For-Profit Colleges, Drilling Ban, BSkyB: Compliance (Update1)

Recruiters at U.S. for-profit colleges lied to entice students and encouraged them to commit fraud to qualify for aid, a report by the Government Accountability Office found.

Recruiters at all 15 colleges studied by the GAO, Congress’s investigational arm, misled potential students about the costs, duration and quality of their programs, according to a report obtained by Bloomberg News that will be released publicly today. The 30-page report said recruiters at four of the colleges encouraged fraud on loan applications, without identifying the institutions.

The Senate Health, Education, Labor and Pensions Committee, which commissioned the report, will hold a hearing today to examine the tactics that for-profit colleges use to recruit students and coach them to apply for financial aid. GAO investigators posed as prospective students to investigate practices in the education industry, which received at least $4 billion in U.S. grants and $20 billion in Department of Education loans last year, the report said.

“College representatives exaggerated undercover applicants’ potential salary after graduation and failed to provide clear information about the college’s program duration, costs, or graduation rate,” the report said.

The GAO probe examined for-profit colleges in Arizona, California, Florida, Illinois, Pennsylvania, Texas and Washington, D.C. Both privately held and publicly traded education companies were included.

Recruiters also manipulated figures to downplay or hide the cost of their programs, the report said. Representatives from nine of the colleges projected the date of program completion as though students would be attending class 12 months a year, while projecting costs for nine months’ annual attendance.

“The results of this broad-reaching survey of for-profit school recruiting practices leave little question that these practices occur across the industry and are in no way limited to a few rogue recruiters or even schools,” said Kate Cyrul, a spokeswoman for Iowa Democratic Senator Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee, in an e- mail.

To read the full story on deception at for-profit colleges, click here.

Compliance Policy

New York Weighs State Drilling Ban on Natural Gas From Shale

Companies led by Chesapeake Energy Corp. would be banned temporarily from drilling for natural gas in shale in New York under state legislation proposed because of disputes over environmental risks.

The measure would suspend drilling until May 15 in New York’s portion of the Marcellus Shale formation for further study, said Kate Sinding, senior attorney with the New York- based Natural Resources Defense Council. The drilling moratorium may come up during a special session weighing legislation to close a $9.2 billion gap in the state’s $135.6 billion budget.

To get gas from shale, companies use hydraulic fracturing, or fracking, in which water, sand and chemicals are injected deep underground to break up rock and allow gas to flow. The U.S. Environmental Protection Agency is planning a study to determine whether fracking fluids have contaminated drinking water.

The measure would postpone a potential revenue source for the state. Drilling revenue in New York could reach $1.9 billion in 2015, according to a study from Laramie, Wyoming-based Natural Resource Economics Inc.

Revenue from Marcellus shale lease payments, royalties, taxes and pipeline and plant construction in Pennsylvania and West Virginia totaled $5.8 billion in 2009, according to the July 14 study prepared for the American Petroleum Institute, a Washington-based group that represents oil companies.

For more, click here.

Fed to Conduct Reverse Repo Tests as Part of Readiness Program

The Federal Reserve will conduct a tri-party reverse repurchase agreement with agency mortgage securities to test one of the tools for an eventual withdrawal of the central bank’s unprecedented monetary stimulus.

Policy makers led by Fed Chairman Ben S. Bernanke are considering how to withdraw the more than $1 trillion they have pumped into the financial system to combat the deepest recession since the 1930s. Along with raising the overnight bank lending rate, Fed officials have said they may use tools including reverse repos to withdraw or neutralize cash in the banking system.

In a reverse repo, the Fed lends securities for a set period, temporarily draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to the 18 primary dealers that act as counterparties to the central bank.

Huawei Technologies Said to Have Failed in U.S. Takeover Bids

Huawei Technologies Co. failed to reach agreements to buy two U.S. assets last month, even though the Chinese phone- equipment maker offered at least $100 million more in each case, according to two people with knowledge of the matter.

The sellers doubted Huawei’s ability to win U.S. government approval to purchase software supplier 2Wire Inc. and Motorola Inc.’s wireless-equipment unit, the people said. They declined to be identified because Huawei’s offers weren’t public.

