Lawyers Caught In Web Of Deceit

A complaint filed in federal court against a Bozeman, Montana man Wednesday offers an unusual insight into the tactics used by some lawyers to secure information that could help their clients.

According to the complaint, Michael Lair first contacted lawyers representing a large pharmaceutical company engaged in a high-profile litigation against a hedge fund in March 2006, offering to provide information that could help their suit. The lawyers paid him $6,000 but he never provided the promised information.

Six months later, Lair turned the tables and contacted lawyers representing the hedge fund and offered to provide them with information for $50,000.

But this time, the lawyers called the Federal Bureau of Investigation, a probe was launched and resulted in a complaint for wire fraud filed against Lair in the U.S. District Court for the Southern District of New York.

Lair is scheduled to be arraigned Thursday in Montana.

Neither the drug company, nor the hedge fund is identified in the complaint against Lair. Nor are two other victims; lawyers representing a large insurance company involved in litigation with its former chief executive and chairman.

Allegations Over Share Price

Lawyers representing Canadian company Biovail Corp. (BVF) told Dow Jones Newswires that they were first contacted by Lair shortly after the company filed its lawsuit against SAC Capital Management LLC and research firms it accuses of playing dirty.

In a complaint filed in New Jersey state court in late February, Biovail accused hedge funds of conspiring with research firms Gradient Analytics Inc. and Gerson Lehrman to produce tainted bearish reports to undermine the company's share price.

"He called us and said he had a witness with information about SAC and Rocker Partners that would be relevant to the case," said Michael Bowe of Kasowitz, Benson, Torres & Friedman LLP, the law firm representing Biovail in its lawsuit against hedge funds.

Bowe and Marc Kasowitz said Lair came to New York to meet with them after they agreed to pay his expenses and travel cost.

"We decided he had nothing to offer and paid his airfare and expenses," Bowe said. Asked why his firm paid Lair if he had no valuable information, Bowe explained "we weren't going to quibble over $6,000."

Bowe said that Kasowitz Benson filed a complaint against Lair for fraud in September after the firm was contacted by other lawyers about the man. That complaint was filed in the Supreme Court of the State of New York, County of New York on Sept. 13.

A person familiar with the matter said SAC's lawyers were first contacted by Lair on Friday Sept.15 and contacted the FBI the following Monday.

A spokesman for SAC declined to comment.

Turning The Tables

According to the complaint filed in the Southern District of New York, Lair contacted lawyers for SAC and told them that Biovail's lawyers had hired him to use illegal and unethical investigative techniques to obtain information about SAC, including hacking into computers used by fund's employees, illegally obtaining financial records and using pretexting to obtain telephone records of SAC's employees.

Lair told SAC's lawyers that he told Biovail's legal representatives that it would be illegal to perform these tasks and refused to carry them out.

Biovail's lawyers told the FBI that they never instructed Lair to conduct any illegal or unethical investigative tactics to investigate SAC.

Lair also contacted an attorney working for a large insurance company involved in litigation. That insurance company isn't identified in the criminal complaint against Lair, but people familiar with the matter said it's American International Group Inc. (AIG).

In that instance, Lair told AIG's lawyers in September that a lawyer representing ex-CEO Maurice "Hank" Greenberg hired him to illegally obtain information about AIG, including hacking into the company's computers and email accounts.

Greenberg is represented by Robert Morvillo of Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C.

According to the complaint, Morvillo, who is not identified in the document, told the FBI that he had been contacted by Lair in spring 2005. The lawyer said that Lair offered information about AIG and demanded payment before providing it. According to the complaint, Lair received $75,000 from Morvillo's firm but never provided information in return. Morvillo told the FBI he terminated the relationship with Lair in September 2006 because of misrepresentation made by Lair.

Morvillo said that because he is a potential witness in the case against Lair, he couldn't answer any questions.

Greenberg retired shortly before he and a top lieutenant were accused of using improper accounting to bolster AIG's bottom line; charges that Greenberg has denied. Probes by regulators, including New York Attorney General Eliot Spitzer and the Securities and Exchange Commission forced AIG to restate several years of results.

The FBI searched two storage units rented by Lair in Bozeman earlier this month and found documents indicating that he had approached other lawyers involved in high profile legal cases. The FBI said it didn't find indications that law firms contacted by Lair engaged in illegal and unethical tactics.

