Citigroup, Apple-Google, For-Profit Aid: Compliance

Citigroup Inc.’s $75 million settlement with the U.S. Securities and Exchange Commission won approval from a federal judge, resolving claims the bank failed to disclose $40 billion in subprime-related holdings.

U.S. District Judge Ellen Huvelle in Washington said Sept. 24 she would sign the settlement after both sides agreed Citigroup must continue the disclosure plan it began during the financial crisis. She told the attorneys in court to submit new language for the settlement within two weeks.

The judge said that she wanted to make sure there are “procedures in place that both satisfy me and the SEC.”

Huvelle last month held off approving the settlement, saying she was dissatisfied with the proposal and wanted more information before making a decision. Both the bank and the SEC filed additional papers with the court urging acceptance of their accord.

The penalty “takes into account the seriousness of the misconduct,” the SEC wrote in a Sept. 8 filing. “It is sufficiently substantial to send a clear message that misleading statements by a corporation on issues of importance to investors cannot go unaddressed.”

The company made misstatements on earnings calls and in filings regarding assets tied to subprime loans as the housing crisis unfolded in 2007, the SEC said in its July 29 complaint. Some disclosures omitted more than $40 billion in investments, regulators said.

Responding to Huvelle’s request, the SEC identified Citigroup officials -- including former Chief Executive Officer Charles Prince and former Chairman Robert Rubin --who were aware that losses were mounting in October 2007 on the highest-rated segments of mortgage-based assets. The agency claims those losses hadn’t been fully disclosed, but didn’t accuse those officials of wrongdoing.

The fact that so many executives were aware of the disclosure and valuation process and “nonetheless did not note the central issue identified by the commission in its complaint, only underscores the weakness of any possible case against additional parties,” Citigroup wrote in a Sept. 13 filing.

Citigroup was under “no obligation to say anything about its ‘subprime exposure’” in the second and third quarters of 2007, the bank wrote. It voluntarily decided shareholders would benefit from “a more concrete understanding” and made some statements, it said.

“In making these July and October disclosures, Citigroup was among the first of its financial institution peers to provide information of this type to the investing public,” the bank said.

While noting changes in Citigroup’s practices, Huvelle was concerned the agreement hadn’t required more transparency. The initial accord only barred the bank from violating SEC rules.

“You may have the best practices there are, but I would

The case is Securities and Exchange Commission v. Citigroup Inc., 10-cv-01277, U.S. District Court, District of Columbia (Washington).

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Compliance Action

Texas, Illinois, Iowa Investigate GMAC Foreclosures

Attorneys general in Texas, Iowa and Illinois, following Florida, have started investigations into mortgage practices at Ally Financial Inc.’s GMAC unit while California has ordered the company to prove its foreclosures are legal or halt them.

California Attorney General Jerry Brown said Sept. 24 in a statement that he is “demanding that Ally Financial, the fourth largest home loan institution in the country, demonstrate its compliance with California law or else halt all foreclosure operations in the state.”

Iowa, which leads an 11-state working group of attorneys general and bank examiners exploring ways to prevent foreclosures, opened an inquiry Sept. 23.

“The integrity of the foreclosure process is of utmost importance and we are very concerned by the issues that have been raised regarding Ally Financial’s treatment of affidavits,” Iowa Assistant Attorney General Patrick Madigan said.

Texas Attorney General Greg Abbott opened an investigation “early this month,” said Tom Kelley, a spokesman for the office. Illinois Attorney General Lisa Madigan asked for a meeting with the company and requested information about how homeowners in the state have been affected, according to a statement.

The action by officials in the four states follows an announcement by Florida Attorney General William McCollum, who last month said he was investigating three Florida law firms handling foreclosures.

Florida investigators issued subpoenas in the case to the Law Offices of Marshall C. Watson PA; Shapiro & Fishman LLP; and the Law Offices of David J. Stern PA, according to a news release posted on the attorney general’s website.

The law firms were hired by loan servicers to begin foreclosure proceedings when consumers were behind on their mortgages, according to McCollum’s office.

Homeowners facing eviction have accused the companies of filing foreclosure actions without verifying that borrowers actually defaulted or who owns the loans.

GMAC Mortgage notified agents and brokers on Sept. 17 that it had suspended evictions in 23 states. Last week, Ally, the Detroit-based auto and home lender, said it found a “technical” deficiency in its foreclosure process allowing employees to sign documents without a notary present or with information they didn’t personally know was true.

GMAC said Friday in a statement that the problem was identified and then corrected “a few months ago.” The defects didn’t occur in all foreclosure cases in the 23 affected states, according to the statement. Ally said it has issued a “more robust policy” on processing foreclosures, increased staff to handle documents and instituted more training for employees.

