in the company.

All are awaiting a report from bankruptcy-court examiner Kenneth Klee, which will probe circumstances surrounding Tribune's ill-fated buyout. If Mr. Klee finds that fraudulent-conveyance claims have merit, it could embolden lower-ranking creditors and push the Oaktree group to accept the current settlement, which insulates bank lenders and others from legal liability.
A finding that the claims are meritless, on the other hand, could encourage the Oaktree group to continue fighting, on the belief they shouldn't bear costs of a settlement with bondholders whose litigation would be unsuccessful in the first place. . Mr. Klee has called his task "massive" and asked Wednesday for a two-week extension, adding another potential delay to Tribune's restructuring. He declined to comment.

What's in a Name? Sometimes a Lawsuit.

The Wall Street Journal
Start-Ups Can Get Mired in Costly Trademark Scuffles With Bigger Firms

Jimmy Winkelmann, founder of The South Butt, 
resolved a trademark infringement lawsuit with VF Corp.

Jimmy Winkelmann started a clothing company several years ago to mock fellow students who wore the outdoorsy The North Face brand, despite having no inclination to venture into the wilderness. He dubbed his company "The South Butt" and flipped The North Face's half-dome logo to look like buttocks.

But at least one party wasn't amused: The North Face.

Mr. Winkelmann, now a student at the University of Missouri at Columbia, received a cease-and-desist letter from the company last summer. He declined to comply, prompting a trademark infringement suit that was settled out of court in April.

The South Butt is still in operation. Mr. Winkelmann's lawyer and a spokeswoman for The North Face, a unit of VF Corp., said the matter was resolved amicably, but declined to comment further. It's unclear if Mr. Winkelmann is required to make any payments to The North Face or if the company has imposed any conditions on his marketing efforts.

Small businesses, unwittingly or not, have a history of running into scuffles by playing off a larger company's protected trademarks—sometimes resulting in legal battles they can ill afford, given the limited resources of most start-up operations. Some 3,500 trademark cases are filed each year in U.S. district courts, according to FTI Consulting Inc., a Baltimore advisory firm that tracks intellectual-property statistics.

Large corporations are highly protective of the brands and logos they often spend years and millions of dollars promoting. Inexperienced entrepreneurs may not realize "that a lot of big businesses have people who are assigned to find people who are using their trademark," says Anuj Desai, an attorney specializing in trademarks and licensing at Arnall, Golden, Gregory LLP in Atlanta.

Victor and Cathy Moseley of Elizabethtown, Ky., say they received an initial complaint alleging trademark infringement from Limited Brands Inc., the parent company of Victoria's Secret, within two weeks of opening an adult novelty and lingerie shop called "Victor's Secret" in 1998. The Moseleys ultimately changed the name of the boutique to Cathy's Little Secret, but still entered into a 12-year court battle to keep the original name. The shop lost an appeal in May.

"It's discouraging," says Ms. Moseley, who plans a further appeal. Limited Brands declined to comment.

The big corporation doesn't always win. Last fall, McDonald's Corp. lost an eight-year battle to prevent a family-run restaurant in Kuala Lumpur from calling itself McCurry. Malaysia's top court ruled that the Indian-food eatery could keep the prefix "Mc" in its name, as long as it distinguishes its food from the hamburger giant's. McDonald's didn't return a call for comment.

But many small businesses find it's not worth picking a battle with a deep-pocketed corporation. Legal representation alone can run $10,000 to $50,000, or several hundred thousand dollars if the matter goes to court, according to Mr. Desai. Most owners who find themselves on the receiving end of a cease-and-desist letter often settle the matter quickly to avoid the cost of a prolonged lawsuit, he says.

Problems could likely be avoided with some due diligence, says Maria A. Scungio, co-chair of international trademark and copyright practice for Edwards Angell Palmer & Dodge LLP in New York. When starting up, many small-business owners don't seek legal advice or register their name with the U.S. Patent and Trademark Office, which could tip them off if they are encroaching on someone else's trademark, she says.

Ric Trader says he regrets not registering his company's trademark when he started Yard Doctor Landscaping in Punta Gorda, Fla., in 1998. That process, he says, may have made him aware of the existence of Lawn Doctor Inc., a national lawn-care company in Holmdel, N.J., that began franchising in 1967.

Mr. Trader says he was sent a cease-and-desist letter by Lawn Doctor in 2002, when his company was already well established, breaking $1 million in annual sales. He ultimately decided to ignore the letter, reasoning that customers wouldn't be confused by the similar names.

Lawn Doctor soon filed a lawsuit against the small company. Mr. Trader, who didn't retain a business lawyer, says that the ensuing years of legal paperwork were draining.

In an out-of-court settlement in 2005, Mr. Trader says he agreed to change his company's name in exchange for a five-figure sum. But with all the setbacks as well as Hurricane Charley taking a toll on his business, Mr. Trader decided to sell the business just weeks later. Lawn Doctor declined to comment.

Wednesday, June 23, 2010

Defendants' Damaged Reputations Persist When Prosecutors Walk Away


David Stockman
David Pinkerton had just left his 8- year-old twins at his in-laws’ home in Morristown, New Jersey, when he learned he was no longer a suspected felon.

Pinkerton’s lawyer called to say that the U.S. prosecutors who had charged the former American International Group Inc. managing director with bribery -- which could have led to a decade in prison -- had dropped the case, Bloomberg Markets reports in its August 2010 issue.

The relief was so great that day in July 2008 that the 6- foot-2-inch-tall (1.88-meter-tall) executive, who had fought the stress of the 31-month-long ordeal with intense gym workouts, broke down and cried.

David Stockman, a former U.S. budget director, lived under the shadow of a fraud indictment for two years before prosecutors dropped the charges without explanation or apology.

“They wrecked my reputation, my business career,” Stockman, 63, says. “I don’t know how you compensate for that.”

Stockman and Pinkerton are among a growing number of executives who have been indicted for corporate crimes in recent years and then had the charges dropped. From 2006 to 2008, the most recent period available, U.S. prosecutors dismissed charges against 42 such defendants for which the most serious charge was securities fraud. That’s more than twice the 20 dismissals in the prior three years, according to the Federal Justice Statistics Resource Center.

Surprising Statistic

The collapse of so many cases is surprising, legal experts say, because U.S. prosecutors are expected to have thoroughly investigated the facts and law before asking a grand jury to bring charges.

At least five indictments were returned -- and then dropped -- by the U.S. Attorney’s Office in Manhattan, which oversees Wall Street.

“This strikes me as very unusual,” says Duke University law professor Samuel Buell, a former prosecutor who brought fraud cases stemming from the collapse of Enron Corp. “These are some of the best prosecutors in the Justice Department.”

The increasing number of dismissals may signify that the transactions in some corporate cases have become so intricate that even top prosecutors have trouble mastering them, Buell says.

The phenomenon may become more widespread as investigators sift through the wreckage of the global financial crisis. Criminal investigators have probed Lehman Brothers Holdings Inc., which filed for bankruptcy in 2008; Countrywide Financial Corp., which Bank of America Corp. acquired that year; and AIG, which got $182 billion in the U.S. bailout, according to people familiar with the probes.

