G-20 Meeting, Cap-and-Trade, Fed, Madoff: Compliance
The trustee overseeing the bankruptcy of Bernard Madoff’s investment firm sued five of Madoff’s former employees, seeking to recover at least $48 million in allegedly fraudulent transfers.
The trustee, New York attorney Irving Picard, sued Enrica Cotellessa-Pitz, Madoff’s former controller; Daniel Bonventre, former head of operations; and employees Annette Bongiorno and Jo Ann Crupi.
In the suits, filed in U.S. Bankruptcy Court in Manhattan Nov. 12, Picard claims the four were paid millions of dollars to help sustain the Madoff fraud. Madoff, 72, is serving 150 years in prison after pleading guilty to orchestrating history’s biggest Ponzi scheme at New York-based Bernard L. Madoff Investment Securities LLC.
At the time of his arrest, Madoff’s account statements reflected 4,900 accounts with $65 billion in nonexistent investments. Investors lost about $20 billion in principal.
The new suits follow 19 others filed by Picard seeking to recover more than $15.5 billion from parties related to Madoff, including his friends and family, and from so-called feeder funds, which directed most or all of their clients’ money to Madoff.
The cases are Picard v. Cotellessa-Pitz, 10-4213; Picard v. Bonventre, 10-4214; Picard v. Bongiorno, 10-4215; and Picard v. Crupi, 10-4216, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Compliance Policy
Banks Get One-Year Reprieve as G-20 Told to Wait for Measures
The world’s largest banks have won a reprieve of at least a year before facing extra measures that would force them to rein in risk. Divisions within the Group of 20 nations delayed an agreement on such rules.
The Financial Stability Board, which brings together G-20 finance ministers, regulators and central banks, told leaders meeting in Seoul Nov. 12 that steps to prevent the collapse of systemically important financial firms will be suggested by the end of 2011. The G-20 had asked for a proposal by the end of this year.
G-20 leaders approved another set of rules that requires all banks to hold more capital. Those were agreed to by the Basel Committee on Banking Supervision in September. Divisions between Basel committee members, as well as lobbying by banks, led to the softening of the capital rules and put off final decisions about liquidity standards.
“You can tell from the FSB statements that there’s been huge amount of controversy,” said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC in Washington. “Some of these issues have been on the international agenda for decades, and still there’s no end in sight to the debate.”
The board said it will identify the firms that should be subject to stricter rules by the middle of next year and also complete studies by then on the additional “loss absorbency” the largest banks will need. National regulators will be able to select “from a menu of viable alternatives” depending on their individual circumstances, the board wrote in a report to the G- 20 leaders released Nov. 12.
The options being considered include a straightforward capital surcharge for the systemically important banks, contingent capital and bail-in instruments. Contingent capital is debt that automatically converts to stock under stressful conditions. Bail-in instruments require bondholders to take a pre-set loss when a lender collapses. A capital surcharge would raise the equity-to-assets ratio that the largest banks must hold compared with smaller firms.
“How this greater capacity is going to be addressed by different institutions will depend on what these institutions are, what is their history,” said FSB Chairman Mario Draghi in an interview with Bloomberg News last week.
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G-20 Says Countries Can Act Against Capital Inflows
The Group of 20 nations said emerging markets facing a surge of capital inflows can adopt regulatory steps to cope, offering them cover to limit currency swings and stem asset bubbles as the U.S. adds $600 billion of liquidity.
“In circumstances where countries are facing undue burden of adjustment, policy responses in emerging-market economies with adequate reserves and increasingly overvalued flexible exchange rates may also include carefully designed macro- prudential measures,” leaders of the G-20 nations said in a statement Nov. 12 following a two-day meeting in Seoul.
The agreement comes after countries from Brazil and Indonesia to South Korea imposed restrictions on investment inflows aimed at defusing the danger of hot money, or capital seeking short-term gains. The G-20 called on international regulators to compile a report on best practices on financial- security policies, including capital-flow tools.
“We have seen increasing ‘intellectual acceptance’ of capital-flow measures as part of the policy toolkit for emerging-market authorities,” said Wellian Wiranto, a Singapore-based economist at HSBC Holdings Plc. The “G-20 statement both acknowledges the extraordinary circumstances that the policy makers have to deal with and the limitations of the more traditional means of coping with the inflows.”