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IRS Trims Demand for Corporate Tax-Shelter Lists

The U.S. Internal Revenue Service scaled back its requirement that companies begin listing all tax-saving transactions to help the agency identify issues for possible audits.

The IRS dropped a requirement that companies list their maximum tax liability and said it will phase in the new rules over five years, although the largest companies will start immediately. The IRS earlier this year called on companies to provide potential audit information, saying it would save the agency and companies time and money.

IRS Commissioner Doug Shulman said in an interview he is trying to change the relationship between the agency and taxpayers from one that’s “very adversarial to one that’s more transparent.”

Even as it seeks more information upfront from companies, he said, the agency is asking more from its own employees.

Auditors “need to realize that tax positions are uncertain sometimes because the law is uncertain or our guidance is uncertain,” Shulman said. “Just because there’s an uncertain tax position on a return doesn’t mean that’s an appropriate position that has to get set up for audit.”

Shulman told a tax lawyers’ meeting in Toronto Sept. 24 that the agency revised its plan after receiving numerous comments from companies that the proposed requirements were too intrusive, according to a text of his speech.

Eli Dicker, chief tax counsel of the Tax Executives Institute, said in an e-mail the changes show that “the IRS listened carefully to the comments it received from the business tax community.” The Washington-based group is an association of tax officials from Fortune 1000 companies.

Google, Apple Enter Hiring Accord, U.S. Says

Six companies including Google Inc. and Apple Inc. agreed to end practices that limited the recruiting and hiring of each other’s employees, the U.S. Justice Department said.

Intel Corp., Adobe Systems Inc., Walt Disney Co.’s Pixar animation unit and Intuit Inc. also are part of the accord that halts agreements under which companies refrained from placing “cold calls” to lure each other’s workers, the Justice Department said Sept. 24.

“The agreements challenged here restrained competition for affected employees without any pro-competitive justification,” Molly Boast, deputy assistant attorney general in the Antitrust Division, said in the statement.

The agreement concludes an antitrust investigation into recruiting and hiring practices that involved some of the biggest U.S. technology companies. Spokesmen for Microsoft Corp. and International Business Machines Corp. said earlier this month that they were no longer part of the investigation.

Investment Advisers to Boost Disclosure, U.K. Watchdog Says

Investment advisers in the U.K. selling payment protection products will have to be more transparent to customers on how they are compensated, the Financial Services Authority said Sept. 24.

It is “in the specific circumstances where the customer is also paying an adviser charge that we are concerned confusion could arise about what the adviser charge covers,” The FSA said. “We think it is important that the customer understands the entirety of his adviser’s remuneration in these circumstances. We therefore intend to introduce increased transparency requirements for pure protection services associated with investment advice.”

The FSA’s regulation is part of an overhaul of the way independent financial advisers and banks’ investment advisory staff work when they recommend products such as mutual funds, pensions or insurance. The London-based regulator began planning the changes in June 2006 and the rules on retail distribution will take effect from the end of 2012.

“For stand-alone sales, not associated with investment advice, our view remains that the customer’s main concern is the premium he will have to pay, rather than his adviser’s remuneration,” the FSA said.

In March the regulator said investment advisers in the U.K. must stop taking commissions for recommending specific products to the public, in order to “restore consumer confidence” in their advice.

Advisers will have to show sales of pensions, bonds and equity funds are in their clients’ best interest and result from comprehensive, unbiased analysis of the market, the Financial Services Authority said in an e-mailed statement. Personal investment advisers must also disclose fees separately from the cost of the products they sell.

RTL, ProSieben TV Deal Faces German, Austrian Probes, EU Says

RTL Group SA and ProSiebenSat.1 Media AG face reviews in Germany and Austria over their plan to set up a joint Internet platform for free television in the countries, after the European Union’s top antitrust regulator referred it to national authorities.

The European Commission’s antitrust department said it granted requests from the national competition regulators to take jurisdiction over the parts of the TV deal affecting their countries.

The joint venture “would affect competition in national online TV and advertising markets in Austria and Germany,” the Brussels-based regulator said in an e-mailed statement Sept. 24. The plan doesn’t raise competition concerns elsewhere in the 27- nation EU, the commission said.

TV channels are looking to build their online presence to compete with illegal sites and offset a decline in traditional advertising revenue. ITV Plc, the U.K.’s biggest commercial broadcaster, said last month it would invest in its website to compete with rival British Broadcasting Corp.’s online player.

“We believe that the planned central internet platform for TV content meets with the interest of German and Austrian Internet users and we are convinced that the project complies with antitrust rules,” Christian Koerner, a spokesman for RTL Deutschland, said in an e-mailed statement.

ProSiebenSat.1 spokesman Julian Geist didn’t immediately respond to calls seeking comment.

