SEC/Madoff, Berkshire Hathaway, Insider Trading, Nasdaq OMX: Compliance

Two of Bernard L. Madoff’s investors lost their bid to sue the U.S. Securities and Exchange Commission for allegedly gross negligent oversight in its failure to uncover his Ponzi scheme.

U.S. District Judge Laura Taylor Swain in New York yesterday threw out the 2009 lawsuit by investors Phyllis Molchatsky and Steven Schneider which claimed the SEC failed to detect and end the scheme.

“Plaintiffs have identified no statutory or regulatory provision that suggests the existence of prescriptive rules for the conduct of SEC investigations,” Swain said in a 28-page ruling.

Swain has 27 similar cases, according to the court docket.

Molchatsky, a disabled retiree and single mother who claims she lost $1.7 million in the fraud, and Schneider, a doctor who said he lost almost $753,000, filed the lawsuit under the Federal Tort Claims Act in October 2009 after the SEC denied their administrative claims.

The U.S. asked the court to dismiss the case, claiming the government is immune from suits because the SEC has discretion in deciding who to investigate and how to conduct its queries.

Kevin Callahan, a spokesman for the SEC, declined to comment on the court’s ruling. Plaintiffs’ lawyer Howard Elisofon of New York-based Herrick Feinstein LLP, did not immediately respond to a phone message seeking comment.

The case is Molchatsky v. U.S., 1:09-cv-08697, U.S. District Court, Southern District of New York (Manhattan).

New Suits

Berkshire Hathaway, Buffett, Sokol Sued Over Lubrizol Profit

Berkshire Hathaway Inc. (BRK/A) and Chief Executive Officer Warren Buffett were sued by a shareholder over trades in Lubrizol Corp. (LZ) by former Berkshire manager David Sokol.

Berkshire investor Mason Kirby, suing to recover damages for the company, contends that Sokol, also a defendant, hurt the firm by taking a stake in Lubrizol before recommending to Buffett that Berkshire buy the company, according to papers made public yesterday in Delaware Chancery Court in Wilmington.

“Sokol knew that Buffett would closely consider and likely take his recommendation,” Kirby said. “As a result of Sokol’s unethical behavior, Berkshire suffered significant reputational losses and other damages.”

Sokol bought 96,060 shares of Lubrizol in early January before recommending that Omaha, Nebraska-based Berkshire acquire the company, Buffett said in a March statement announcing Sokol’s resignation.

Buffett didn’t immediately respond to a request for comment e-mailed to his assistant, Carrie Kizer.

Ann Thelen, a spokeswoman for Berkshire’s MidAmerican Energy Holdings Co., where Sokol remains chairman until April 21, didn’t immediately return a call seeking comment from Sokol.

Kirby alleges that Buffett and Sokol, “working in concert,” violated duties to shareholders “and put the company at risk for a potential adverse SEC action and negative credit rating.”

The case is Kirby v. Sokol, CA6392, Delaware Chancery Court (Wilmington).

Gunns Sued by Shareholders Over 2010 Financial Disclosure

Gunns Ltd. (GNS), Australia’s biggest woodchip exporter, failed to warn investors of a drop in profit in the first half of fiscal 2010 as required by law, lawyers suing on behalf of about 300 shareholders said.

The investors lost millions of dollars after shares slumped following the company’s announcement in February 2010 that profit fell 99 percent to A$420,000 ($445,000), the law firm Maurice Blackburn said today in an e-mailed statement announcing the lawsuit.

Gunns slumped 22 percent in Sydney trading on Feb. 22, 2010, following the release of first-half financial data, which created concern among investors that the company wouldn’t be able to expand. The shares had a further decline of as much as 15 percent on Feb. 26, 2010, sinking to a nine-year low.

“Investors expect listed companies and their officers to fulfill disclosure obligations,” Jason Geisker, a senior associate at Maurice Blackburn, said in the statement.

Matthew Horan, an outside spokesman for Launceston, Tasmania-based Gunns, said the company will defend itself in court.

The lawsuit, filed in Federal Court in Sydney, is being financed by IMF (Australia) Ltd., the country’s biggest litigation funder.

Courts

Galleon Ex-Trader Goffer Pleads Not Guilty to New Indictment

Galleon Group LLC trader Zvi Goffer, accused of leading one of three insider-trading rings that are the subject of a U.S. probe, pleaded not guilty to new federal charges in an amended indictment.