‘Tough to Prove’

If indictments stem from the collapse, Peter Henning, a former Justice Department fraud prosecutor, says he doubts they’ll focus on sophisticated transactions involving mortgage- backed securities.

“Those are very tough cases to prove,” says Henning, who now teaches at Wayne State University Law School in Detroit, citing the acquittals in November of former Bear Stearns Cos. hedge fund managers Ralph Cioffi and Matthew Tannin on fraud charges. Instead, prosecutors will look for clear instances where executives lied about company finances, he says.

Compassionate Decision

Yusill Scribner, a spokeswoman for U.S. Attorney Preet Bharara in New York, who took office after the Manhattan dismissals, declined to comment. A dismissal -- or what lawyers call a nolle prosequi -- may result when the evidence or law changes or because prosecutors make a tactical or even a compassionate decision, says Bruce Green, a professor at Fordham University School of Law.

“It should only be necessary in the rarest of circumstances,” says Michael Garcia, who was U.S. attorney in Manhattan from September 2005 to November 2008. “But the circumstances arise.”

Kevin McDonald, who was acting U.S. attorney in South Carolina until May, says prosecutors owed no apology after dismissing fraud charges against four former executives of a company acquired by WebMD Corp. His office would have pressed the case, which was developed by agents with accounting expertise, had there not been adverse legal rulings before the trial, he says.

“A grand jury indicted them based on the strength of the evidence,” he says. “It’s not unusual during the course of the case and the investigation for the facts and circumstances to change and for rulings to limit the admissibility of evidence.”

Silent Blackberry

Alan Vinegrad, U.S. attorney in Brooklyn, New York, in 2001 and 2002, praises prosecutors for reconsidering cases while also urging them to ask what went wrong.

“My own view would be, ‘How come we didn’t think of this before we indicted the case?’” he says.

Though exonerated defendants may sue for fees, there is no legal provision for repairing a damaged reputation.

“Somebody made an allegation that I did something improper, and everything got thrown under the bus,” Pinkerton, 49, says. “One day, 100 people around the world want to talk to you. The next, your BlackBerry goes silent and you have three friends.”

For a public figure such as Stockman, the impact was magnified. Television cameras rolled at a packed press conference on March 26, 2007, as Garcia announced the indictment of the former director of the Office of Management and Budget under President Ronald Reagan.

Allegations of Fraud

Flanked by investigators, Garcia said Stockman had lied in regulatory filings and defrauded investors of $1.35 billion in a scheme to raise capital and save Collins & Aikman Corp., the Southfield, Michigan-based auto parts maker of which he was chairman, from bankruptcy.

Stockman’s private-equity firm, Heartland Industrial Partners LP, paid $260 million for the parts maker in 2001 and snapped up other auto-supply companies in a bid to create the dominant supplier of fabric, consoles and other components for automakers. Four years later, in May 2005, Collins & Aikman, with more than $1 billion in debt, filed for bankruptcy as Ford Motor Co. and General Motors Corp. slashed production.

After appearing in court in March 2007 to deny fraud charges that could have brought him two decades in prison, the gray-haired Stockman retreated to his home in Greenwich, Connecticut. He spent much of his time in his home office, which is decorated with framed tributes including one dated Aug. 13, 1981, from Reagan after the president signed a $750 billion tax cut.

“You rode point on this,” Reagan’s note says.

‘Prospect of the Guillotine’

Hunched over company documents, Stockman spent weeks reviewing the rebate transactions and accounting at the heart of the case. Then he penned a 31-page memo to his lawyers outlining how he had tried to rescue his company.

“The prospect of the guillotine tends to focus the mind,” says a now-relaxed Stockman, in jeans and a white baseball cap, from the office where scores of binders filled with company documents still line his bookshelves.

Stockman hasn’t lost any of the combativeness he showed decades earlier in Reagan’s cabinet when he was forced to apologize to lawmakers after saying they lacked courage to truly slash government spending.

Ignoring his lawyers’ warnings that the government rarely dismissed fraud cases, he insisted that his attorneys seek to convince prosecutors that they were wrong. Stockman helped lead dozens of lawyers, paralegals, accountants and investigators through 15 million documents that the government turned over.

“I was naive enough not to understand how bad the odds were,” says Stockman, a former Harvard Divinity School student and U.S. congressman.

47 Binders of Documents

After more than a year of research, Stockman’s attorneys produced a 221-page report backed by 647 footnotes and 47 binders of documents. Evidence was overwhelming that he was innocent, the report said, adding that prosecutors hadn’t done their homework and had relied too heavily on an internal probe done by Davis Polk & Wardwell LLP, the law firm that guided Collins & Aikman after its 2005 collapse.

“The government gave far too much credit to private counsel’s unfounded conclusions,” the report said. “Much of the documentary evidence most directly relevant to this case appears not to have been reviewed at all -- by anyone -- prior to Mr. Stockman’s indictment.”

The report, financed by Stockman’s indemnification policies, argued that Collins & Aikman was never in jeopardy of violating loan covenants and that the accounting issues in the case were ambiguous.

‘15 Million-Page Swamp’

The defense found documents indicating that outside auditors knew of deals prosecutors said Stockman hid, transcripts of conference calls showing that Stockman never made statements attributed to him and records demonstrating that lenders weren’t deceived about collateral.

“We found a lot of these,” Stockman says. “You’d find these nuggets everywhere, but it was a 15 million-page swamp.”

Stockman’s defense delivered the report to prosecutors on Oct. 20, 2008. On Jan. 9, 2009, the government released a brief statement saying it had dropped the case against Stockman “in the interests of justice.” By then, the lead prosecutor had left for private practice.

Elkan Abramowitz, Stockman’s lawyer, says the case underscores a wider issue. Lawyers for companies that come under government scrutiny have discovered that corporations won’t be prosecuted if they deliver to authorities evidence against top executives, and sometimes they find crimes where there are none, he says.

‘Institutional Bias’

“There is almost an institutional bias to find and expose criminality,” he says.

Davis Polk partner Dennis Glazer defends his firm’s confidential probe and refuses to characterize its findings.

Today, Stockman’s anger is palpable. He leans forward, his voice urgent.

“I think the prosecutors involved in this should be personally liable,” says Stockman, who paid a total of $7.2 million to settle lawsuits by investors and the Securities and Exchange Commission without admitting or denying liability.

Lawyer Andrew Weissman says Stockman, who is writing a book on the banking crisis, wants the case behind him. Seven other Collins & Aikman employees, including four who pleaded guilty, also won dismissals. Prosecutors never announced their dismissal of charges against the four who had earlier pleaded guilty.

Azerbaijan Oil Deal

An indictment is devastating, AIG managing director Pinkerton says. His ordeal began with his decision to invest a fraction of the private-equity and hedge fund money he managed for AIG in an oil deal in Azerbaijan in 1998.

“It wasn’t a bet-the-house,” says Pinkerton, who then managed about $6 billion. “It was $15 million.”

The deal had potential, Pinkerton thought. Clayton Lewis, who oversaw an AIG investment at New York-based hedge fund firm Omega Advisors Inc., was investing $126 million in a bid to buy state assets in the Caspian Sea nation and suggested AIG join.