Huawei, founded by former Chinese army official Ren Zhengfei, failed in its latest attempts to expand in the U.S. where the Shenzhen, southern China-based company had encountered opposition based on national security concerns. In 2008, Huawei dropped a bid for computer-equipment maker 3Com Corp. after the U.S. began investigating whether a deal would give China access to anti-hacking technology used by the Defense Department.

“There is still some skepticism in the U.S. about any potential sale of technology assets to a Chinese company,” said Wilson Chai, an analyst at Mirae Asset Securities in Hong Kong. “After years of trying in the U.S., Huawei hasn’t made any significant breakthroughs in that market.”

To read more, click here.

Compliance Action

Internet Compromise Sought by AT&T, Google in FCC Talks

Google Inc., AT&T Inc. and Verizon Communications Inc. executives met behind closed doors over the weekend with Federal Communications Commission officials in efforts to resolve a dispute over U.S. Internet regulation.

The rare Saturday session reflected attempts to reach a compromise on net-neutrality rules that would govern how phone and cable companies providing Internet connections treat Web traffic such as Google’s YouTube videos and Skype Technologies SA’s free phone calls.

Questions being hashed out include whether Web providers can boost delivery of some content, at the cost of slowing other traffic, and whether rules should apply to increasingly popular Web applications on mobile phones, according to the disclosure filings on the FCC website that summarize the topics discussed and name the participants.

The companies and senior FCC aides have been holding the private meetings since June, according to disclosure statements on the agency’s website.

The FCC may be negotiating a “secret deal” that would keep Chairman Julius Genachowski from fulfilling President Barack Obama’s pledge to back net neutrality, said Josh Silver, president of the Washington-based advocacy group Free Press. The agency may be about to “abdicate its responsibility to protect Internet users,” Silver said in an e-mailed statement.

“We are fully committed to preserving the free and open Internet,” Jen Howard, an FCC spokeswoman, said Aug. 2.

The long-running fight over net neutrality has pitted cable and phone companies that say they need leeway to protect the performance of their networks against content providers and advocacy groups that say the communications companies may favor their own online offerings or those of partners.

For more, click here.

Kellogg Asked to Brief Congress on Breakfast Cereal Recall

A U.S. congressional committee asked Kellogg Co., the largest U.S. maker of breakfast cereal, to brief staff investigators and provide documents on a June 25 recall of cereal including Froot Loops and Corn Pops.

In a letter sent Aug. 2 to Kellogg Chief Executive Officer David Mackay, lawmakers cited a Washington Post news story that suggested a substance in package liners at the center of the recall could have been 2-methylnaphthalene. The chemical has been linked to lung injuries in adults, according to the letter by U.S. Rep. Henry Waxman, a California Democrat and chairman of the House energy and commerce committee.

Kellogg’s recall of 28 million boxes of cereal, including Apple Jacks and Honey Smacks, probably will lower per-share earnings by 12 cents this year, the company said July 29.

Kellogg said in June that the recall came after it “identified a substance in the package liner that can produce an uncharacteristic waxy-like off-taste and smell.” The company, based in Battle Creek, Michigan, destroyed tainted packaging before announcing the recall, the letter from Waxman and Stupak said, citing the Washington Post. Kellogg “acted swiftly and responsibly to protect our consumers,” a company spokeswoman, Kris Charles, said in an e-mail. “It’s important to correct the record that we did not destroy packaging prior to contacting” the U.S. Food and Drug Administration and conducting the recall, she said.

Volkswagen Passat Probed by U.S. for Engine Fire Risk

Volkswagen AG Passat cars are being investigated by the U.S. for fires in the engine compartment that may be related to ignition-coil failures.

Passat cars for model years 2002 and 2003 have been the subject of 10 reports of fires and six complaints of coil failures that didn’t cause a fire, the National Highway Traffic Safety Administration said on its website.

Drivers reported that the check-engine or other dashboard lights were illuminated before fires, and some vehicles had ignition coils that failed and were replaced more than once, NHTSA said. The investigation covers almost 200,000 cars.