Abbott Sevoflurane Patent Invalid In Baxter Case

A U.S. appeals court said Thursday that an Abbott Laboratories Inc. (ABT) patent covering the formulation of a inhaled anesthetic called sevoflurane is invalid, further protecting Baxter International Inc.'s (BAX) right to market a version of the drug.

Neither company sees a market impact from the ruling, as it maintains a situation that's been in place since earlier this year when Baxter started selling its generic version of the anesthetic.

Baxter developed sevoflurane in the 1970s, licensed patents to another company called Maruishi Pharmaceuticals Co., and that company later licensed the patents to Abbott. A legal battle has dragged on for years involving Abbott's allegation that Baxter infringed on an Abbott patient related to the combination of sevoflurane and water.

The U.S. District Court for the Northern District of Illinois ruled in September 2005 that the patent in question, owned by Abbott and a company called Central Glass Co., was not infringed by Baxter's generic product. Abbott appealed that ruling, and Baxter filed a cross-appeal on the patent's validity.

In a ruling released Thursday, the U.S. Court of Appeals for the Federal Circuit reversed the district court's validity judgment, arguing that an older patent related to the drug "anticipates the claims" in Abbott's patent.

Baxter spokeswoman Deb Spak said the ruling doesn't have an impact for the company, as it's already selling sevoflurane in the U.S. and other markets around the world.

Abbott spokesman Scott Stoffel said in a statement that the company does not agree with the court's decision, and that Abbott is also evaluating its legal options.

"However, a generic form of the product from Baxter has been available since the beginning of 2006 and accordingly, this decision, while disappointing, does not alter the market dynamic," Stoffel said.

Baxter has not projected sevoflurane sales and doesn't break out sales of individual drugs in its earnings releases.

Abbott sells sevoflurane under the names Ultane and Sevorane. Those products posted U.S. sales of $203 million through the first three quarters of 2006, down 17.4% from the same period last year amid generic competition. Overall sales through three quarters were $604 million, down 5.7%

Shares of Abbott recently traded 2.2% lower at $46.26. Baxter shares were recently down 1.4% to $45.19.

Jury Says Genentech Doesn't Have To Pay Doctor

A federal jury on Wednesday found Genentech Inc. (DNA) doesn't have to pay a Pennsylvania ophthalmologist for research that he claimed helped the company develop a fast-selling new eye-disease drug.

Kourosh Dastgheib, of Lebanon, Pa., claims he shared research materials with the biotechnology company in the mid-1990s that were key to developing Lucentis, which was approved by the Food and Drug Administration earlier this year to treat wet age-related macular degeneration. The disease can cause blindness, and studies have shown Lucentis to be effective in combating vision loss.

Dastgheib filed a lawsuit against Genentech in 2004, alleging it walked away from a 1995 agreement to pay him royalties of 1% of future sales of the drug and recognize his work in the scientific community, if he shared his research with the company. Dastgheib's lawyer suggested to the jury Tuesday Genentech should pay as much as $1.16 billion for his contribution.

But the nine-member jury in federal court in Philadelphia rejected Dastgheib's claims that Genentech was unjustly enriched by his alleged contribution, that it violated a North Carolina state law and that it committed fraud, according to Genentech attorney Kenneth Gallo. The nine-member jury reached the verdict one day after getting the case, following more than two weeks of testimony.

Genentech maintained there was no evidence of any agreement with Dastgheib, and that its payment of $2,000 to him in the mid-1990s was sufficient reimbursement for his work.

"We're very pleased that the jury agreed with Genentech that Doctor Dastgheib is not entitled to any proceeds from Lucentis," Genentech spokeswoman Robin Snyder said. "Our scientists and collaborators spent more than a decade in research-and-development efforts to bring this breakthrough treatment to patients. The company has invested hundreds of millions of dollars to support this R&D."

Dastgheib and his lawyers couldn't immediately be reached.

Genentech shares rose $1.39, or 1.7%, to $83.58 Wednesday.

Dastgheib had sent Genentech microscopic slides of human eye samples and other materials, which he claims were instrumental in confirming the presence of a substance known as vascular endothelial growth factor, or VEGF, in cases of wet AMD. Lucentis is designed to attack VEGF. Dastgheib was in a medical residency program at the time in North Carolina.

