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Goldman Sachs Not Liable for Failed 580 Million Deal

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Goldman Sachs Group Inc. won a $580 million negligence suit over its role as adviser to speech-recognition pioneer Dragon Systems Inc. in a doomed merger, Bloomberg News reported yesterday. A federal jury rejected the claims of Dragon's founders Jim and Janet Baker and two other shareholders that Goldman Sachs failed to properly vet Belgium-based Lernout & Hauspie Speech Products NV. The all-stock deal in June 2000 was rendered worthless months later when the fraud at Lernout & Hauspie was exposed and the company filed for bankruptcy. The verdict relieves Goldman Sachs of responsibility for a sale that left its clients with worthless shares in a failed company. The four Dragon founders sold a portion of their Lernout & Hauspie shares for $11 million before the stock collapsed and the Bakers lost the technology they spent decades developing.

AIG Asks Greenberg to Inform Court If He Will Challenge Decision

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American International Group Inc. filed legal papers yesterday asking its former chief executive to inform a federal court if he will challenge the company's decision to stay out of his lawsuit against the government, the Wall Street Journal reported today. The suit is being pursued by AIG's longtime former leader, 87-year-old Maurice R. "Hank" Greenberg, through a company he leads. The entity, Starr International Co., was long one of AIG's biggest shareholders. The suit contends the U.S. government extracted onerous terms in its rescue package for AIG, and seeks about $25 billion. The U.S. Court of Federal Claims in Washington, D.C., ruled in July that the case could proceed, after federal officials sought to dismiss it. The court also required AIG to decide whether it would join Starr's complaint. News of AIG's possible involvement in the lawsuit earlier this month unleashed a torrent of criticism that the insurer appeared ungrateful toward taxpayers for the government's rescue effort, one of the biggest of the 2008-09 crisis. AIG said in its filing yesterday that it wants to close the loop on its role in the lawsuit, after its board voted unanimously on Jan. 9 to pass on participating.

Nortel U.S. Disabled Employees Reach Settlement

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Nortel Networks Inc., which filed for bankruptcy in 2009, has reached a settlement with a committee representing its long-term disabled employees over a plan to end disability benefits, according to court documents, Reuters reported yesterday. Nortel, once the largest telecommunication equipment company in North America, said that it will not terminate any of the existing long-term disability benefits for its former employees on or before May 31, unless the company grants the committee a general unsecured claim of $28 million. If the company were to grant the committee an unsecured claim, the proceeds of the claim, minus the administrative costs, would be allocated among the disabled employees and would free Nortel from any further liability. The company has asked only for an initial approval of the settlement agreement with an opportunity for the employees to object to the settlement, according to documents filed on Friday. The initial hearing regarding the approval is expected to take place on Feb. 14. Read more:
http://www.reuters.com/article/2013/01/22/nortel-bankruptcy-mediation-i…

In related news, a mediator overseeing creditor negotiations in Nortel Networks' bankruptcy said yesterday that he is extending talks over how to distribute about $9 billion in cash at the fallen telecom, Reuters reported. Ontario Chief Justice Warren Winkler said in a statement that the mediation, scheduled to end yesterday, had been extended, but did not say for how long. Read more: http://www.reuters.com/article/2013/01/23/nortel-mediation-idUSL1N0ARBA…

Peregrine Financial Fraud Loss Tops 215 Million

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U.S. prosecutors said that Peregrine Financial Group's former chief executive stole more than $215 million from customers of his now-defunct futures brokerage and should be sentenced to the maximum 50 years in jail, Reuters reported yesterday. Russell Wasendorf Sr., who founded the firm, has pleaded guilty to embezzlement but wants a lighter sentence, saying that the loss was less than $200 million and that he used "very basic, simple means" to carry out his fraud, according to documents filed by U.S. prosecutors. Wasendorf, whose attempted suicide sent his firm into bankruptcy last July, is in jail in Iowa and will be sentenced on Jan. 31. U.S. prosecutors say the large loss, the sophisticated nature of the crime, and the sheer number of victims - more than 10,000 - justify his spending the rest of his life behind bars. Prosecutors put the exact loss at $215,530,547, based on Peregrine's bank records, and will call Brenda Cuypers, the firm's chief financial officer, as a witness at the sentencing hearing next week. They had previously pegged the embezzlement only at "more than $100 million," to which Wasendorf pleaded guilty.