“Volkswagen takes all of these reports very seriously,” Kerry Christopher, a U.S.-based spokesman for Volkswagen, said in an interview yesterday. “We intend to work with NHTSA and fully investigate these complaints.”

U.S. Said to Probe BP Disclosures, Stock Trading After Spill

The U.S. is examining whether BP Plc made misleading statements after its Gulf of Mexico oil spill and if company executives traded stock based on insider information about the accident, according to a person familiar with the matter.

The Justice Department is investigating possible criminal wrongdoing and the Securities and Exchange Commission is probing potential civil violations, said the person, who wasn’t authorized to speak publicly and asked not to be identified.

“We will cooperate with any investigations,” Sheila Williams, a BP spokeswoman based in London, said in an e-mail yesterday.

BP shares have dropped 34 percent in U.S. trading since the accident, wiping out $64.1 billion in market value.

The government has been reviewing whether there were violations of the Clean Water Act, which carries civil and criminal penalties, and the Oil Pollution Act of 1990, which can be used to hold companies liable for cleanup costs.

BSkyB Pay-TV Movie Rights Being Probed by Antitrust Regulator

British Sky Broadcasting Group Plc is being investigated by the U.K.’s antitrust regulator over concerns it is distorting competition for “premium” Hollywood movies in the pay-TV market.

The probe will cover rights sold by movie studios to show films on pay television for the first time, and the supply of TV packages containing movie channels based on those rights, according to an e-mail yesterday from Competition Commission spokesman Rory Taylor.

The current distribution method “creates a situation in which Sky has the incentive and ability to distort competition,” communications watchdog Ofcom, which requested the probe, said in a statement. “The end result for consumers is less choice, less innovation and higher prices.”

Robert Fraser, a spokesman for Isleworth, England-based BSkyB, didn’t immediately return a call for comment.

The new probe will be limited to BSkyB’s pay-TV movie rights, Taylor said.

Courts

Cerberus’s LNR Property Accused of Defrauding Retirees

LNR Property Corp., the real estate finance company co- owned by Cerberus Capital Management LP, was accused in a lawsuit of defrauding creditors including retired California public employees of $700 million.

Creditors of a defunct California land company sued LNR in U.S. Bankruptcy Court in Wilmington, Delaware, claiming LNR and homebuilder Lennar Corp. drained $1.4 billion from a joint venture that left their partners with nothing. Those partners, including the California Public Employees’ Retirement System, lost their $970 million investment, according to the suit.

LNR and Lennar knew that the company they controlled, LandSource Communities Development LLC, was insolvent when lenders represented by Barclays Capital Plc loaned it as much as $1.55 billion in February 2007, creditors claimed in the lawsuit. Instead of using the money to recapitalize LandSource just as the real estate market began to collapse, the company paid a special distribution of $1.4 billion to LNR and Lennar, creditors claimed.

“LandSource painted a fraudulent picture of its corporate health in order to induce an equity payout to Lennar and LNR under the guise of a recapitalization,” the lawsuit said.

LandSource filed for bankruptcy in June 2008. Under the company’s plan of reorganization approved last year, creditors set up a litigation trust that filed the lawsuit against LNR. Lennar wasn’t named in the complaint, filed on June 8. The Sacramento Bee first reported the lawsuit yesterday.

LNR spokeswoman Jen Brown declined to comment. A spokesman for Lennar didn’t immediately return a message.

The case is Landsource Creditor Litigation Liquidating Trust V. LNR NWHL Holdings, Inc. 10-51219, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Argentine Assets Properly Seized, U.S. Court Rules

Assets of the Republic of Argentina held in a trust administered by the U.S. Bank Trust National Association were properly attached to pay owners of defaulted bonds, a U.S. appeals court ruled.

The court in New York yesterday upheld an August 2009 decision by U.S. District Judge Thomas Griesa, ruling in favor of EM Ltd. and NML Capital Ltd., which have judgments against the republic for hundreds of millions of dollars.

“The record shows that the Republic, on numerous occasions, took action consistent with discretionary use of the public funds as part of the Republic itself and that the funds were properly attached and restrained to satisfy the debts of the Republic,” a three-judge panel of the appeals court said in a written opinion.