"He had a theory, he proved the theory, he wrote about it, and (Gententech) went to him to get what they needed," Dastgheib's lawyer, Raymond Niro, told jurors in closing statements Tuesday.

But Genentech's lawyer, Gallo, told jurors there was no agreement for Genentech to pay Dastgheib a 1% royalty and recognize his work in the scientific community. He said Genentech, of South San Francisco, Calif., sent him a $2,000 check as reimbursement for his time collecting the research materials, which Dastgheib cashed.

"There is no evidence of a promise," Gallo said. Dastgheib claims the agreement was struck during a telephone conversation with a Genentech employee who subsequently left the company.

Gallo also argued the materials sent by Dastgheib didn't play a key role in Genentech's decision to proceed with developing the drug. He said other scientists had confirmed the presence of VEGF in cases of wet AMD.

Gallo also said Dastgheib waited too long to bring legal action against Genentech, exceeding the statute of limitations. The jury found that Dastgheib did file his suit within the statute of limitations, but rejected his underlying claims.

Genentech developed Lucentis in a partnership with Novartis AG (NVS) of Switzerland. Genentech, which is majority-owned by Roche Holding AG (RHHBY) of Switzerland, holds commercial rights for Lucentis in the U.S., while Novartis has marketing rights for the rest of the world.

Lucentis racked up third-quarter sales of about $153 million, exceeding expectations for the new drug.

Although Lucentis sales have been brisk, it has been dogged by controversy. Some experts say another Genentech drug, the cancer treatment Avastin, is as effective as Lucentis in treating wet AMD, but much cheaper. The National Institutes of Health said earlier this month it planned to fund a study comparing the two drugs.

Merck Adds US, Canada Tax Disputes To Woes

Merck & Co. disclosed four separate tax disputes in the U.S. and Canada with potential liabilities totaling $5.58 billion, adding to the financial pressures weighing on the drug maker as it continues to battle tens of thousands of lawsuits related to its withdrawn painkiller Vioxx.

The newly disclosed liabilities, which Merck says it is fighting, signal a crackdown by tax authorities in the U.S. and Canada on some of the maneuvers pharmaceutical companies employ to maximize profits on their drugs. In September, drug giant GlaxoSmithKline PLC agreed to pay the U.S. government $3.4 billion to settle a dispute over how to tax dealings between the British company and its American subsidiary.

The fact that Merck is in four sizable tax disputes at once is unusual and the liabilities involved are big, but Merck likely can afford to pay them. As of Sept. 30, it had $15.22 billion in current assets, including $6.22 billion in cash. But an unfavorable resolution to the disputes would hurt the company's operations and cash flow in the quarter it made the payment. At least one of the transactions in dispute also provided an income statement benefit, which could potentially be reversed depending on the outcome. In the third quarter, Merck earned $940.6 million on $5.41 billion in sales.

Moreover, Merck is facing liabilities that could reach tens of billions of dollars related to Vioxx, the painkiller it withdrew from the market in September 2004 after evidence emerged that it increased the risk of heart attacks and strokes. Merck has been fighting the cases one by one. So far, it has won five cases and lost four.

In a recent interview, Merck's chief executive officer, Richard Clark, said the company was "very conservative" in its tax practices. He also said the potential liabilities weren't a concern, given Merck's financial wherewithal. "I don't lose any sleep over that," he said.

Among the new disclosures Merck made in a filing with the Securities and Exchange Commission, the company for the first time put a dollar figure on a previously disclosed dispute with the Canada Revenue Agency. According to Merck's filing, the Canada Revenue Agency issued the Whitehouse Station, N.J., company a notice on Oct. 10 for $1.76 billion in back taxes and interest "related to certain intercompany pricing matters."

The dispute involves revenues Merck had in 1998 to 2004 on its blockbuster asthma and allergy drug Singulair, according to someone familiar with the matter. Singulair was originally developed by Merck's Canadian subsidiary in Montreal, entitling the Canadian government to tax revenue on the drug, the person said.

U.S. Patent & Trademark Office records show that, in December 1998, Merck transferred patents associated with Singulair to a Barbados subsidiary called Tradewinds Manufacturing SRL. At the time, Barbados was considered a tax haven because of a variety of favorable tax provisions it offered.