FCStone Fights 15.6 Million Ruling in Sentinel Bankruptcy

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INTL FCStone said that it will appeal a federal court ruling ordering it to return $15.6 million to the trustee overseeing the bankruptcy of Sentinel Management Group, Reuters reported on Friday. FCStone, a New York-based commodities brokerage with many farmers for clients, had to return the funds to the trustee because a distribution to former Sentinel clients was unfair, U.S. District Judge James Zagel ruled. Judge Zagel on Thursday ordered FCStone to post an $8 million cash deposit with the U.S. Circuit Court for the Northern District of Illinois pending a judgment in the appeal. Sentinel managed investments for clients, including FCStone, until it collapsed in 2007, when prosecutors say that executives moved customer money out of protected accounts to be used as collateral for loans to Sentinel's own trading operations.

Goldman Says Dragon Founders Scapegoating It Over Sale

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A Goldman Sachs Group Inc. lawyer told a federal jury the founders of speech-recognition pioneer Dragon Systems Inc. are scapegoating the investment bank for their own mistakes in a $580 million all-stock sale rendered worthless when the buyer was exposed as a fraud, Bloomberg News reported today. In closing arguments yesterday in Boston federal court in a lawsuit accusing Goldman Sachs of negligence, the attorney said Dragon co-founder Janet Baker and Chief Financial Officer Ellen Chamberlain ignored the bank’s advice to hire accountants to further vet Belgium-based suitor Lernout & Hauspie Speech Products NV and rushed the deal amid Dragon’s cash-flow problems in 2000. Donovan blamed Baker, also Dragon’s former chief executive officer, for negotiating a change from a half-cash/half-stock deal to an all-stock deal without consulting the banking team. Lawyers for Dragon argued New York-based Goldman Sachs committed gross negligence, committed misrepresentation through key omissions and should have stopped the deal because of unanswered questions about Lernout & Hauspie’s revenue.

Tribune to Drop Clawback Lawsuits Against Many Top Executives

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Just out of bankruptcy, Tribune Co. intends to drop the bulk of some 170 lawsuits that targeted senior media executives who cashed in on the going-private deal that ruined the company's finances, Dow Jones Daily Bankruptcy Review reported yesterday. The in-court announcement on Wednesday came as Tribune moved to take control of part of the flood of litigation touched off by its 2008 collapse into chapter 11, which happened less than a year after a leveraged buyout. Lawsuits will continue against upper-echelon executives such as former Chief Executive Dennis FitzSimons, who pocketed $47 million out of the deal, court papers say. Tribune's chapter 11 plan divided the litigation spoils of the failed LBO, giving creditors the right to chase the big-ticket causes of action against top-ranking insiders involved in the 2007 LBO. Most of that action is in a New York court, with creditors relying on the findings of a bankruptcy probe that found the taint of fraud on part of the LBO.

Howrey Trustee Targets Former Partners

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Nearly two years after Howrey went under, the trustee overseeing the defunct firm's chapter 11 case is ramping up his efforts to recover tens of millions of dollars from former partners and the firms they moved to, American Law Daily reported today. A total of 71 firms hired the 302 partners streaming out of Howrey in the months leading up to its March 2011 dissolution. Trustee Allan Diamond says that he is seeking about $100 million in clawback claims for money paid to former partners when the firm was likely insolvent, as well as an estimated up to $100 million more for "unfinished business" claims stemming from work those partners took with them to their new firms. Diamond says that he plans to take a new approach to reach settlements in the Howrey case by presenting law firms with a bundled settlement plan that includes both the claims against individual partners and the unfinished business claims against the firm. How the firm and its partners decide to divvy up the responsibility and pay the estate is up to them, he says. Also, unlike in the Dewey case, where the estate chose to recover money paid to partners only after January 2011, Diamond says that he does not plan to have a hard-and-fast date. Instead, he'll approach each settlement "with a rational model based upon the strength of my claim at various points in time."

Elpida Memory Clears Hurdle on Way to Micron Deal

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Elpida Memory Inc. won bankruptcy court approval for technology deals over the objections of U.S. bondholders, who argued the agreements were an attempt to bind the bankrupt chipmaker to a proposed $2.5 billion sale to Micron Technology Inc., Reuters reported yesterday. Bankruptcy Judge Christopher Sontchi said that he found no evidence of collusion or improper motives yesterday in Elpida's technology licensing deals with Micron and a $15 million patent sale to Rambus Inc. U.S. bondholders opposed the deals because they said that they would effectively tie Elpida to its proposed sale and were unfairly beneficial to Micron. Elpida said that it would be able to immediately begin improving its operations thanks to the licensing agreements with Micron.