Pinkerton says his due diligence showed the possibility for big gains: Investors might see a 1,000 percent return if Azerbaijan sold part of its hobbled oil industry. There was also risk: Not only might Azerbaijan choose not to sell the company; media reports said the deal’s promoter, Viktor Kozeny, had stolen assets from public companies in the Czech Republic.

Pinkerton signed on, believing that Omega was a solid partner and that an oil investment was a good hedge against inflation. Kozeny denies stealing assets.

An AIG Blue Blood

The transaction was one of hundreds that Pinkerton authorized over the years. A University of Delaware graduate who later got a degree at night from Brooklyn Law School, Pinkerton joined AIG in 1985 in a $19,000-a-year underwriting job and eventually became its first U.S. employee devoted to hedge funds and private equity. He rose through the ranks overseeing AIG’s investments in Blackstone Group LP, Carlyle Group and others.

“My blood ran blue with AIG,” Pinkerton says.

“He was a guy who you knew could handle bigger and bigger investments,” says Edward Matthews, who was AIG’s vice chairman until 2005. “He grew into the position.”

Personal success followed, as Pinkerton and his college- sweetheart wife, Ana, moved up from a $105,000 condominium in Hoboken, New Jersey, to a 6,000-square-foot (560-square-meter) home in Bernardsville, New Jersey, a leafy community 39 miles (63 kilometers) from AIG’s -Manhattan headquarters. They had twins.

Deal Collapses

The Azerbaijan deal collapsed in 1999 when Azeri leaders didn’t sell the company. AIG and Omega sued Kozeny, claiming he had pocketed their investment. Kozeny denied that and said AIG and Omega should be barred from suing because they had joined him in a plot to bribe Azeri leaders, in violation of U.S. anti- bribery laws. Kozeny also took his allegations to U.S. prosecutors, who launched a probe.

Lewis later pleaded guilty in Manhattan to charges of investing with Kozeny after learning of the bribery scheme. Seeking leniency, he cooperated with prosecutors and, according to court records, claimed Pinkerton knew of the payoffs.

On Oct. 4, 2005, Pinkerton’s lawyer summoned him home from Switzerland, where he was visiting a client. Pinkerton surrendered to the Federal Bureau of Investigation two days later and was jailed for hours in a Manhattan federal court holding pen.

Shredded Dignity

“There’s a process,” Pinkerton says. “It’s really about trying to shred your dignity, putting you in a jail cell and letting you sit.”

Pinkerton’s life slowly fell apart. After first being supportive, friends stopped calling. In December 2005, AIG placed him on leave without pay. Living off savings, Pinkerton immersed himself in his defense, only to grow frustrated at the glacial pace. He curtailed his daily contact with his lawyers.

“I’d wake up some mornings and say, ‘I can’t handle it anymore,’” Pinkerton says. At one point, he fainted from what he feared was a stroke.

“It was all stress-related,” he says. Pinkerton planted bushes at home and began working out with a personal trainer.

Then Ana got sick -- and prison became his second-biggest worry.

“You start to think, ‘What happens to my kids if my wife doesn’t make it and I’m wrongfully convicted?’” he says.

Meanwhile, lawyer Barry Berke worked to prove Pinkerton’s innocence. The co-chief of the white-collar practice at Kramer Levin Naftalis & Frankel LLP in New York, Berke gathered evidence showing that Pinkerton’s due diligence was genuine, including assurances about Kozeny that a top AIG executive had gotten from another investor in the deal.

Misinterpreted Notes

Berke learned that Pinkerton had heard Azeri officials seeking American investors at a Washington conference. Colleagues of Pinkerton’s agreed to testify that Lewis had said the deal was legitimate.

Berke concluded that prosecutors had misinterpreted notes found in AIG files. For instance, a mention that Azerbaijan’s president was involved in the deal meant only that he supervised the asset sale, not that he had been bribed, Berke says.

Berke says prosecutors didn’t probe deeply enough before filing charges. “The government often views the case with blinders on,” he says.

The indemnification policy that paid Berke also financed a defense investigative team at Nardello & Co., which turned its sights on Lewis.

Investigators hired by Berke traveled to Australia, Azerbaijan, Hawaii and Seattle, following leads that Lewis was more involved in the scheme than he had claimed. They also uncovered documents indicating that Lewis had wrested control of an Australian pearl farm from its owners, which could be used to attack his credibility at a trial.

Background Investigations

“The government doesn’t do the same sort of background investigation of witnesses,” says Dan Nardello, a Manhattan federal prosecutor from 1987 to 1994 and principal of the New York-based international investigative firm.

R. Scott Thompson, Lewis’s lawyer, says Nardello got facts wrong about the pearl farm and his client’s role in the bribes.

“They took a grain of truth and stretched it,” says Thompson, of Lowenstein Sandler PC in Roseland, New Jersey. In a lawsuit that was settled in May, Omega accused Lewis of hiding the bribery scheme from the firm.

Prosecutors, meanwhile, disclosed that Lewis had told Pinkerton that Omega had investigated Kozeny’s arrangement with Azeri officials and concluded it wouldn’t run afoul of anti- bribery laws.

Charges Dropped

On July 1, 2008, after nearly a year of discussions between defense lawyers and prosecutors, the government dropped the charges. Mark Mendelsohn, who was deputy fraud chief in the Justice Department, which brought the charges, declined to comment. Another investor, Frederic Bourke, was convicted of bribery conspiracy last year. He’s appealing.

Now, with his wife recovered, Pinkerton is working to build the asset management firm he launched after his arrest, Pinkerton Capital Management LLC.

“I got a lot of feedback from people,” he says. “They said, ‘That could have been me.’”

Federal agents came knocking at Rick Karl’s door in September 2003 -- three years after he quit Medical Manager Corp. following its acquisition by WebMD. Karl, who earned about $225,000 a year as general counsel of the Tampa, Florida-based software company, had amassed some cash after selling stock options worth about $1.7 million over five years.

“I became a stay-at-home dad,” says Karl, then divorced and the father of four.

‘The End of Life’

Agents were investigating whether Medical Manager had cooked its books to inflate revenue and hide liabilities. In November 2005, Karl was among 10 executives indicted for a $16.8 million fraud.

“To be accused of fraud and money laundering, it felt like this is the end of life,” says Karl, 55, a lanky man who is the son of a judge.

Karl says he focused on software rights as a lawyer at Medical Manager, not financial deals.

“I wasn’t designing transactions or giving advice on how to account for these things,” he says. He thinks prosecutors wanted to pressure him to plead guilty and testify against his former bosses, as others had.

“I had absolutely no idea that something was wrong,” he says.

Late last year, prosecutors gave up on Karl, dismissing charges against him and others after defense lawyers including James Robinson of Cadwalader Wickersham & Taft LLP won pretrial legal rulings.

Forever Linked

For Karl, exoneration came four years too late. By then, he says, he had lost an expected appointment to the Florida judicial bench, seen his reputation besmirched and spent countless sleepless nights wondering what he had done wrong.

The trauma is only now lifting. He works in a $127,000-a- year government job managing the airport in Volusia County, Florida, and lives in his three-bedroom childhood home, which he bought in 2004. His dreams of becoming a judge have evaporated; in the age of Google, he’s aware he’ll be forever linked to a fraud.

“It’s like a shadow that’s out there,” he says.