In such "transfer pricing" disputes, tax authorities argue either that too much revenue is being reported in a low-tax jurisdiction, or that too many expenses are being reported in connection with a high-tax jurisdiction, thus lowering taxable income there.

In its SEC filing, Merck said it disagrees with the position taken by the Canadian tax authorities, but said it could be "required to post a deposit of up to one-half the tax and interest assessed which could have a material adverse effect on the Company's cash flows in the quarter in which the deposit is made." Merck said it will contest the assessments.

Large transfer pricing disputes are increasingly common. GlaxoSmithKline's settlement with the IRS came after the agency alleged that Glaxo's American unit overpaid its British parent for drugs, largely for antiulcer drug Zantac. Those overpayments had the effect of reducing the company's U.S. profit, and also its U.S. tax bill. The IRS said the settlement was the largest ever.

Software maker Symantec Corp. and telecom equipment manufacturer Motorola Inc. have also disclosed sizable transfer pricing disputes with the IRS. Symantec and Motorola disagree with the IRS's position. Symantec is suing the IRS over the proposed adjustments and Motorola says it is planning to dispute the finding.

Of the $5.58 billion in potential liabilities disclosed yesterday, Merck had previously disclosed $2.3 billion related to a partnership deal dating back to 1993. That deal was the subject of a page-one article in The Wall Street Journal in September, which disclosed the complex transaction allowed Merck to shift taxable income to a subsidiary of a United Kingdom bank, Abbey National PLC, but avoid the financial loss of shifting comparable book income. The disputed $2.3 billion in taxes cover the years 1993 to 2001. The total liability could be higher if the IRS assesses additional penalties.

Merck said the two other disputes, which are with the IRS, stem from "minority equity financing" deals. But the details of those deals are unclear.

Dow Chemical Co. is also in a dispute with the IRS and Justice Department that is very similar to the deal that Merck struck with Abbey. Dow has called that deal a "minority equity financing" as well.

Land grab after Hurricane Katrina leaves out many hard-hit property owners

Mississippi-Rebuilding the Gulf Coast's coastal casino industry in the wake of Hurricane Katrina turned some landowners around here into instant millionaires, but 70-year-old retiree Mary Rose and many of her neighbors - among them, Vietnamese migrants who work the shrimp boats - were left behind by the land rush.

Rose lives in Point Cadet, a hurricane-battered, working-class neighborhood in southeast Biloxi where casino operators snatched up tracts of land from property owners whose homes were flattened by the Aug. 29, 2005, hurricane.

This peninsula has been home to generations of shrimpers and fishermen with roots in eastern Europe and, in recent decades, Vietnam.

A few weeks after Katrina, Mississippi passed a law allowing floating casino barges to move ashore and build up to 800 feet (240 meters) inland - a change designed to jump-start the region's economic recovery and protect the hotel resorts from future storms.

The move sent property values soaring for some homeowners, but the early land grab by casinos and condominium developers passed over many others who live near the water.

In March, one of Rose's neighbors across the street sold his property to a casino for more than $1 million (€780,000), much more than it was worth before Katrina. Rose, however, says she has not had a single offer to buy her land. She believes her property is within 800 feet (240 meters) of the water line, but an interim map produced by the city suggests otherwise. There is no definitive map yet available.

"Nobody said life was fair," said Rose, who lives in a government-issued trailer on a weed-choked lot where her home once stood. "Why would I waste my energies worrying about it? I'm not jealous of anyone. It's not my nature. I wish them all the best."

Across the street from Rose's property is a nearly vacant lot where Kenny Barhanovich once lived. Isle of Capri, one of the first casinos to reopen after the storm, purchased his 13,600-square-foot (1,224-square-meter) property for slightly more than $1 million (€780,000) - a whopping $80 (€62) per square foot.

"It made life a little easier," said Barhanovich, 60, a charter boat captain. "I could retire next year if I wanted to."

It is not getting any easier for trailer-bound homeowners like Rose to find buyers willing to pay top dollar. Industry observers say the casinos' shopping spree on the coast is in a lull.

Nine of the 12 casinos that operated on Mississippi's Gulf Coast before Katrina have reopened. In September, the reopened casinos had nearly 14,000 employees and took in $241 million (€188 million), the most ever generated during that month since gambling was legalized here in 1992, according to the state.

Mayor A.J. Holloway, an outspoken advocate of gaming, has predicted that Biloxi alone will host as many as 22 casinos within a decade.