Steps to impose restrictions on capital have increased as emerging-market currencies strengthened, with Brazil’s real climbing 21 percent against the dollar in the past 18 months, Chile’s peso up 18 percent, Thailand’s baht rising 16 percent and South Korea’s won appreciating 10 percent.
The Fed fueled concern in emerging economies last week when it announced plans to buy $600 billion of long-term government bonds to reduce borrowing costs and spur growth in a second round of so-called quantitative easing. The U.S. dollar has weakened over the past three months against all 16 major market currencies tracked by Bloomberg.
Capital flows into emerging markets are running at $575 billion a year, 20 percent higher than before the world financial crisis, Goldman Sachs Group Inc. said in September.
Pledges to refrain from competitive devaluations of currencies, and efforts to move toward market-set exchange rates should help stem excessive capital flows, according to the G-20 statement. So will efforts by advanced economies like the U.S. to be vigilant against “disorderly movements” in exchange rates, it said.
The G-20 also agreed Nov. 12 to develop early warning indicators to head off sustained current-account imbalances that risk roiling the global economy. The group said the first round of assessments will start next year.
Tarullo Says Fed Has ‘Conservative’ Approach on Bank Dividends
Federal Reserve Governor Daniel Tarullo said that banks seeking to increase dividends will be required to undergo a stress test showing they would have sufficient capital for two years.
“Our approach to considering such requests will be a conservative one,” Tarullo said Nov. 12 in prepared remarks in Washington. “We will expect firms to submit convincing capital plans that demonstrate their ability to absorb losses over the next two years under an adverse economic scenario that we will specify, and still remain adequately capitalized.”
Concerns that bank capital was under pressure from souring loans prompted Fed officials in February 2009 to issue a letter to its regional supervisors telling them banks “should reduce or eliminate dividends” when earnings decline or the economic outlook deteriorates. The new guidelines may show the Fed’s confidence in banks’ health is being restored.
Tarullo said firms must also have a “sound estimate of any significant risks that may not be captured by the stress testing, such as potential mortgage putback exposures, and the capacity to absorb any consequent losses.” Firms must also be able to demonstrate their capital will conform with the new Basel III requirements and any adjustments required under financial overhaul legislation passed this summer.
The Fed will “soon” be issuing the guidelines for the first quarter of next year, said Tarullo, 58, who is playing a lead role in overhauling the Fed’s supervision of financial firms after President Barack Obama signed legislation remaking the financial regulatory system in July.
The legislation, known as the Dodd-Frank Act, creates a consumer bureau housed at the Fed, a council of regulators to monitor firms for systemic risk to the economy and a mechanism for liquidating large financial firms whose collapse could threaten economic stability.
Tarullo also said U.S. banks and regulators would adopt the guidelines of Basel III.
For a video of the speech, click here.
G-20 to Pursue Climate Talks, Fossil Fuel Subsidy Curbs
Leaders of the Group of 20 nations expressed support Nov. 12 for the United Nations climate change negotiations beginning later this month in Mexico and the drive to phase out $312 billion in fossil fuel subsidies.
The group, which includes the U.S., China, Germany, France, Britain, Japan, India and Korea, said in a statement following a meeting in Seoul that they would “spare no effort to reach a balanced and successful outcome in Cancun.”
The two-week meeting in the Mexican resort city starting Nov. 29 marks the annual effort by delegates from some 190 nations to agree to a framework for reducing carbon dioxide emissions and funneling up to $100 billion to developing nations seeking cleaner forms of energy.
A year ago in Copenhagen, delegates from 190 nations at the UN talks failed to agree to a treaty. Instead, a group of countries including the U.S. and China made an informal accord that included voluntary measures to reduce emissions blamed for damaging the atmosphere.
The statement from G-20 leaders said, “We reiterate our commitment to take strong and action-oriented measures and remain fully dedicated to UN climate change negotiations. We reaffirm the objective, provisions, and the principles of the UN Framework Convention on Climate Change.”
The group will “take steps to create, as appropriate, the enabling environments that are conducive to the development and deployment of energy efficiency and clean energy technologies.”