Wrongful accusations hang over Pinkerton and Stockman, too. Along with a notice of the dismissal in Stockman’s case, press releases announcing his and Pinkerton’s indictments remain on the prosecutor’s website.

Tuesday, June 22, 2010

U.S. FDA Demands Philip Morris Marketing Documents


U.S. regulators demanded on Thursday that cigarette maker Philip Morris turn over all market research material on Marlboro Lights, citing concern over an advertisement for the brand.

In a letter to Philip Morris parent company Altria Group, Inc, the U.S. Food and Drug Administration said it was concerned about advertisements, or "onserts," attached to packs of Marlboro Lights.

A U.S. ban on promoting cigarettes as "light," "mild" or "low" takes effect on Tuesday. The ban is a key provision of a new federal law that gives the FDA authority to regulate tobacco products.

"By stating that only the packaging is changing, but the cigarettes will stay the same, the onsert suggests that Marlboro in the gold pack will have the same characteristics as Marlboro Lights, including any mistaken attributes associated with the 'light' cigarettes," the FDA letter read.

Altria must submit by July 30 all materials related to the marketing or sale of Marlboro Lights, including themes, creative recommendations and dissemination strategies, the FDA said.

Altria spokesman Bill Phelps said, "We received the letter today and we're reviewing it and we will respond."

The anti-smoking group Campaign for Tobacco-Free Kids said the FDA action would prevent Philip Morris from evading the ban.

"This will give the FDA the information it needs to take additional enforcement action if Philip Morris does not pull the onserts," the group said in a statement.

Connecticut to Lead Multistate Probe of Google

The Wall Street Journal

As many as 30 U.S. states are considering joining forces to look into how Google Inc.'s Street View vehicles came to collect Internet users' personal data from unsecured wireless networks.

The joint investigation, led by Connecticut Attorney General Richard Blumenthal, will seek additional information from Google and determine whether laws may have been broken when the company mistakenly collected information on people's Web usage.

Mr. Blumenthal said in an interview that a "core group" of state attorneys general had agreed to combine their resources and expertise to look into the matter. He said more than 30 states had expressed interest in the matter, and he expected a "significant group" of states will ultimately join the investigation. He declined to be more specific.

Google in May acknowledged that its Street View vehicles for years had inadvertently collected data over public Wi-Fi networks—such as fragments of Web pages and email messages—while marking the location of the Wi-Fi networks and taking pictures for its online mapping service.

The company has said that while it was a mistake to collect the personal data, it doesn't believe it has done anything illegal. A Google spokesperson Monday said that the company continues to work with relevant authorities to answer their questions and concerns.

Mr. Blumenthal said his investigation was at an early stage, and he declined to challenge Google's assertion that it didn't break any laws. "They certainly acknowledge, at the very least, that intercepting and gathering people's data was wrong," he said. "There may be a need to strengthen and enhance federal and state laws."

The multistate investigation is the latest development in a growing privacy controversy that has rippled around the world. The Internet giant, which is based in Mountain View, Calif., has blamed the mistake on an experimental piece of software accidentally used in its signal-collection software. The company has hired an Internet security firm to look into the software error.

A Democratic candidate to succeed Sen. Chris Dodd (D., Conn.), Mr. Blumenthal said Google's response so far raises as many questions as answers. He said the company must provide a comprehensive explanation of how the unauthorized data collection happened, why the information was kept if collection was inadvertent and what action will prevent a recurrence.

Monday, June 21, 2010

Arizona Braces for Legal Challenges to SB 1070


Few issues are more hotly contested today than immigration law and few laws produce debate like Arizona’s SB1070, set to take effect on July 29.

Friday, however, was a big day for SB1070.

Secretary of State, Hilary Clinton, speaking on a Latin American news television show, said that the Obama administration planned to bring a lawsuit to prevent the implementation of Arizona’s new immigration law. The Department of Justice, the federal agency that would be responsible for bringing such a legal challenge, would only say that it was “continuing to review the law.” Nonetheless, a “senior administration official” apparently told CBS News that the Justice Department IS formally preparing to sue the state of Arizona.

Meanwhile, late Friday afternoon, Arizona’s Attorney General, Terry Goddard, announced that his office would NOT represent the state in ANY lawsuits arising over SB1070. This means that the Governor’s office would have to rely on its own attorneys for what is expected to be a slew of legal challenges.

It will be interesting to see what the courts do with a federal challenge to a State immigration law. If a State law conflicts with a valid federal law, the federal law will “preempt” the State law. In this case, it isn’t clear whether the Arizona law CONFLICTS with any provisions of our complex federal immigration code.

How will the Obama Administration challenge the Arizona law if it does NOT conflict with existing federal immigration law?

Hilary Clinton said that the Obama Administration is going to argue that it believes that it is the job of the federal government to create immigration policy, not the States. Without a basis for preemption, will this argument prevail in court?

Article I of the U.S. Constitution specifically lists what Congress is allowed to do. In what is known as the Commerce Clause, Congress is empowered to regulate interstate commerce. Over time, the courts have decided that even if there is no conflicting, existing federal law (i.e., no basis for preemption), States still cannot create laws regulating interstate commerce. This is now known as the “dormant Commerce Clause.” It is the inference that because Congress was directed to regulate interstate commerce, individual States cannot.

The basis for our complex federal immigration code is in Article I as well, where Congress is directed to create a “uniform rule of Naturalization” for the United States. The question is whether the same inference will be made in the area of immigration that was made in the area of interstate commerce.

The Justice Department cannot file a lawsuit until the Arizona law takes effect.

Sunday, June 20, 2010

Decision Upheld to Bar California Nurses' Strike

Sacramento Bee

The California Nurses Association vowed to continue its fight with the University of California over staffing levels, saying it won't be deterred by a San Francisco judge's ruling Friday that bars nurses from staging a one-day strike.

San Francisco Superior Court Judge Peter J. Busch prohibited the union from staging strikes at the university's five medical centers until at least Sept. 30, when the current contract between the union and the university ends.

Two days before the union was to stage a June 10 walkout at UC-run hospitals, Busch intervened by issuing a temporary restraining order requested by the state Public Employment Relations Board on behalf of the university.

On Friday, the judge made his ruling permanent, saying that there was reasonable cause for PERB to believe that a strike would violate state labor laws.

The CNA walkout was intended to protest what the union said are unsafe nurse staffing levels – a charge the university denies.

At the center of the dispute is whether the university is complying with state-mandated nurse-to-patient ratios, which require at least one nurse for every five patients – and even more for patients with higher levels of need.

The dispute over staffing levels has long been a sticking point in negotiations.

"I'm hopeful that because of the judge's ruling, the CNA will sit down at the table so we can work out a really good contract for the nurses. We can do this in earnest instead of posturing," said Carol Robinson, chief nursing officer for UC Davis Medical Center.

The CNA represents nearly 11,000 registered nurses employed by the university, including 1,800 at the UC Davis Medical Center.

University officials commended the judge's decision, but the setback upset union officials.

"We're going to continue fighting for proper staffing levels. We're not going to stop," said Beth Keane, the CNA's lead negotiator for the union's university labor contracts.

She said the union plans to file complaints with the state Department of Public Health. The state agency, however, has yet to act on a complaint filed by the union in November over staffing levels at the UC Davis Medical Center.