Paul Girvan, a New Orleans-based managing director of The Innovation Group, a gaming industry consulting firm, said the pace of expansion has been tempered by high construction costs and uncertainty over how many casino operators will enter the Gulf Coast market.

"There have been so many people kicking the tires. The ones who are seriously kicking the tires are waiting until things settle a bit," he said.

Several casinos tower over the devastated landscape now, and "the Point" has become fertile ground for commercial real estate brokers like Raymond Stronsky, a broker for six different casinos.

"This is the hottest real estate in town," he gushed as he drove down a nearly deserted street lined by gutted houses.

Since the storm, Stronsky has helped casinos buy about 45 parcels in Biloxi and neighboring D'Iberville for a total of roughly $30 million (€23 million). Most of that dates back to January, when Landry's Restaurants began closing on 23 parcels in Point Cadet where the company wants to build a Golden Nugget-brand casino.

Many homeowners who turned down offers in the early aftermath of Katrina have found interest in their property rapidly waning. Stronsky blames unrealistic expectations.

"I hate to say it, but greed has actually set in something fierce around here since Katrina," he said. "Land grabbing is over. With the prices right now, nobody can do anything."

That is bad news for Ronald Baker, who has been eager to sell his property ever since Katrina destroyed his uninsured home. Isle of Capri only offered him $20 (€15) per square foot, but he quickly turned it down.

"I don't want to be greedy or nothing, but I want to get what everybody else gets," Baker said. "I'm going to hold on and see what comes up."

Mary Rose is part of a group of about 20 property owners who are teaming up to try to sell their Point Cadet land. Forming a united front, they reason, will make their land more attractive to developers who may be reluctant to negotiate deals individually.

Even though Rose was born and raised here, she is eager to move on.

"I figure I'm good for 10 more years and I want to enjoy them," she said. "There are still some things I want to do with my life, and I need money to do them. But that may not be in the stars for me."

Man Cleared by DNA Awarded $450,000

Personal Injury: Texas has awarded more than $450,000 to a man who was exonerated by DNA evidence after spending 18 years in prison for a sexual assault conviction.

Arthur Mumphrey was released from prison in January after his lawyer found DNA evidence clearing him in the rape of a 13-year-old girl. Mumphrey had been sentenced in 1986 to 35 years in prison.

Gov. Rick Perry pardoned Mumphrey in March, clearing his record and making him eligible for compensation. Under state law, a person pardoned based on innocence is eligible for up to $25,000 for each year in prison with a cap at $500,000.

Mumphrey recently got his first payment of $226,041, according to the Texas Comptroller's Office. An official there said Mumphrey will have to report the compensation to the Internal Revenue Service. It will be up to tax officials to decide if and how much he will be taxed.

Mumphrey, who was 42 when he was released, declined to talk about his plans for the money.

His brother, Charles, confessed to the rape while serving time in jail for unauthorized use of a motor vehicle, shortly after his brother's release. No criminal charges will be filed against Charles Mumphrey because the statute of limitations has expired, prosecutors said.

Judge tosses alleged confession in attack on pregnant woman

Criminal: A judge tossed out the alleged confession of a woman accused of trying to cut a fetus from her neighbor's womb, ruling that police did not have enough evidence to take the defendant into custody at the scene.

Prosecutors have accused Peggy Jo Conner, 38, of attacking Valerie Oskin in Oct. 2005 with a baseball bat and then taking her to a secluded wooded area and slicing Oskin's belly in an attempt to cut the child from its mother.

Both Oskin, 30, and her son, delivered by emergency Caesarean, survived. Conner was charged with attempted homicide, aggravated assault, aggravated assault on an unborn infant and related offenses.

Armstrong County Common Pleas Judge Kenneth Valasek, in a 32-page opinion given Thursday, said state troopers did not collect enough evidence at the scene to warrant taking Conner into custody.

"Simply because (Connor) was present with some blood on her clothes does not, by itself, constitute probable cause to effect a lawful arrest," Valasek wrote.

State troopers have testified that Conner was read her Miranda rights three times before she talked in detail with a trooper as he filled out paperwork about 12 hours after police said they found the two women in the woods.

By that time, Conner had been awake about 24 hours and without food while in police custody, defense attorney David DeFazio has said.