The court held that, because the trust assets are held in New York, the Foreign Sovereign Immunities Act doesn’t prevent their seizure.

Griesa ruled July 26 that a different set of creditors couldn’t attach bonds held in a government trust fund in Buenos Aires.

A phone message for Jonathan Blackman, a lawyer who represented Argentina in the case, wasn’t immediately returned.

The case is EM Ltd. v. Republic of Argentina, 09-3908, Second Circuit U.S. Court of Appeals (Manhattan).

Google Sale of Rosetta Stone Trademarks Ruled Legal

A federal judge who previously ruled in favor of Internet search-engine Google Inc. in a trademark suit by Rosetta Stone Inc. said Google’s practice of directing users to websites of Rosetta’s competitors won’t confuse consumers.

U.S. District Judge Gerald Bruce Lee granted final judgment to Google, dismissing Rosetta Stone’s motion to rule in its favor, in an opinion filed yesterday in District Court in Alexandria, Virginia. Lee originally approved Google’s summary judgment motion in April without giving reasons.

Rosetta Stone, the language-learning software maker, charged in its lawsuit that Google infringed Rosetta’s trademarks by selling them to other companies, which directed Web users to competitors and counterfeiters of its software.

“No reasonable trier of fact could find that Google’s practice of auctioning Rosetta Stone’s trademarks as keyword triggers to third-party advertisers for use in their sponsored link titles and text creates a likelihood of confusion as to the source or origin of Rosetta Stone’s goods,” Lee wrote.

The case is Rosetta Stone v. Google Inc., 09-00736, U.S. District Court, Eastern District of Virginia (Alexandria).

Distraught Salander, Sentenced to Up to 18 Years, Says Sorry

Lawrence Salander was sentenced in lower Manhattan to six to 18 years in state prison, the maximum he could receive after he pleaded guilty to stealing $120 million from clients, investors and Bank of America Corp.

The sentencing yesterday was the end of a public saga that began in November 2007, when Salander and his gallery filed for bankruptcy. Prosecutors called it one of the biggest art frauds in New York state history.

With good behavior, Salander may be eligible for parole in less than six years, said his lawyer, Charles Ross.

Salander, 61, was arrested in March 2009 and pleaded guilty a year later to stealing from clients and investors, including tennis champion John McEnroe and actor Robert De Niro. The bankrupt dealer hasn’t paid any of the $114.9 million of restitution he owes, New York State Supreme Court Justice Michael Obus said.

The case is People v. Salander, 09-03581, New York State Supreme Court, New York County (Manhattan).

Interviews

Cline Says Regulators Boosting Retained-Asset Disclosure

Jane Cline, president of the National Association of Insurance Commissioners, talks with Bloomberg’s Julie Hyman about insurance companies’ so-called retained-asset accounts.

The NAIC said last week it is reviewing the accounts after Bloomberg Markets reported that the funds allow more than 100 carriers to earn income on $28 billion owed to life insurance beneficiaries. To see the video, click here.

Analyst De Frias Says Basel Decision Eases Investor Concerns

Arturo De Frias, an analyst at Evolution Securities Ltd., talks about banking regulation and the outlook for UniCredit SpA and Barclays Plc earnings. To see the video, click here.

Comings and Goings

Greece Names Former ECB Board Member Padoa-Schioppa as Adviser

Greek Prime Minister George Papandreou hired former European Central Bank board member Tommaso Padoa-Schioppa to advise on the country’s economy and debt management.

Padoa-Schioppa, also a former Italian finance minister, will advise Papandreou on “issues of policy planning which relate to the implementation of economic, fiscal and structural policy in the framework of the European support mechanism,” according to a statement.

Greece received a three-year, 110 billion-euro ($145 billion) bailout from the European Union and International Monetary Fund in May.

Greece’s austerity drive may pass its first test this week, giving way to a second tranche of the bailout. The EU and the IMF plan to hold a press conference to discuss Greece’s progress, IMF spokeswoman Jennifer Beckman said.

To contact the reporter on this story: Michael Bathon in Wilmington, Delaware, at mbathon@bloomberg.net.