The university said it had already spent $8.4 million preparing for a possible walkout by nurses.

Friday, June 18, 2010

Supreme Court: Your Boss can read your E-Mail

LA Times

The Supreme Court on Thursday rejected a broad right of privacy for workers who send text messages on the job, ruling that supervisors may read through an employee's communications if they suspect rules are being violated.

In a 9-0 ruling, the justices said a police chief in Ontario, Calif., did not violate the constitutional rights of an officer when he read the transcripts of sexually explicit text messages sent from the officer's work pager.
In this case, the high court said, the police chief's reading of the officer's text messages was a search, but it was also reasonable.

The court's ruling comes at a time when most U.S. workers spend at least part of their day talking on phones or sending messages on computers or cellphones, many supplied by their employers.

At issue was whether the 4th Amendment's ban on "unreasonable searches" puts any limits on searches by public employers. The court said the limits were minimal, so long as the employer had a "work-related purpose" for inspecting an employee's desk or reading messages sent by the employee on an agency paging system.

This decision applies directly to the more than 20 million employees of state and local governments, as well as federal workers. In the past, the court's decisions on the right to privacy have also influenced decisions in the private sector.

The ruling tossed out a privacy suit brought by a former police sergeant against the police chief in Ontario. Concerned that officers were using their text pagers mostly for personal messages, Chief Lloyd Scharf decided in 2002 to read some of them.

He learned most of the messages sent by Sgt. Jeff Quon were personal, and some were sexually explicit. Some of Quon's messages were sent to an ex-wife, others to a girlfriend. In August 2002, for example, the audit found Quon had sent or received 456 messages, but only 57 were work-related.

After learning his messages had been read, Quon sued Scharf and the city, and won a ruling from the U.S. 9th Circuit Court of Appeals. Its judges said there was no need to snoop through Quon's personal messages. They noted that Quon's commanding officer had told him he could use the pager for personal messages, so long as he paid the cost.

But the Supreme Court disagreed. The justices said the law tilts the balance in favor of the employer, not the employee. A public employee has at most "a limited privacy expectation" when using a text pager supplied by the police department, the justices said.

"Because the search [by the police chief] was motivated by a legitimate work-related purpose and because it was not excessive in scope, the search was reasonable," said Justice Anthony M. Kennedy in City of Ontario vs. Quon.

More than 20 years ago, in its only similar ruling, the high court had upheld the search of an office and the desk of a doctor who worked for a state-run hospital in Northern California. In that case, the justices said that although the doctor had some right to privacy in his desk, hospital administrators could search if they had a legitimate basis for suspecting wrongdoing.

In Thursday's opinion, the court said the same rationale applied to messages sent on a texting system supplied by a public agency.

The lawyer for Quon called the ruling a setback for employees everywhere. "It is a very bad opinion," said Michael McGill, a lawyer in Upland. "They are chipping away at the constitutional rights of employees."

Kent Ashland, a lawyer for the city of Ontario, said the ruling vindicated the actions of the police chief.

"This says what they did was reasonable in light of the circumstances," Ashland said. He also said the ruling was not a complete defeat for workers. "The court says there must be a legitimate reason for the search. It protects privacy to that extent."

The text messaging case drew wide interest among experts in workplace law and privacy. Kennedy cautioned that the decision was narrow and did not seek to resolve all the disputes that will arise in an era when most employees spend much of their day using computers and cellphones.

Business lawyers said they advised employers to tell employees they did not have a right to privacy when they used a computer or cellphone supplied by the agency. And employees need to heed the warning, said Damon Dunn, a Chicago lawyer. They "need to anticipate their communication devices may be monitored for seemingly routine business purposes," he said, "even if the search reveals intimate and embarrassing information."

Rothstein Gets 50 Years for $1.2 Billion Fraud

Bloomberg Business Week

Former South Florida lawyer Scott Rothstein was sentenced to 50 years in prison for using his law firm to run a $1.2 billion Ponzi scheme that financed a lavish lifestyle, bankrolled his firm and bought political influence.

The sentence imposed today by U.S. District Judge James Cohn is 10 years longer than prosecutors requested. Rothstein, who turns 48 tomorrow, pleaded guilty in January to two counts of wire fraud and three conspiracy charges. He faced a maximum sentence of 100 years.

“These acts constitute the most egregious wrongs a licensed attorney can commit,” Cohn told Rothstein in federal court in Fort Lauderdale, Florida.

Rothstein sold discounted stakes in fraudulent settlements of sexual-harassment and whistleblower claims, which ranged from hundreds of thousands to millions of dollars, he admitted in January. He told investors they would collect the full proceeds when the cases settled, while taking money from new investors to pay back old ones.

Rothstein and unidentified co-conspirators created fake settlement papers, bank statements and personal guarantees to convince investors the scheme was real, he admitted. He also generated false court orders and forged a judge’s signature.

Undercover Operations

“The defendant placed himself in the pantheon of fraudsters,” Assistant U.S. Attorney Lawrence LaVecchio told Cohn today.

“I don’t expect your forgiveness,” Rothstein said, reading from a prepared statement. “I do promise you that I will do everything in my power to undo the terrible harm that I caused.”

Rothstein had asked Cohn for a 30-year sentence. Prosecutors sought 40 years. Rothstein said he deserved a lighter sentence because he voluntarily returned from Morocco, where he had fled when the scheme was unraveling, and admitted his guilt to authorities.

He cooperated with prosecutors and participated in “numerous undercover operations,” Rothstein said in a June 4 request for leniency. He didn’t disclose details. Prosecutors said his “post-offense conduct has been extraordinary.”

Marc Nurik, an attorney representing Rothstein, said he is still cooperating with authorities and may request a sentence reduction in the future.

Sentencing Hearing

“In light of the fact that we anticipate a subsequent sentencing hearing down the road, based on his ongoing cooperation, it would not be appropriate to make a statement at this time,” Nurik said in a telephone interview.

One other person, Debra Villegas, the firm’s former chief operating officer, has been charged with a role in the scheme. Villegas, who pleaded not guilty to charges of money-laundering conspiracy, will change her plea June 11 in Fort Lauderdale federal court, records show.

The 70-lawyer firm Rothstein co-founded, Rothstein Rosenfeldt Adler PA, is being dissolved in U.S. Bankruptcy Court in Fort Lauderdale. It collapsed after other attorneys there said they found evidence that Rothstein was running an illegal side business.

Rothstein used money from the scheme to keep his firm afloat, pay employees, rent office space and buy equipment, he said in January.

Political Campaigns

He instructed law firm employees to contribute to the campaigns of local, state and federal politicians in a way that evaded limits on such donations and disguised the true sources of the money. Many of the donations were returned after the accusations against Rothstein became public.

“Mr. Rothstein acknowledges that he not only stole other people’s monies, he also used it to corrupt the political process and enhance his power for personal gain,” according to Rothstein’s request for leniency.

Rothstein used proceeds from his crimes to buy property in Florida and Narragansett, Rhode Island, and residences in New York City, prosecutors said in court papers. He had a white Lamborghini, a red Ferrari Spider, 304 pieces of jewelry and a collection of sports memorabilia.

Cohn will determine how much to pay back alleged victims, former clients and banks from property Rothstein agreed to forfeit. Rothstein agreed to be disbarred in November by the Florida Supreme Court.