Conner has testified that she didn't feel she was free to leave the police barracks until she gave the final statement. She said troopers pounded on a table and cursed at her.

"I was told if I wasn't guilty then I didn't need a lawyer," Conner has said.

Armstrong County District Attorney Scott Andreassi said the case could go forward without the alleged statements.

Video of violent arrest in Hollywood triggers FBI probe of Los Angeles police officers

Video footage posted on Youtube.com showing a police officer repeatedly striking a suspect in the face during an arrest three months ago has triggered an FBI investigation.

The video shows two officers holding down William Cardenas, 24, on a Hollywood street as one punches him several times in the face before they are able to handcuff him. One of the officers appeared to be pressing his knee on Cardenas' neck, and the struggling suspect yells repeatedly "I can't breathe!"

A Superior Court commissioner who viewed the video nearly two months ago and heard the officers' testimony has already found that their conduct was "more than reasonable" under the circumstances because Cardenas was resisting, the Los Angeles Times reported Friday.

The footage, shot by an area resident, came to the FBI's attention Thursday, prompting investigators to open a civil rights inquiry into the Aug. 11 incident, agency spokeswoman Laura Eimiller said.

The police department has begun its own criminal and administrative investigations into the officers' use of force, said police spokesman Lt. Paul Vernon.

The officers were identified as Alexander Schlegel and Patrick Farrell. Both have been reassigned to administrative work.

"There's no denying that the video is disturbing," Chief William Bratton said at a news conference. "But as to whether the actions of the officers were appropriate in light of what they were experiencing and the totality of the circumstances is what the investigation will determine."

Vernon said Cardenas is a known gang member who had been wanted on a felony warrant for receiving stolen property.

In an arrest report obtained by The Associated Press, the officers said they tried to arrest Cardenas as he and two others were drinking beer on a sidewalk.

Cardenas ran and the officers caught up to him and tripped him before applying handcuffs, the report said.

The officers described repeated blows to the suspect's face in the report, as well as his efforts to resist, and their concern that he might grab one of their guns during the brawl.

"The suspect's hand covered my partner's gun holster so I yelled at my partner to watch his gun. My partner responded by capping his gun and delivering a left elbow to the suspect's face causing the suspect to let go of him," the report said.

With Cardenas still resisting, one officer used pepper spray on him, but that had "little effect," the report said. The officers were only able to handcuff him after two of his friends arrived and told him to stop fighting, according to the report.

Cardenas suffered cuts and bruises on his arms, leg and face, and received stitches on an eyelid. His attorney, B. Kwaku Duren, accused the officers of violating his client's civil rights and claimed department investigators were stalling.

"I think the LAPD is being caught covering up an obvious excessive use of force," he said.

Cardenas, who was held without bail, faces charges of resisting arrest.

Authorities learned of the video footage when the defense made it public Sept. 14 during Cardenas' preliminary hearing on the charges of resisting arrest and the felony warrant, police said.

At the hearing, Superior Court Commissioner Ronald Rose acknowledged that the video was violent but he ordered Cardenas to stand trial after finding that "the response of the officers was more than reasonable under the circumstances," the Los Angeles Times said.

"The issue here is not whether the officers had to use force. The question is whether or not the defendant used force in resisting the lawful arrest, and I find that he did resist, using force," Rose said at the hearing.

The district attorney's office is reviewing whether to continue with the Cardenas case, which is scheduled for trial Nov. 20, said spokeswoman Jane Robison.

U.S. settles civil case against British online gambling company BetOnSports

Attorney Catherine Hanaway reached a settlement with online gambling company BetOnSports PLC that permanently bars the London-based company from accepting any bets from the United States.

The lawsuit has been closely watched by the online gambling industry, which generates about $6 billion (€4.7 billion) annually in the United States.

The settlement announced Thursday ends a massive civil case Hanaway filed this summer. It does not affect a criminal case still pending against several BetOnSports employees, including Chief Executive David Carruthers, who remains under house arrest in a St. Louis suburb.

Carruthers faces 22 counts of fraud and racketeering charges. His case is scheduled to go to trial early next year. BetOnSports fired him soon after he was arrested in July.

Hanaway spokeswoman Jan Diltz said the U.S. Attorney's Office would not comment on the civil settlement because the criminal case is ongoing.

BetOnSports said in a statement that it did not admit wrongdoing by entering the settlement.