Early CO2 Auctions ‘Hardly Feasible’ in 2011, EU Says
Early auctions of carbon allowances for the post-2012 period of the European Union emissions program are not likely to start in 2011 as further work is needed on infrastructure for the sales, according to a senior EU official.
The 27-nation EU, which has given away the majority of allowances since it started the world’s largest cap-and-trade program in 2005, will require most emitters to purchase their allotment of permits in the third phase that starts in 2013 and runs through 2020. European power producers, including Germany’s second-biggest utility, RWE AG, have said they need phase-three permits immediately to hedge their future electricity sales.
“In view of the further work needed, a start of phase 3 auctions in 2011 is hardly feasible,” Jos Delbeke, director general at the European Commission’s climate department, said in a statement Nov. 12. “The commission is fully committed to ensure a smooth transition to large-scale auctions.”
The commission, the EU’s regulatory arm, is planning a meeting with experts and interested parties before the end of this year to discuss the volume and timing for early auctions of CO2 permits, Delbeke said. A decision on that will be included as an annex to the auctioning regulation that member states agreed on July 14 and the commission formally adopted Nov. 12.
The EU emissions program, designed to help fight climate change, imposes CO2 quotas on around 12,000 power plants and factories, requiring those producing more than their allowance to buy more and letting those that emit less can sell their surplus. The EU carbon market was valued at $118.5 billion last year, according to the World Bank.
The bloc will auction around 60 percent of the total number of permits in 2013, according to the commission estimates, and the proportion will increase in coming years. The cap for CO2 discharges for that year has been set at 2.04 billion tons, including aluminum and chemical makers that join the program in the third phase. A further adjustment is planned for airlines that will become part of the system from 2012.
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Plan to Abolish FSA Attacked, Bonus Rule Angers Wall Street
Peter Clarke, chief executive officer of Man Group Plc, said the U.K. government’s plan to dismantle the Financial Services Authority has damaged the country’s ability to withstand regulatory moves from Europe, the Financial Times reported, citing an interview with Clarke.
The U.K.’s bargaining position in Europe has been “impaired” at an important time by the decision to abolish the FSA because it has left the future of financial industry regulation unclear, Clarke said, according to the newspaper.
Separately, the FSA has angered Wall Street banks by attempting to clamp down on bonuses to financiers who rarely set foot in London, the Sunday Times reported, citing a lawyer at Clifford Chance LLP.
The regulator determined that any individual with significant influence over decisions made in Britain be included in remuneration curbs, the newspaper said. Banks being pressured to comply include Bank of America Merrill Lynch, Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley, it said.
Bankers are leaving Britain, according to the report.
Compliance Action
CIBC Suspends Two Advisers in OSC Trading Probe
Canadian Imperial Bank of Commerce suspended two investment advisers accused by Ontario’s securities regulator of trading on insider information of Barrick Gold Corp.’s takeover of Placer Dome Inc. and three other deals passed on by a Toronto lawyer.
The Ontario Securities Commission alleges that Mitchell Finkelstein, a lawyer for Davies Ward Phillips & Vineberg LLP, along with CIBC advisers Paul Azeff and Korin Bobrow of Montreal, were engaged in an illegal insider “tipping and trading scheme” between November 2004 and May 2007.
“As a result of the charges filed by the staff of the Ontario Securities Commission yesterday, these two individuals have been suspended immediately,” CIBC spokesman Rob McLeod said in a statement on Nov. 12. “We have and will continue to cooperate fully with the OSC investigation.”
Finkelstein, a partner in Davies’ corporate finance and mergers and acquisition practices in Toronto, was alleged to have sought out and acquired details of takeovers, which he leaked to CIBC’s Azeff, according to a statement of allegations filed by the Canadian regulator.
Those deals included Kohlberg Kravis Roberts & Co.’s 2004 bid for Masonite International Corp., Barrick’s takeover offer for Placer Dome in 2005, and Sherritt International Corp.’s acquisition of Dynatec Corp. in 2007.
Azeff shared the information with his co-worker, Bobrow, and they would then trade the stocks based on the undisclosed details. The pair also recommended the stocks to family, friends and clients, the OSC said.
The regulator also named former TD Waterhouse Canada investment advisers Howard Jeffrey Miller and Man Kin Cheng, also known as Francis Cheng, accusing them of insider trading and tipping. Miller learned of the material from one of Azeff’s clients, according to the statement.