While the total amount of the fraud was $1.2 billion, about 400 victims lost $400 million and some investors recouped their money, Nurik told Cohn today.

Jealousy and Greed

Rothstein grew up in the Bronx and moved as a teenager to South Florida, where he attended college and law school, he wrote in a letter accompanying his leniency request. After founding his law firm, he became motivated by jealousy and greed, he wrote.

“My partner and I continued to grow the firm at an alarming pace despite the clear fact that the business would never support the growth,” Rothstein wrote. “I needed to find some other way to fund the business and the lifestyle I had created out of thin air. Failure was not an option.”

Rothstein began to ask acquaintances for high-interest loans, saying they were for clients. He then devised the scheme to sell non-existent legal settlements, he wrote.

“We went from tens of millions to hundreds of millions almost overnight,” he said in the letter.

Stuart Rosenfeldt, Rothstein’s former law partner, denies any involvement in the scheme, a lawyer for Rosenfeldt said in a telephone interview yesterday.

“If he’s going to try to lay this at the feet of Stuart Rosenfeldt, Stuart Rosenfeldt will be one more victim of Scott Rothstein,” attorney Bruce Lehr said.

Rosenfeldt was sued in February by the defunct firm’s court-appointed trustee for taking almost $8 million in excess compensation.

The case is U.S. v. Rothstein, 09-cr-60331, U.S. District Court, Southern District of Florida (Fort Lauderdale).

Thursday, June 17, 2010

Man Accused in Officer's Death Slugs his Lawyer

Philadelphia Inquirer

For years, Philadelphia lawyer William L. Bowe has represented people most lawyers will not: accused killers, often with long criminal records and short tempers, some of them on what seems like a fast track to death row.

It's the kind of job that might make some lawyers ask for combat pay. In Bowe's case, literally.

On Wednesday - for the second time in seven months - Bowe was assaulted in court by a client, this time Eric DeShann Floyd, one of two men on trial for murder in the 2008 shooting of Police Sgt. Stephen Liczbinski.

Wednesday's attack happened after two days of disruptions of jury selection by Floyd, who has openly argued with Common Pleas Court Judge Renee Cardwell Hughes about her refusal to grant his last-minute request to fire his lawyers and represent himself.

By Tuesday, after Floyd publicly interrupted questioning of a prospective juror, Hughes told him he would watch the rest of the trial in a holding cell via closed-circuit television.

On Wednesday, the judge ordered Floyd back into court to see whether he had changed his mind about behaving. When Floyd said no and Hughes ordered him removed, Floyd swung and punched Bowe behind an ear.

As Bowe slumped to the side, Floyd hit the lawyer again in the back of the head as sheriff's deputies wrestled him away and took him from the courtroom.

Bowe tried to walk from the courtroom with help but was persuaded by paramedics to be moved by stretcher to an ambulance. He was taken to Thomas Jefferson University Hospital for examination and released.

Floyd's action again postponed jury selection, this time to Friday, when prosecution and defense lawyers - including Bowe - return.

"Mr. Bowe is tired, but he will be in good health when we resume this case on Friday," the judge announced in a brief return to the bench.

Common Pleas Court President Judge Pamela Pryor Dembe said such incidents are always possible in the criminal court system. She said she was pleased that sheriff's deputies subdued Floyd so quickly.

"By and large, when you consider how many unhappy and how many violent people are brought into our courtrooms, and that includes nondefendants as well, it's amazing we don't see this type of thing more often," Dembe said.

As word spread that a lawyer, and specifically Bowe, had been assaulted, colleagues stopped by the third-floor courtroom at the Criminal Justice Center.

Criminal defense lawyer Guy R. Sciolla called Bowe "the consummate professional," whom he has known since the early 1970s, when Bowe was a public defender and he was a city prosecutor.

"I think every lawyer thinks about something like this happening," Sciolla said, adding, "If he [Floyd] is going to do this to Bill Bowe, he would have done it to anybody."

The fact that Bowe will continue representing Floyd shows his professionalism, Sciolla said.

Bowe, 63, has been a fixture of the Center City legal community for decades. Standing well over six feet, with a head of mussed gray hair and a thick mustache, he is soft-spoken and reticent in public, almost a casting director's choice for "country lawyer."

Bowe is cordial, but never comments to reporters. Nor would he Wednesday as he was wheeled to the ambulance.

In recent years, colleagues say, Bowe's solo practice has been limited almost exclusively to murder and death-penalty cases.

Outside court, he has taught trial advocacy at Temple University's law school and conducted professional seminars about death-penalty law.

His last physical encounter with a client was in November, when he was punched out by Eric Arms, 29, moments after a Philadelphia jury convicted Arms of third-degree murder. Arms was sentenced to 18 to 45 years in prison for the murder. He has yet to be tried for assaulting Bowe.

Floyd - short and muscular to Bowe's tall and lanky - is expected to be charged with assault in Wednesday's incident after the current murder trial.

He has a record of arrests for robbery, including a 1994 case in which he pleaded guilty and was sentenced to one to five years in prison.

Floyd, of North Philadelphia, and co-defendant Levon T. Warner, 41, of West Philadelphia, face the possibility of the death penalty if the jury finds them guilty of first-degree murder.

Floyd and Warner are accused of taking part in the May 3, 2008, bank robbery and chase that ended in Port Richmond with Liczbinski, who had been pursuing them, dead of gunshot wounds.

Howard Cain, 33, alleged leader of the group who police say shot the 12-year veteran officer, was killed by police after the three split up and he ran off.

Jury selection in Floyd's and Warner's trial began Monday and Floyd began interrupting the proceedings, demanding the right to fire Bowe, who he said "rubbed me the wrong way."

Floyd complained that Bowe and co-counsel Earl G. Kauffman were not asking questions or raising pretrial issues that he thought were important.

Still, Floyd's disruptions were only vocal. Until Wednesday.

Wednesday, June 16, 2010

NYC, 9/11 Workers Reach $712.5 Million Injury-Claims Settlement

Bloomberg Business Week

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.

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.

Tuesday, June 15, 2010

LA County Judge Clears way for Marijuana Dispensary Crackdown

LA Times

Medical marijuana patients and dozens of dispensaries lost an eleventh-hour bid Friday to stop a city ordinance from going into effect next week, but a judge indicated that both groups may have a legitimate basis for an injunction at a later date.

Los Angeles County Superior Court Judge James C. Chalfont cleared the way for the ordinance to take effect Monday by denying more than a dozen requests for a temporary restraining order to bar the city from enforcing the law, which would force more than 400 shops to shutter their doors.

Attorneys for patients using medical marijuana had filed a class-action lawsuit against the city last week, contending that the law would unconstitutionally bar patients' access to their medicine.

The patients, who estimate that more than 100,000 Los Angeles residents are in their ranks, suffer from illnesses ranging from anxiety and menopause to lupus or AIDS, according to their lawsuit.

In court Friday, attorneys presented a map to the judge that they said showed most dispensaries will have to close if forced to comply with the ordinance, which prohibits them from being located within 1,000 feet of "sensitive use" areas, including schools, churches and parks.

