WASHINGTON - SMBC Capital Markets Inc, formerly Sakura Global Capital Markets Inc., and Michael Lissack are battling over whether a federal court should dismiss yield-burning charges Lissack filed against the firm in 1996 and last year under the federal False Claims Act to recover alleged losses by the Treasury Department.
Sakura is urging the U.S. District Court in Manhattan to dismiss the charges, claiming, among other things, that the suit is a "'freeloading' knock-off" of a related Securities and Exchange Commission suit that Sakura settled in February 1999 for about $250,000.
Lissack, a former Smith Barney Inc. managing director-turned whistleblower, is arguing against dismissal, claiming Sakura is trying to "game" the False Claims Act as well as "leverage the fact that it was prosecuted for securities fraud into a reason why it should not also be prosecuted for stealing money from the public fisc (U.S.Treasury)."
The charges stem from a yield-burning suit Lissack secretly filed against more than a dozen broker-dealer firms in February 1995 claiming the Treasury Dept. suffered losses from yield burning in advance refundings. The suit was filed under the False Claims Act, which permits private citizens to file fraud suits on behalf of the federal government. Such suits are kept confidential until the government decides whether to join the action, seek treble damages, and allow citizen plaintiffs to share in any awards.
Lissack amended the False Claims Act suit in May 1996, adding Sakura's name to the list of firms and charging that its alleged mispricing of 10 forward supply agreements for issuers' advance refunding escrows caused yield burning and damaged Treasury. After settling with most of the broker-dealers named in the 1995 and 1996 suits, Lissack filed an amended complaint last March that singled out Sakura and alleged it engaged in yield burning in connection with 15 forward supply agreements for advance refunding escrows.
The suit claims Sakura fraudulently mispriced the agreements so that yield burning occurred. Yield burning is when escrow securities or agreements are mispriced so that the investment yield is burned or reduced below the bond yield and that the issuer avoids earning arbitrage it would have to rebate to the federal government.
Lissack alleges the Treasury Department was damaged by the Sakura forwards as a result by having to pay arbitrage in the form of interest and principal on the Treasury investments held in escrow and by being deprived of the zero interest borrowing it would have received had the escrow met yield restriction requirements. Sakura denies these charges.
In a motion it filed in June, Sakura said Lissack is barred from bringing these claims under the False Claims Act because they are "substantially similar" to prior publicly disclosed allegations, were the focus of a settled SEC suit, and have been made under the Internal Revenue Code and are thus outside the jurisdiction of the act.
Sakura told the court that Lissack "seeks a windfall from it in basing this action on stale allegations" - 1992 bond offerings by the Oklahoma Turnpike Authority and Sisters of Saint Mary's Health Care Obligated Group that the SEC began investigating long before Lissack filed his first yield burning complaint in 1995. "The allegations forming the basis of Lissack's action against Sakura were well within the 'public domain' long before he filed either his initial complaint against other entities or his first amended complaint naming Sakura ," the firm said.
"Moreover, as the SEC has long ago litigated and resulted Sakura's entire exposure concerning forward supply agreements, Lissack's action does not and never did contribute to the government's enforcement effort. In short, Lissack's action is a 'freeloading' knock-off," Sakura told the court.
However, in a memorandum of law filed with the court on Aug. 17, Lissack rejected Sakura's claims and said his allegations "are sound." Sakura "pocketed tens of millions of dollars in illegal profits by virtue of its fraudulent pricing -- monies that rightfully belonged to the U.S. Treasury and that should properly be recovered through this ... action," he said.
Lissack argued that the SEC's suit against Sakura and other transaction participants in the OTA and SSM deals involved securities fraud charges over alleged kickbacks or fees paid in connection with the forward supply agreements.
"The SEC's action did not allege that Sakura defrauded the U.S. Treasury or submitted false claims to the government." It also did not seek to recover damages Sakura caused the government to suffer," Lissack told the court. There was no prior public disclosure of these charges, he added.
But even if the court finds the SEC's allegations were a prior "public disclosure" of Lissack's charges against Sakura, the False Claims Act's jurisdictional bar still would not apply because Lissack was the "original source" for the SEC's suit, the memo said. Lissack "voluntarily provided information to the Federal Bureau of Investigation, Department of Justice, and SEC about Sakura's government fraud prior to the 1996 complaint," it said.
Lissack argued that the False Claims Act's tax exclusion does not apply in this case because it was intended, and has only been applied, to exclude cases that seek to impose liability for taxes owed to the Internal Revenue Service. These are non-tax claims for payments owed to the Bureau of Public Debt. In addition, the IRS has no other enforcement mechanism for recovering such money, he said.
John Carroll, with Clifford Chance Rogers & Wells in New York, represents Sakura. Lissack's lawyers include Erika A. Kelton and John R. Phillips at Phillips & Cohen here, William B. Pollard 3d at Kornstein Veisz & Wexler in New York, and Marc Marmaro at Jeffer, Mangels, Butler & Marmaro in Los Angeles.