ABIs Chapter 11 Commission Eyes Updates to Bankruptcy Code

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ABI Bankruptcy Brief | January 17 2013


 


  

January 17, 2013

 

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  NEWS AND ANALYSIS   

ABI'S CHAPTER 11 COMMISSION EYES UPDATES TO BANKRUPTCY CODE



With the Bankruptcy Code now 35 years old, 2013 looks to be a key year in developing a replacement as ABI's Chapter 11 Commission continues its study of chapter 11 with a "top to bottom look" at the Code, The Deal reported yesterday. No specific changes have been recommended to date, and the Commission will not be close to specifics until it gets reports from all 13 of its advisory committees, according to Commission Co-Chair Al Togut of Togut, Segal & Segal LLP (New York). The commission, which is just looking at corporate chapter 11 and the parts of the code that affect business bankruptcies, expects to complete its report in the spring of 2014, said fellow Co-Chair Bob Keach of Bernstein Shur (Portland, Maine), adding that by the end of 2013 the commission should have a good idea of what the report will look like. The report will have two components: ideas for change where there is a consensus and proposals that lack a consensus. Since the ABI does not lobby Congress for legislation, an organization or a combination of organizations will likely work to convert the report into legislation, said Keach. "The idea is to develop a statute for the next 40 years that will get us through as well as this one did," Keach says. Read more.

PENSION FUNDING GAP WIDENS FOR BIG CITIES



A study released on Tuesday by the the Pew Center on the States found that major U.S. cities emerged from the financial crisis with increasingly underfunded pension and retiree health care plans, the Wall Street Journal reported today. Cities employing nearly half of U.S. municipal workers saw their pension and retiree health care funding levels fall from 79 percent in fiscal year 2007 to 74 percent in fiscal year 2009, according to the latest available data, the Pew report stated. The growing funding gulf, which the study estimated at more than $217 billion for the 61 cities in the study, raises worries about local finances at a time when states are also struggling to recover from the recession. More than half, or some $118 billion, of the projected pension shortfall stems from unfunded retiree health care costs, according to the Pew report. Read more. (Subscription required.)

ABI will be holding a media teleconference on Tuesday, Jan. 22, at 11 a.m. ET with experts examining municipal distress in 2013. There are limited spots available to ABI members that would like to join the call next week. Contact John Hartgen, ABI's Public Affairs Manager, at jhartgen@abiworld.org if you would like to participate in the teleconference.

CFPB'S NEW MORTGAGE RULES AID HOMEOWNERS



U.S. banks will have to do more to help struggling mortgage borrowers keep their homes under final rules released today by the Consumer Financial Protection Bureau (CFPB), the Wall Street Journal reported today. Mortgage-loan servicers, which collect borrowers' loan payments, will have to evaluate troubled borrowers for all loan-assistance options permitted by mortgage investors such as Fannie Mae and Freddie Mac, as well as private investors, according to the CFPB rules that will take effect in a year. Currently, no national standard exists for how mortgage servicers must treat defaulting borrowers. The lending industry "must consider all options available from the mortgage owners or investors to help the borrower retain the home," said CFPB director Richard Cordray. The industry "can no longer steer borrowers to those options that are most financially favorable for the servicer." The agency's move follows numerous federal and state efforts to regulate the industry, which came under fire after reports in 2010 found that banks were foreclosing on borrowers without properly reviewing documents and other paperwork, a practice dubbed "robo-signing." In 2011, regulators found abuses of foreclosure processes at 14 lenders. Ten of those lenders agreed to an $8.5 billion settlement of regulators' allegations. Read more. (Subscription required.)

ANALYSIS: "ODD COUPLE" IN U.S. HOUSE TO TACKLE MORTGAGE FINANCE



The will of the new Congress to begin rebuilding the U.S. mortgage finance system rests largely in the hands of Reps. Jeb Hensarling (R-Texas) and Maxine Waters (D-Calif.), known to be partisan fighters from opposite ends of the ideological spectrum, Bloomberg News reported yesterday. Hensarling is the new chairman of the House Financial Services Committee, while Waters is the highest-ranking Democrat. "While we clearly have profound philosophical differences – some might call us Capitol Hill’s newest odd couple – we are exploring areas of common concern where we hopefully can work together," Hensarling said. In addition to grappling with proposals to tweak and amend the Dodd-Frank regulatory law, they will be seeking common ground on what may be the panel's biggest issue this year: The future of Fannie Mae and Freddie Mac. For Hensarling, the solution is to abolish the government-owned mortgage companies and completely privatize the mortgage market. Waters argues that some government involvement is needed to preserve the 30-year fixed home loan. It is likely that the two lawmakers eventually will support a plan that would shrink the role of Fannie Mae and Freddie Mac without threatening to choke off the flow of money into home loans. Read more.