Chalfont rejected that argument, saying because patients can grow their own marijuana and an estimated 137 shops will be allowed to remain open at least temporarily, there was no reason to issue an emergency order stopping the city from implementing the law.

"I believe access to medical marijuana … is supposed to be limited," the judge said. "It is not supposed to be freely available on the street to anyone who wants it; that was the intention of the people."

He said, however, that patients may have grounds to ask for an injunction based on their privacy rights — the city ordinance says police will be able to obtain patient lists and doctors' recommendations without a warrant.

The judge also denied requests from lawyers representing dispensaries to stop the ordinance. The lawyers had contended that their clients' rights as property owners and their due process rights would be violated when the city's law takes effect.

Chalfont ordered attorneys to file additional papers on whether allowing certain dispensaries to remain open while closing others would be a violation of the equal protection clause of the California Constitution.

Physicians would be Protected under Proposed Law

The Detroit Free Press

Should doctors apologize to their patients if they or their hospitals screw up?

"I'm sorry" legislation pending in Lansing would let physicians express regrets without fear that the words would be used against them in court. Michigan is one of only 15 states without extra legal protection for doctors who want to apologize to a patient or family.

The bill's sponsor, Rep. Jim Marleau, R-Lake Orion, expects the proposal, which has been introduced before, has a better chance of passage this time because it coincides with a focus in federal health reforms to rein in health costs.

He points to a physician apology policy at the University of Michigan, which has resulted in 40% fewer lawsuits and cut legal costs in half since the approach began in 2004.

Michigan physicians currently are warned to "tread very softly" with apologies, said Dr. Daniel Michael, president of the Michigan State Medical Society and a Beaumont Hospital, Royal Oak, neurosurgeon.

Dr. Abelkader Hawasli, a St. John Hospital & Medical Center surgeon, said he believes doctors should apologize to patients, and he has over the years, he said. "No physician wants to harm anyone. Doctors aren't Gods. We're just human beings."

Apologies put state's doctors at risk

"I'm sorry."

"This shouldn't have happened."

"Please accept my condolences for your loss."

Apologies like these from doctors to patients and families may happen more often in Michigan if so-called "I'm Sorry" legislation pending in Lansing collects more support this time around.

Marleau reintroduced a proposal in late April to let doctors apologize to a patient or family without having to worry about having the comments, unless they were an admission of negligence, used against them in court.

"Families want closure, and sometimes they don't understand that there are two attorneys trying to keep both parties as far apart as possible," Marleau said.

Dr. Joe Schwarz, a Battle Creek ear-nose-and-throat surgeon, said he has "never had blowback" in court from being candid with people. But he added: "You have to know with whom you can be candid and with whom you can't." When he apologies, he said, he might say, "It may have gone better had I done something else, but I made a decision as best as I can with the information I had on hand and I'm sorry this happened."

The legislation, pending before the House Judiciary committee, has been introduced several times since 2003. But the bills got watered down, then failed to attract support, according to Colin Ford, director of state and federal government relations for the Michigan State Medical Society, which has supported the bills

Marleau said he believes growing national efforts to rein in health costs will help push through the proposal this time around, because heading off lawsuits saves money.

Much like real estate, where everything is "location, location, in Lansing, it's timing, timing," Marleau said last week.

Marleau points to the University of Michigan, which began a physician disclosure and apology policy in 2004, as evidence that apologies work. On the patient safety portion of its Web site, U-M officials explain why the policy was created: "We believe that court should be the last resort, not the first, when a medical mishap, complication or near-miss occurs."

U-M has seen a 40% reduction in the number of new lawsuits filed by patients and has cut its health care litigation costs in half, its top attorney Richard Boothman said in a 2009 journal article explaining the school's approach to medical errors. Once a person or family's need for information is satisfied, and if they feel an institution has responded with improvements so the problem doesn't occur again, they are less likely to sue, Boothman said.

The state's trial lawyers association, the Michigan Association for Justice, has taken no position on the legislation, but spokesman Jesse Green said he considers any law worthless without reforms to make insurance companies change language in physician malpractice policies that prohibit apologies.

The State Bar of Michigan typically doesn't take legislative stands, but some of its top leaders support doctor apologies. "To me, it's the right thing to do," said José Brown, a Flint attorney who defends doctors in malpractice cases and who chairs the bar association's negligence section.

He compares a physician apology with a statement a homeowner might make if a dog bit a visitor or the person tripped on their property. Such statements go a long way to help a physician who might have to face a jury, Brown said. "I tell my clients if they are sitting in front of a jury, they would want (the jury) to know they had gone to the family and apologized," he said.

In Maryland, MedChi, the state's largest physician organization, sought changes this year to its 2005 physician apology law to provide stronger prohibitions against using doctors' statements in court.

Marleau's bill, like Maryland's, would allow a doctor's admission of fault to be used in court for cases for true negligence, but Ford, of the Michigan medical society, said most states with physician apology laws have not had problems with doctors' statements routinely being used against them.

Monday, June 14, 2010

Lawyer's Heirs Fight Insurers in $56 Million Policy Intrigue

The Wall Street Journal

Days after New York attorney Arthur Kramer died unexpectedly at age 81, members of his family seated in a lawyer's office were told that in his final years, he had taken out $56.2 million in life insurance.

There was a catch: They weren't the beneficiaries.

Mr. Kramer had bought seven large life-insurance policies and quickly arranged a sale of the right to claim the benefits. Investors, not relatives, would collect upon the death of the prominent attorney, the co-founder of law firm Kramer Levin Naftalis & Frankel and brother of playwright Larry Kramer.

Arthur Kramer's widow, Alice, refused to give the investors a death certificate. And soon she filed suit making an unusual assertion. Her late husband, she alleged, had arranged deals with investors that skirted a state "insurable interest" law, which says people can't procure life insurance on someone they aren't close to. Because his arrangement violated that law, she argued, the $56 million should go to the Kramer estate.

Investors cried foul, saying Kramer family members had agreed to let the investors be the beneficiaries and had been paid for this. Rather than stick to a bargain, said an investor called Life Product Clearing LLC in a federal-court filing, "the Kramers decided instead to savage the late Arthur Kramer's memory and reputation by falsely alleging that this legal giant had spent the last years of his storied life engaging in fraudulent and illicit 'insurable-interest' schemes."

If lawsuits had slogans, the investor continued, "this one's would be 'Dad was a crook—and could we please have the money?'"

The case set off a legal firestorm involving five courts, three insurance companies and investors including Credit Suisse Group. New York state's highest court has agreed to decide a key issue. Insurers and lawyers are watching the case closely.

Lawyers battling the Kramers say the family isn't likely ultimately to collect anything close to $56 million; a document one investor unearthed appears to have weakened the family's case. Still, lawyers say a New York Court of Appeals ruling in Ms. Kramer's favor could give her enough leverage to force a settlement giving the estate part of the insurance proceeds.

Such a ruling also could put in doubt the status of hundreds of giant investor-owned life-insurance policies that were taken out in New York or have other ties to New York, and could have influence in other states.

Ms. Kramer and lawyers for the family declined to comment.

The Kramer case is among the most significant of several hundred wending their way through courts nationwide as families, insurers and investors sort out the legal wreckage from a now-collapsed boom in the market for life-insurance policies purchased by investors.