The joint venture will allow public and private TV channels to put content online, where it can be streamed by users, the companies said on Aug. 6. The TV channels will pay for use of the technical infrastructure and services.

In the U.S., Internet TV is being offered via televisions as well as computers and mobile devices. In June, Hulu LLC, a TV website controlled by three U.S. broadcast networks, began promoting its Hulu Plus paid online service on Samsung TVs.

Compliance Policy

EU Needs Twice-Yearly Bank Stress Test, Finance Minister Says

The European Union should conduct regular stress tests on its biggest banks to sustain transparency, Finland’s Finance Minister Jyrki Katainen said.

“I’m trying to push for the idea that it should be at regular intervals, at least twice a year,” Katainen said in an interview in Helsinki Sept. 24. “Transparency is the best medicine to improve confidence on the financial markets.”

EU leaders have struggled to restore investor confidence in the region and its banks after Greece’s fiscal crisis sparked concerns about debt levels. Regulators measured the capital adequacy of 91 of the biggest banks in a July test passed by 84 lenders. That calmed markets by giving information financial institutions could use to test each other, Katainen said.

Previously, the London-based European Committee of Banking Supervisors in 2009 stress-tested 26 of the biggest banks operating across national borders.

The July tests showed the banks needed only 3.5 billion euros ($4.7 billion) of new capital, about a 10th of the lowest analyst estimate.

The value of the exercise “was wider than the result the test really gave,” Katainen said. “Openness gave market forces more information, which they can test by themselves.”

The proposed European Banking Authority, the new organization that will be formed from the European Committee of Banking Supervisors on Jan. 1, has been mandated “to initiate and coordinate Union-wide stress tests” on a periodic basis so as to constantly test the resilience of the EU banking sector, said Franca Rosa Congiu from the CEBS in an e-mail Sept. 24.

Katainen said he has found “quite a lot” of support for regular testing. He’s also pushing for strict and automatic sanctions for countries breaching the rules set out in the EU Stability and Growth Pact. The agreement requires euro members to keep government debt below 60 percent of gross domestic product and budget deficits below 3 percent of GDP.

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U.S. to Delay Release of For-Profit College Aid Rule

The U.S. Education Department will delay the release of proposed limits on for-profit colleges’ access to student grants and loans that can represent as much as 90 percent of their revenue, Secretary Arne Duncan said.

The proposal, called gainful employment, requires for- profit colleges to show their programs improve job prospects or lose eligibility for funds. The department will postpone publication of the rule to early 2011 from Nov. 1 to review public comments and hold meetings and hearings, Duncan said Sept. 24 in an interview. The regulation is still scheduled to take effect in July 2012, he said.

“We have 90,000 comments and we want to do it justice,” Duncan said. “We’re going to read every single one.”

The proposal has provoked a letter-writing campaign from for-profit colleges and opposition from at least 80 members of Congress. The Education Department says the rule is necessary to ensure taxpayer money isn’t wasted and that graduates aren’t saddled with debt for programs that don’t improve their job prospects. For-profit colleges say the regulation would hurt low-income students.

“We’re very pleased that the secretary has delayed the rule,” said Harris Miller, president and chief executive officer of the Career College Association, a Washington-based industry group in a telephone interview. “We’re also glad to see that the department is willing to have further dialogue with stakeholders.”

The Education Department will still issue 13 other rules on or about Nov. 1 intended to protect students at for-profit colleges, the agency said in a statement. For-profit colleges will be required to provide applicants with information on graduation and job placement rates. The department also will strengthen sanctions against colleges whose recruiters mislead students, according to the statement.

If the gainful employment rule were in place today, about 5 percent of all for-profit college programs would no longer be eligible for federal student aid, according to Education Department estimates.

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Schaeuble Pushes EU Fines, Voting Ban for Debt Offenders

German Finance Minister Wolfgang Schaeuble renewed his push for tougher penalties against high-deficit euro-region countries ahead of a meeting of the group charged with drawing up new European Union rules.

In a letter to his counterparts before traveling to Brussels today, Schaeuble called for payments from the EU’s so- called structural funds to euro members failing to adhere to deficit-reduction requirements to be suspended or permanently revoked.

Countries that twice ignore deficit-cutting recommendations or manipulate statistics should lose some of their EU voting rights for a year, Schaeuble said in the letter. That sanction would apply to votes on deficit proceedings against the country in question and decisions concerning “the proper functioning of economic and monetary union,” Schaeuble said.

Germany, the biggest contributor to an emergency fund for over-indebted euro members, is pushing for tougher penalties after bond-yield premiums for countries such as Ireland and Portugal over benchmark German bonds rose to records last week.