Spokesman Kevin Smith said about 20 percent of the company's revenue came from other countries, most of them in Asia.

"That will be the total focus of the company now," he said.

The settlement requires BetOnSports to open a toll-free telephone service to inform bettors how they can reclaim wagers pending before the suit was filed.

Smith said the hot line should be running within a week. He said he did not know how BetOnSports planned to refund customers.

BetOnSports must also take out an advertisement in a major newspaper telling customers that Internet gambling is illegal in the United States and the company will no longer take their bets. It must post similar messages on its Web sites.

The settlement is not likely to have a huge effect on the Internet gambling industry, said Nelson Rose, a professor at Whittier College of Law and an expert on Internet gambling.

Rose said companies paid more attention to the recent passage of the Unlawful Internet Gambling Enforcement Act, which President George W. Bush signed into law Oct. 13. The act cracks down on banks that transfer bets placed on the Internet.

Rose said passage of the act forced Internet gambling companies to decide whether they want to risk doing business in the United States.

November 10, 2006

Trademark Dilution Revision Act of 2005

The Supreme Court's decision in Moseley v. V. Secret Catalogue, Inc., in 2003, mandated a showing of "actual dilution" in order for a famous mark to be protected under the Federal Trademark Dilution Act (FTDA) from blurring of its distinctive character or tarnishment through the indiscriminate use by parties unaffiliated with its owner. See report in WRF's July 2004 Trademark Alert.

In Moseley, the Supreme Court attempted to reconcile differing interpretations by lower courts of the evidentiary showing required under the FTDA for injunctive relief but succeeded merely, in the opinion of observers, in rendering the statute unworkable. Counsel wondered just how they were supposed to "prove" actual dilution of a famous mark before irreparable, perhaps fatal, harm had been done to it.

The Moseley decision caused Congress to hold hearings in 2004 on possible revisions to the FTDA and these hearings resumed again before the 109th Congress in 2005. The Trademark Dilution Revision Act, HR 683, was reported to the floor of the U.S. House of Representatives on March 9, 2005, from the House Judiciary Committee. The bill, sponsored by Rep. Lamar Smith (R-TX), chairman of the House Subcommittee on Courts, the Internet and Intellectual Property, provides a more precise definition of "fame" that would qualify a mark for protection from dilution and sets forth an explicit "likelihood of dilution" standard intended to supplant the "actual dilution" requirement announced in Moseley. A fair use defense would remain available to a defendant upon a showing that the challenged use is not as a designation of product source, but is a descriptive use, or a use intended as parody, commentary or criticism.

The bill was passed by the House of Representatives on April 19, 2005, and now goes to the Senate.

WRF Attorneys Author New Bankruptcy Telecommunications Manual

In 2003, members of Wiley Rein & Fielding's highly regarded Bankruptcy and Communications practices authored The Bankruptcy Telecommunications Manual to assist the industry in addressing the important questions raised by the intersection of these two complex bodies of law.

In the past three years, courts have continued to address many of the important issues addressed in that primer. In addition, the 2005 amendments to the Bankruptcy Code set forth in The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) have significantly impacted bankruptcy cases affecting the telecom industry.

The second edition of The Bankruptcy Telecommunications Manual, edited by H. Jason Gold, Valerie P. Morrison and Peter D. Shields, was published in July 2006 by the American Bankruptcy Institute. The second edition provides an up-to-date, straightforward and concise overview of both areas of law, and includes a comprehensive glossary, statutory appendixes and a discussion of key issues in telecommunications bankruptcies. This article briefly highlights several of the issues that have been updated in the second edition.

Post-Petition Relationships
Section 366 of the Bankruptcy Code provides that a utility may not discriminate against, alter or discontinue service to a debtor solely on the basis of an unpaid pre-petition debt or the filing of a bankruptcy petition. BAPCPA was intended to provide increased protections to utility companies through amendments to Section 366 of the Bankruptcy Code.

Prior to the 2005 amendments, bankruptcy courts in major telecommunications cases would often require only minimal "protections" to telecoms in bankruptcy cases where many millions of dollars were owed to incumbent local exchange carriers (ILEC). These "protections" often took the form of merely allowing administrative priority to post-petition claims (which is already provided for by other sections of the Bankruptcy Code), ordering prompt payment of undisputed post-petition invoices, shortening billing cycles, requiring the debtor to provide regular financial disclosures to utilities and expediting dispute resolution. Many reorganization cases failed, resulting in administrative insolvencies and leaving utility companies exposed to large and valueless unpaid post-petition claims, often running into many millions of dollars.