“We have a strong risk and governance culture and take the trust our clients place in us very seriously,” Maria Leung, a Toronto-Dominion spokeswoman, said in an e-mailed statement. “We fully cooperate with and support the regulatory authorities, in this instance the OSC.”
Finkelstein, who left the firm Nov. 11, couldn’t immediately be reached for comment.
“Davies has recently been informed of the allegations against a former member of our firm and has cooperated fully with the OSC,” managing partner Shawn McReynolds said in an e- mailed statement. “We have reviewed the allegations and have concluded they are isolated to actions allegedly taken years ago by one individual.”
Azeff, Bobrow, Miller and Cheng couldn’t be reached for comment.
A hearing has been set for Jan. 11.
Swiss Shipper Finds Resistance Futile in Bribe Probe
A Swiss freight forwarder, like Siemens AG before it, faced potentially crippling penalties when U.S. prosecutors began investigating the bribes it paid to government officials around the world.
The freight company, Panalpina World Transport Holding Ltd., could battle the probe and risk an indictment, or clean up its practices and help prosecutors unearth its wrongdoing. Like Siemens, Panalpina chose cooperation. On Nov. 4, the Justice Department rewarded Panalpina, letting it avoid prosecution by paying $81.5 million, admitting “a culture of corruption,” and strengthening compliance programs.
Surrender by companies such as Panalpina and Siemens is now the norm under the 33-year-old Foreign Corrupt Practices Act. No company has risked an FCPA court fight in two decades out of fear that a conviction could lead to a loss of public contracts and higher penalties, lawyers said. After resolving two or three cases a year, the U.S. settled 47 corporate cases since 2005 without trial, reaping $3.3 billion for the U.S. treasury.
“Publicly traded companies cooperate in FCPA matters because they can’t afford the potential consequences of fighting with the government,” said Kirk Ogrosky, a partner at Arnold & Porter LLP who supervised Justice Department fraud cases. “After 33 years, there is shockingly little court precedent to rely on.”
Settlements this year involved BAE Systems Plc, Europe’s largest defense company, which agreed to pay $400 million; Daimler AG, maker of Mercedes-Benz cars, which will pay $185 million; and Royal Dutch Shell Plc, Europe’s largest oil company, which agreed Nov. 4 to pay $48.1 million.
Cooperating and settling to avoid the possibility of an indictment allows companies to erase uncertainty and remove the “uncapped liability” of a trial, said Joseph Warin, an FCPA lawyer at Gibson, Dunn & Crutcher LLP.
The FCPA bars corrupt payments to foreign officials for obtaining or keeping business. The law requires companies with securities listed in the U.S. to keep accurate books and records of transactions and maintain internal accounting controls.
FCPA enforcement is a rising priority at the Justice Department, where about 30 to 40 lawyers might work at any time on FCPA cases, including 15 who are full-time. The SEC has assigned more than 30 lawyers to FCPA cases, and the Federal Bureau of Investigation has an entire squad of agents on foreign anti-bribery cases.
The intensity of U.S. enforcement has provoked critics. The U.S. Chamber of Commerce’s Institute for Legal Reform said the Justice Department and the U.S. Securities and Exchange Commission, which has civil authority in FCPA cases, “almost exclusively” define gray areas of the law without judicial oversight.
Congress should clarify ambiguities in the law that “have had a chilling effect” on U.S. businesses, some of which have “ceased foreign operations rather than face the uncertainties of FCPA enforcement,” the institute said in a paper last month.
Michael Koehler, an assistant professor of business law at Butler University in Indiana, assails settlements reached without judges having input on questions such as whether employees of state-owned companies are foreign officials. Many instances of “clear-cut bribery,” as in Siemens, are resolved through lesser books-and-records or internal controls charges, he said.
The U.S. and 37 other countries also are fighting transnational bribery through the Paris-based Organization for Economic Cooperation and Development.
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South African Reserve Bank Suspends Head of Money Printer
The South African Reserve Bank suspended the head of South African Bank Note Co. after discovering “issues” in its technical operations, the central bank said in a statement posted on its website, without naming the person involved.