Courts

Litwin Foundation Sues SEC for Madoff ‘Negligence’

The Litwin Foundation, a victim of convicted con man Bernard Madoff, sued the U.S. Securities Exchange Commission for “negligence” in failing to uncover the $65 billion Ponzi scheme.

The New Hyde Park, New York-based foundation seeks to recover at least $19 million and other unspecified damages against the agency for failing to prevent losses at Madoff’s investment firm.

The government’s “sovereign immunity” from lawsuits should be waived under a law that allows cases to be brought against the U.S. if its workers were negligent, the foundation said in the complaint. The organization was established in 1989 and contributes to nonprofits that include Lincoln Center for the Performing Arts and the Brooklyn Botanical Garden.

The SEC “had countless opportunities to stop the Ponzi scheme Madoff operated over 16 years and botched all of them,” the foundation said in the complaint.

The plaintiffs said that during a period of 16 years, the SEC investigated Madoff on multiple occasions and failed to expose the fraud.

“The SEC failed to do so because the assigned staff committed numerous negligent, non-discretionary acts and inactions due chiefly to their inexperience, incompetence, bureaucratic pettiness, laziness, inattentiveness, and an agency culture of deference to powerful industry figures,” the foundation said in the complaint.

John Heine, a spokesman for the SEC, didn’t immediately return an e-mail seeking comment about the lawsuit.

Last year a related lawsuit was filed by Phyllis Molchatsky, a disabled retiree and single mother who lost $1.7 million, and Steven Schneider, a doctor who lost almost $753,000.

Madoff, 72, is serving a 150-year sentence for running the fraud. His family members and his biggest investors have been sued for as much as $15 billion by the bankruptcy liquidator.

The case is Litwin Foundation v. United States of America, 10-CV-7367, Southern District of New York (Manhattan).

Sallie Mae Suit to Proceed on Some Claims, Judge Says

A lawsuit alleging student-loan maker SLM Corp. hid its lack of reserves and made misleading statements about earnings may proceed, a judge ruled.

U.S. District Judge William Pauley in Manhattan said Sept. 24 the investor plaintiffs presented enough evidence to continue their case against Reston, Virginia-based SLM, known as Sallie Mae, and its executives. The 2008 suit claims the lender was misleading about its underwriting guidelines, loan forbearance, and financial performance in a bid to inflate its stock price.

Pauley dismissed a related suit brought by plaintiffs who sought to represent participants in SLM’s employee savings and retirement plans, which invested in SLM stock. The plaintiffs, Jitandra Patel and Alex Cordero, claimed SLM breached its fiduciary duty by masking the “precariousness” of its loan portfolio and hid losses from investors.

Edward Ciolko, a lawyer who represents Cordero and Patel, and Jamie Kohen, a lawyer for SLM, didn’t return voice-mail messages left at their offices after business hours.

The cases are In re SLM Securities Corporation Securities Litigation, 08-CV-1029, U.S. District Court, Southern District of New York (Manhattan).

Massey Managers Seek to Block Subpoenas Probing Blast

Lawyers for six Massey Energy Co. managers asked a West Virginia judge to quash subpoenas from the state’s mine safety director requiring them to answer questions about the April explosion that killed 29 people.

The state agency is being used by the federal Mine Safety and Health Administration to force these managers to testify in an abuse of process, the lawyers said in a Sept. 21 filing in state court in West Virginia. The state can compel testimony while the federal agency can’t under limits imposed by Congress, the lawyers said.

The April 5 explosion at Massey’s Performance Coal operation in Montcoal, West Virginia, the worst U.S. mine disaster in 40 years, set off federal and state investigations into its cause. The West Virginia agency this month issued the subpoenas, including one to Elizabeth Chamberlin, Massey’s vice president of safety and health, after the federal probe stalled, the managers’ lawyers said.

The federal mine safety agency has made “inflammatory public statements” about Massey’s Performance Coal operation “from the outset of its investigation,” implying that the accident occurred because of safety violations, the lawyers said. “MSHA has a substantial and immediate interest in making such allegations in order to deflect its own potential responsibility for the tragedy.”

The West Virginia Office of Miners’ Health, Safety and Training “is not commenting at this time on the status of any subpoenas issued pursuant to the official investigation into the Upper Big Branch Mine or on any ongoing litigation,” Leslie Fitzwater, spokeswoman for the agency, said in an e-mail.

Amy Louviere, at MSHA, said, “We don’t comment on ongoing cases. This is a West Virginia matter. We aren’t even a party to this matter.”

The case is In the Matter of Administrative Subpoenas issued by the West Virginia Office of Miners’ Health, Safety & Training, 10-P-22-H, Circuit Court, Raleigh County, West Virginia.

To contact the reporter on this story: Ellen Rosen in New York at erosen14@bloomberg.net; Michael Bathon in Wilmington, Delaware, at mbathon@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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