FLORIDA DEFIES HOUSING REBOUND AS FORECLOSURES SOAR



More than six years after subprime lending and overbuilding led to the recent U.S. real estate slump, RealtyTrac Inc. reported that Florida had the biggest increase in home seizures last year, and the highest foreclosure rate, Bloomberg News reported today. One in every 32 Florida households received a notice of default, auction or repossession in 2012, more than double the average U.S. rate of one in every 72, according to RealtyTrac Inc.'s report. Home repossessions increased by 16,276 during the year to 84,456, the biggest gain nationwide. Adding to the state’s woes is a backlog of foreclosures caused by a required court review of each case. Judicial supervision of repossessions is slowing Florida’s rebound, in contrast to California and Arizona, so-called nonjudicial states, where lenders send notices to delinquent borrowers and record defaults at the county level without court intervention, said Lawrence Yun, chief economist of the National Association of Realtors. It took 853 days on average in Florida to complete a foreclosure in the fourth quarter, the third-longest behind New York and New Jersey, RealtyTrac said in today’s report. The U.S. average rose to 414 days from 348 days a year earlier, the most since the data firm began tracking the metric in 2007. Texas had the shortest period at 113 days. Almost 20 percent of outstanding Florida loans were more than 30 days delinquent or in foreclosure in November, the largest share of non-current mortgages in the nation, according to data provider Lender Processing Services. Read more.

ANALYSIS: REWRITING U.S. TAX LAW HAS CONSENSUS WHILE FIX PROVES ELUSIVE



Maintaining a bipartisan consensus in Congress to rewrite the U.S. tax code will be difficult as there is little agreement on what a tax overhaul means and what it is supposed to achieve, according to a Bloomberg News analysis yesterday. Republicans, who control the U.S. House, want lower tax rates and fewer breaks in a simpler system that raises no additional revenue. The Obama administration and many Democrats endorse some of those goals – particularly corporate rate reduction – while viewing a tax rewrite as a way to guarantee more revenue from top earners. That split will challenge lawmakers as they decide whether to rewrite the code as part of budget talks or work on a major tax bill without a fiscal agreement. Compromise remains elusive, though the code is more convoluted -- and therefore, ripe for change -- following passage of a law Jan. 1 that raised marginal rates and reinstated limits on personal exemptions and deductions. Read more.

BLOOMBERG'S LATEST "BILL ON BANKRUPTCY" VIDEO: MF GLOBAL CREDITORS UNDETERRED BY LOW VALUE



The low valuation creditors of MF Global Holding Ltd. put on their liquidating chapter 11 plan is not deterring the bond market where debt is being sold for roughly twice the predicted recovery for unsecured creditors of the liquidating commodity broker's holding company. Bloomberg Law's Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle explore this and other current cases in their latest video. Click here to view.

TAKE AN IN-DEPTH LOOK AT CREDITORS' COMMITTEES AND THE ROLE OF THE INDENTURE TRUSTEES AT ABI'S 31ST ANNUAL SPRING MEETING



The 2013 Annual Spring Meeting, to be held April 18-21, 2013, at the Gaylord National Resort and Convention Center in National Harbor, Md., features a roster of the best national speakers, while the depth and scope of topics offer something for everyone. Specifically, four concurrent workshops will cover various “tracks,” including programs for attorneys in commercial cases, a track for restructuring professionals, a track of professional development programming and a track dealing solely with consumer issues. More than 16 hours of CLE/CPE is offered in some states, along with ethics credit totaling 3 hours, making the cost only about $50 per credit. In addition, committee sessions will drill down on other topics to provide you with the most practical and varied CLE/CPE experience ever. Sessions include:



• 17th Annual Great Debates

• Mediation: An Irrational Approach to a Rational Result

• Current Issues for Financial Advisors in Bankruptcy Cases

• The Individual Conundrum: Chapter 7, 11 or 13?

• The Power to Veto Bankruptcy Sales

• Real Estate Issues in Health Care Restructurings

• Law Firm Bankruptcies

• How to Be a Successful Expert

• The Ethical Compass: Multiple Ethical Schemes Applicable to Financial Advisors

• Chapter 9s, Nonprofits and Other Nontraditional Restructuring Processes

• And much more!

The Spring Meeting will also feature a field hearing of the ABI Commission to Study the Reform of Chapter 11, a report from the ABI Ethics Task Force, a luncheon panel discussion moderated by Bill Rochelle of Bloomberg News, and a Final Night Gala Dinner featuring a concert by Joan Jett and the Blackhearts!