“Corrective action has been taken” and an acting managing director has been appointed, the bank said without naming anyone.
Musa Mbhele was the managing director of the money printing company as of March 31, according to the central bank’s 2010 annual report. A person identified as G. Zulberg is now acting managing director, according to an updated note on the central bank’s website dated Nov. 5.
Its spokesman, Hlengani Mathebula, didn’t answer calls to the number provided in today’s statement or respond to a message left on his mobile phone.
SABN, as the printer is known, is a unit of the central bank and was established in 1958.
A disciplinary inquiry will provide the suspended executive an opportunity to present his position, the bank said.
Courts
CDR Financial May Face More Charges in Muni-Bond Bid-Rigging
The U.S. Justice Department’s antitrust division plans to file more charges next month against a Los Angeles-based financial adviser accused of rigging bids on municipal-bond investment contracts, a government lawyer said.
The federal government expects to charge CDR Financial Products with depriving states and local governments of its so- called honest services and with defrauding the U.S. Internal Revenue Service, Rebecca Meiklejohn, a Justice Department antitrust lawyer, said Nov. 12 during a hearing in a Manhattan federal court. The government may bring the fresh indictment as soon as Dec. 10, she said.
Last year, prosecutors charged CDR, its founder and two other executives with conspiring to rig bidding on contracts with local governments to invest the proceeds of bond issues. The indictment claimed that CDR and its employees, who handled the bidding, chose winners in exchange for kickbacks. Taxpayers lost because the money was invested at below-market rates, the government says. The company and the three executives deny the charges.
The U.S. Supreme Court this year narrowed the honest services fraud statute to cover only bribery and kickbacks.
Defense lawyers said that the Justice Department informed them before the first indictments that it didn’t plan to file honest-services charges.
“The delay in bringing this to the court’s attention is inexplicable to me,” said Michael McGovern, an attorney with New York-based Ropes & Gray LLP, who represents former CDR Chief Financial Officer Z. Stewart Wolmark.
The government has identified 232 deals in which it says CDR rigged bids and defrauded state and local governments.
The case is U.S. v. Rubin/Chambers, Dunhill Insurance Services Inc., 09-CR-01058, U.S. District Court, Southern District of New York (Manhattan).
Harbinger Investigated by SEC, U.S. Attorney Over Falcone Loan
Harbinger Capital Partners is being investigated by the Securities and Exchange Commission and the U.S. Attorney’s office over a $113 million loan to founder Philip Falcone and possible preferential treatment of some investors, according to two people with knowledge of the probe.
Falcone, 48, took the loan from the Harbinger Capital Partners Special Situations Fund in October 2009 to pay personal taxes, Bloomberg Markets Magazine reported in September. At the time, investors were barred from exiting the fund because it had assets tied up in the bankruptcy of Lehman Brothers Holdings Inc. The New York-based firm disclosed the loan in the fund’s March 12, 2010, financial statements.
“The loan has been a topic of discussion since it was disclosed in March,” Falcone said yesterday in an e-mail, adding that it was documented by outside auditor. Falcone denied there was preferential treatment of clients, saying the allegation “is completely and utterly untrue.”
He declined to comment on whether the SEC and the U.S. Attorney in Manhattan were investigating the firm. The probes were reported yesterday by the Wall Street Journal.
Goldman Sachs Group Inc. plans to pull $120 million from the fund, people familiar with the firm’s decision said earlier this week. Another investor in Harbinger’s core fund, the New York State Common Retirement Fund, has asked to redeem $41 million. Dennis Tompkins, a spokesman for the state pension system, declined to comment on the reason the pension fund is withdrawing the money.
John Nester, a spokesman for the SEC in Washington, declined to comment. A call to the U.S. Attorney’s office after regular business hours wasn’t returned.
Comings and Goings
North Carolina’s Smith to Oversee Fannie Mae, Freddie Mac
President Barack Obama will nominate North Carolina Banking Commissioner Joseph A. Smith Jr. to be chief regulator for Fannie Mae and Freddie Mac as the administration prepares to overhaul the mortgage firms, the White House said Nov. 12 in a statement.
To contact the reporters on this story: Ellen Rosen in New York at erosen14@bloomberg.net; Carla Main in New Jersey at cmain2@bloomberg.net.
To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.
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