From 2004 to 2008, tens of thousands of older people sought to make some fast cash by taking out multimillion-dollar policies on their own lives and flipping these to brokers, who resold them to investors like hedge funds and investment banks. The initiative often came from commission-hungry insurance agents, who in some cases paid older people to take out the policies and then misrepresented the seniors' health or wealth to insurance companies. The boom ended for reasons including new state laws, revised actuarial tables and fading investor interest after the 2008 financial crisis.

Insurance companies have gotten courts to unwind some of these policies. But the legal framework isn't simple. Although state laws generally prohibit taking out life insurance on someone without having a stake in the person's well-being, other laws and legal precedents treat life-insurance policies as property that may be sold.

The question before the New York Court of Appeals: Does state law prohibit taking out a policy on your own life and immediately transferring the rights to an investor, never intending the policy as protection for your loved ones? Ms. Kramer takes the position that such a transaction, which is what she says her husband did, is unlawful.

In many states, a remedy for a policy found to have been wrongly taken out would be to void it, with premiums returned. But laws in New York and a few other states have a quirk that's potentially lucrative to families of the deceased: The laws allow the estate to file an action for the insurance proceeds.

Ms. Kramer isn't the only heiress to make such a claim. Days before Mr. Kramer's January 2008 death, a federal judge in New York ruled in a case involving a butcher-store owner who had taken out a $10 million policy on his own life, promptly flipped it to investors for $300,000, then died a month later. His daughter claimed the $10 million should go to her because investors were impermissibly wagering on her father's life.

The investors said the deal was legal and they were entitled to the proceeds. But in a blow to them, the judge said the matter should be sorted out at a trial. In a preliminary ruling, he said under New York law it was permissible to sell a life-insurance policy immediately after taking it out only if the policy had been taken out in good faith, with no prior intent or agreement to transfer it to an investor. After his ruling, the parties settled.

Mr. Kramer co-founded his law firm, Kramer Levin, in 1968, and helped build it into a powerhouse that now has 375 lawyers. He grew wealthy and had homes in New York, California and Stamford, Conn.

He retired in the mid-1990s to start a money-management firm and was joined by his son, Andrew Kramer. Associates and clients describe the senior Mr. Kramer as a sophisticated investor. "We used to have a lot of fun talking about stocks and trading and investing ideas," says Melinda Reach, a former technology-stock analyst. "He seemed to really enjoy finance."

Around 2004, Mr. Kramer began talking with Martin Fleisher, a former associate at his law firm, about financial strategies involving life insurance, according to people familiar with the matter. Mr. Fleisher introduced Mr. Kramer to an insurance broker, Steven G. Lockwood, a former pension attorney at Wachtell, Lipton, Rosen & Katz.

According to those familiar with the matter, for more than a year Messrs. Kramer and Lockwood explored variations on a theme: Mr. Kramer would put down little or no money but would achieve some sort of financial reward for his children. The two eventually settled on a then-popular strategy involving the purchase and resale of large life-insurance policies, for a quick gain.

From June to November 2005, Mr. Kramer took out seven policies on his own life, through three companies. Initially, the $56 million in benefits was payable to family trusts, with three of Mr. Kramer's adult children variously named as trust beneficiaries.

Such trusts are often used by the wealthy for estate planning. But in this case, Ms. Kramer's suit asserts, the trusts were used in an elaborate arrangement to mask a quick transfer of the rights to the insurance benefits.

Her suit, in federal court in Manhattan, states that neither Mr. Kramer nor his children ever paid any premiums on the policies and were never the true beneficiaries, because Mr. Kramer directed the children to assign their trust interests to "stranger" investors, which they did.

The "strangers": investors rounded up by Mr. Fleisher, some of them via Life Product Clearing, an entity he founded.

People familiar with the transactions say the investors, who included Mr. Fleisher himself, paid about $760,000 to Mr. Kramer's children to take the children's place as trust beneficiaries. Such a sale of a trust's beneficial interest typically isn't reported to insurance companies.

The investors, via the trusts, paid the first two years' premiums on the policies—several million dollars. Two years is also the length of a "contestability" period during which insurance companies can comb for misrepresentations on applications. After that, they generally can't challenge a policy's validity in New York and some other states.

In 2007, two years after the policies were taken out, the initial investors sold six of the policies to other investors for $9 million, pocketing a tidy profit, according to investors' filings and people with knowledge of the deals.

A sale of policies does require notification of insurance companies. But by then, their period for contesting the policies had passed.

Old friends of Mr. Kramer say the lawyer loved such complex maneuvers. "That's Kramer," says Maurice Nessen, an original partner at Kramer Levin. "That he took out and then sold those policies—that kind of shrewd dealing was Kramer."

In January 2008, Mr. Kramer became disoriented while skiing at Sun Valley, Idaho. A friend helped him get home to Connecticut. He died two weeks later of a stroke. His untimely death appeared to turn the policies into a windfall for investors.

But six weeks later, his widow filed suit against various parties demanding that proceeds of the policies be paid to her as representative of the estate, of which she was executor.

Her suit came shortly after the ruling in the butcher's case, which had raised the possibility that families might get the proceeds of life-insurance policies owned by investors.

After Ms. Kramer filed her suit, two of the insurance companies, Phoenix Cos. and a unit of Lincoln National Corp., refused to pay out on the policies.

In turn, three investors that had acquired policies alleged breach of contract against insurers and various members of the Kramer family.

One investor, Credit Suisse, appeared to have an ace in the hole. A Credit Suisse unit had bought five of the policies in 2007, about two years after they were issued. Credit Suisse produced documents appearing to show that Alice Kramer herself had signed off on the sale of those policies.

According to a Credit Suisse filing in Connecticut probate court in Stamford, Ms. Kramer and her husband warranted that the family owned the rights to the policies at the point of Credit Suisse's purchase and that nobody other than the family had paid the premiums.

That statement, Credit Suisse said, contradicted Ms. Kramer's lawsuit assertion that the family never truly owned the policies or paid any premiums.

Ms. Kramer in 2007 also agreed in writing not to challenge Credit Suisse's right to the policy proceeds, the investment bank said.

Credit Suisse has reached a confidential settlement with family members involving three policies that total $18.2 million, which were underwritten by the Transamerica unit of Aegon NV. Aegon was part of the settlement, which included two policies Credit Suisse had reassigned to a unit of Wells Fargo & Co.

Ms. Kramer and Credit Suisse appear to have reached some kind of agreement on two other policies, totaling a similar amount, $18 million; according to an affidavit filed in New York court, Ms. Kramer said she wouldn't object if the underwriter of those policies, Phoenix, paid that sum to Credit Suisse.

But Phoenix maintains no one should get the proceeds. It has said in court filings that Ms. Kramer's effort should be rebuffed because the state law she is suing under didn't envision situations where a patriarch worked with investors to originate a life-insurance policy.

In case Phoenix doesn't pay, Credit Suisse has a claim against the Kramer estate. If upheld, the claim could put quite a dent in the estate, which probate documents pegged at $33.7 million after Mr. Kramer's death.

The status of two remaining policies, totaling $20 million, remains hotly contested by the interested parties.

Resolution of the sprawling litigation is on hold, pending the New York Court of Appeals' ruling on the underlying question of whether the policies were illegal from the start.