Section 366 was amended to limit the risk to utility companies, including common carriers, in bankruptcy cases. Specifically, the section now lists acceptable adequate assurance, such as cash deposits, letters of credit, certificates of deposit, surety bonds and prepayment. Moreover, the amendments specifically preclude the bankruptcy court from considering many factors that were often (mis)used under the prior law; namely, whether the debtor had posted a security deposit pre-petition, whether the debtor had made timely payments for utility services pre-petition and whether an administrative priority status is available for the utilities' post-petition claims. In addition, Section 366 now explicitly authorizes utility creditors to exercise their right of setoff against any deposit without any independent express authorization and to preserve pre-petition security deposits as adequate assurance for post-petition payment.

Despite the new requirements of specific and concrete assurances, debtors not surprisingly seek to minimize their obligations under this new statute by, inter alia, proposing small amounts for cash deposits. In addition, recent case-law has also raised the issue of whether services provided by ILECs even constitute a "utility service" under Section 366. Indeed at least one court has ruled that the term "utility service" in the new Section 366 means only traditional services that the debtor in possession itself consumes in contrast to other services and rights provided by the utility, such as interconnection agreement services. These issues are explored thoroughly in the second edition.

New Privacy Considerations
Also among the changes to the Bankruptcy Code is a legislative response to the Toysmart bankruptcy case. In Toysmart, the debtor-in-possession sought bankruptcy court authority to sell assets, including customer lists and information. Toysmart's proposed sale of its customer list promptly triggered strong public criticism. The attorneys general of Texas, New York and 39 other states, led by Massachusetts, also objected to the proposed sale on the grounds that it would violate their states' respective consumer protection laws. In addition, the Federal Trade Commission filed suit against Toysmart, alleging that the proposed sale would violate Toysmart's website privacy statement and, therefore, would constitute a false or deceptive trade practice. Many other objections were filed to this request, most on the basis that Toysmart had promised in its privacy policy never to sell information that it collected. The motion was ultimately withdrawn and the assets sold without the customer lists.

Although a reorganizing debtor is authorized to sell assets under Section 363 of the Bankruptcy Code, BAPCPA now imposes conditions on a debtor-in-possession's right to sell customer data that is subject to privacy policies. Specifically, the amendments address situations where the debtor had disclosed in a privacy policy in effect on the petition date that certain information would not be transferred to unaffiliated third persons. In such cases, the debtor-in-possession may only sell the customer data (a) if such sale is consistent with the non-disclosure policy or (b) if inconsistent, the court after appointing a customer "privacy ombudsman" to advise the bankruptcy court on privacy issues, upon notice and a hearing, finds that the proposed sale would not violate applicable non-bankruptcy laws. Among the specific non-bankruptcy laws is Section 222 of the Telecommunications Act of 1996, which deals with customer lists and other information and imposes a duty on every telecommunications carrier "to protect the confidentiality of proprietary information of, and relating to, other telecommunications carriers, equipment manufacturers, and customers, including telecommunications carriers reselling telecommunications services provided by a telecommunications carrier." The second edition examines the interplay of these privacy issues and telecom law in the context of a bankruptcy case.

Provisions Concerning Fraud
Allegations of fraud have played a significant role in many recent high-profile bankruptcy cases, including those in the telecom field, such as Adelphia and WorldCom, and well publicized fraud indictments and convictions have emboldened prosecutors. While the Federal Communications Commission (FCC) has not passed any rules specifically addressing the types of frauds that have led to telecommunications bankruptcies, the Act provides a private right of action for individuals alleging that they have been financially harmed by a common carrier by authorizing them to file suit in federal court or file a Section 208 complaint with the Commission.

These allegations may become an issue when a licensee requests FCC permission to transfer a license since under Section 310(d) of the 1996 Act, the FCC must determine, as a threshold matter, whether the assignor and assignee meet the requisite qualifications to hold an FCC license. While the FCC generally will not re-evaluate the qualifications of the assignor, it may designate the issue of the assignor or assignee's character for hearing if the issue is raised to a sufficient extent in petitions.