Register today!

ABI IN-DEPTH

ABI LIVE WEBINAR: REVISITING RADLAX AND HALL – NEW LEGAL AND PRACTICAL IMPACT OF THE DECISIONS



See why this was the top-rated panel at the ABI Winter Leadership Conference last month! Join the expert panel on Feb. 19 from 12:00-1:15pm EST as the summarize and discuss the legal impact and practical implications of the Supreme Court’s 2012 decisions in Radlax and Hall. Participants include:

Susan M. Freeman of Lewis and Roca LLP (Phoenix)

Adam A. Lewis of Morrison & Foerster LLP (San Francisco)

• Prof. Charles J. Tabb of the University of Illinois College of Law (Champaign, Ill.)

Eric E. Walker of Perkins Coie LLP (Chicago)

Click here to register!

LATEST CASE SUMMARY ON VOLO: TIMCO LLC V. T AND M SALES AGENCY INC. (IN RE TIMCO LLC; 6TH CIR.)



Summarized by James E. Bailey III of Butler Snow O'Mara Stevens & Cannada PLLC

The Sixth Circuit ruled that the appeal of the bankruptcy court's decision to remand a case removed by state court action to confirm an arbitration award that was affirmed by a district court was not reviewable by the court of appeals under 28 U.S.C. § 1334(d). The appeal of the order granting relief from the automatic stay to allow the state court action to proceed was moot where the debtor failed to obtain stay pending appeal and the state court had entered a valid order confirming an arbitration award.

There are more than 700 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI’s Volo website.

NEW ON ABI’S BANKRUPTCY BLOG EXCHANGE: HIGH-INCOME EARNERS NOT BARRED FROM PASSING BANKRUPTCY'S MEANS TEST



The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. A new post discusses the misconception that bankruptcy's means test bars high-income earners from qualifying for chapter 7 relief.

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

ABI'S INDUBITABLE EQUIVALENTS: TELL US A TUNE AND WE'LL SING YOU THAT SONG!



ABI's Indubitable Equivalents need your help: Tell us your favorite Rock and Roll tune - that elusive classic that takes you back, makes your feet tap, your head bang, and your horns come out! If we pick your song, you get widespread promotion by the band and you'll receive a free CD of IE’s greatest hits!

To enter, log onto www.abiband.com or “like” the Band’s Facebook page.

The fine print: No purchase necessary. You can enter as many times as you want. Multiple winners will be selected. Winners will be announced on the IE website and on Facebook. Entry deadline: January 31.

ABI Quick Poll

After Stern, bankruptcy courts do not have the constitutional authority to enter final judgments on fraudulent conveyance claims.

Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.

INSOL INTERNATIONAL



INSOL International is a worldwide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 37 member associations worldwide with more than 9,000 professionals participating as members of INSOL International. As a member association of INSOL, ABI's members receive a discounted subscription rate. See ABI's enrollment page for details.

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MONDAY:

 

 

WCBC 2013

Jan. 21, 2013

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NEXT THURSDAY:

 

 

ACBPIKC 2013

Jan. 24-25, 2013

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COMING UP:

 

 

ACBPIKC 2013

Feb. 7-9, 2013

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ABI Live Webinar: Revisiting RadLAX and Hall- New Legal and Practical Impact of the Decisions

Feb. 19, 2013

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ACBPIKC 2013

Feb. 20-22, 2013

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Paskay 2013

March 7-9, 2013

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BBW 2013

March 22, 2013

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ASM 2013

April 18-21, 2013

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  CALENDAR OF EVENTS
 

2013

January

- Western Consumer Bankruptcy Conference

     January 21, 2013 | Las Vegas, Nev.

- Rocky Mountain Bankruptcy Conference

     January 24-25, 2013 | Denver, Colo.

February

- Caribbean Insolvency Symposium

     February 7-9, 2013 | Miami, Fla.

- ABI Live Webinar: Revisiting RadLAX and Hall- New Legal and Practical Impact of the Decisions

     February 19, 2013


  

- VALCON 2013

     February 20-22, 2013 | Las Vegas, Nev.

March

- 37th Annual Alexander L. Paskay Seminar on Bankruptcy Law and Practice

     March 7-9, 2013 | St. Petersburg, Fla.

- Bankruptcy Battleground West

     March 22, 2013 | Los Angeles, Calif.

April

- Annual Spring Meeting

     April 18-21, 2013 | National Harbor, Md.


 
 

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