Goffer and his brother Emanuel Goffer, along with Craig Drimal and Michael Kimelman, yesterday entered not guilty pleas to the new indictment filed by the U.S. on April 7.

U.S. District Judge Richard Sullivan in New York granted defense lawyers’ request for a one-week delay in the trial, which was originally set to begin May 9. The attorneys said they needed time to review evidence because of the new charges.

“I’m not persuaded that a lengthy adjournment is appropriate,” Sullivan told the lawyers, some whom asked for a two-month delay in the case. “It seems an awful lot of what happens in trial preparation happens in the month before trial.”

The indictment added new charges of securities fraud against Zvi Goffer, who now faces two counts of conspiracy and 12 counts of securities fraud. It also removed as defendants David Plate, a former trader at Schottenfeld Group LLC, and Arthur Cutillo, who was a lawyer at the firm Ropes & Gray LLP. Plate pleaded guilty in July while Cutillo pleaded guilty Jan. 14.

The case is U.S. v. Goffer, 10-cr-00056, U.S. District Court, Southern District of New York (Manhattan).

Banks Lose Challenge to U.K. FSA’s Payment-Protection Rules

A group representing banks including Barclays Plc and HSBC Holdings Plc (HSBA) lost a bid to stop U.K. regulators from imposing rules that would require lenders to compensate customers for improperly sold loan insurance.

A London court ruled today in a case filed by the British Bankers’ Association over on payment-protection insurance.

Implementing the measures and handling complaints may cost the banking industry as much 4.5 billion pounds ($7.4 billion), the BBA said in court documents. The industry group also said that the Financial Services Authority imposing the guidelines would unlawfully require banks to make compensation payments.

U.K. antitrust regulators have also cracked down on the product, banning banks from selling most types of payment- protection insurance at the same time they sell the loans the insurance covers.

The insurance, which generates as much as 5.5 billion pounds in annual revenue for U.K. banks, covers payments on credit cards and mortgages in case of illness or unemployment. Customers who bought the insurance rarely compared prices and terms or switched providers, and usually weren’t aware they could have purchased insurance from other companies, the U.K.’s Competition Commission has said.

“We are disappointed with today’s judgment and now need to consider the details of it very carefully as well as next steps including whether it would be appropriate to apply for permission to appeal,” the BBA said in a statement on its website.

The case is The Queen on the Application of the British Bankers Association v. Financial Services Authority, case no. 10/10619, High Court of Justice, Administrative Court (London).

Verdicts/Settlements

Ameriprise, Investors Seek Court Approval of Lawsuit Accord

Ameriprise Financial Inc. (AMP), two of its Securities America units and a group of investors who sued them asked a U.S. judge to approve a proposed $80 million cash settlement.

The investors had bought stock and partnership interests in Provident Royalties LLC, an owner of working interests in oil and natural gas properties, through Securities America from September 2006 through January 2009. They also bought notes issued by so-called special purpose entities affiliated with Medical Capital Holdings Inc., a company that bought accounts receivable, according to papers filed April 18 with U.S. District Judge W. Royal Furgeson in Dallas.

Those who invested in Medical Capital, which was later sued by the U.S. Securities and Exchange Commission for misappropriation of investor funds, lost about $284 million on the special purpose notes. Securities America sold about 37 percent of those notes, according to the investors’ filing. Provident investors lost $46 million when that company went bankrupt.

“The class action settlement will allow investors to recover a meaningful percentage of their losses,” their attorneys told the court.

Ameriprise, a Minneapolis-based company spun off from American Express Co. in 2005, and its Securities America units have also agreed to pay $70 million to investors who filed claims for arbitration and rather than in the courts.

The lead case is case is Billitteri v. Securities America Inc., 09cv1568, U.S. District Court, Northern District of Texas (Dallas).

Former Taylor Bean Chairman Farkas Guilty of Conspiracy, Fraud

Lee Farkas, the ex-chairman of Taylor, Bean & Whitaker Mortgage Corp., was found guilty of 14 counts of conspiracy and bank, wire and securities fraud in what prosecutors said was a $3 billion scheme involving fake mortgage assets.

A federal jury in Alexandria, Virginia, yesterday returned the verdict after one day of deliberations. Farkas, who was free during the trial, was taken into custody. He faces a maximum sentence of 30 years on the conspiracy and bank-fraud charges and 20 years or more on the wire-fraud and securities-fraud counts when he’s sentenced on July 1.

Prosecutors said Farkas, 58, orchestrated one of the largest and longest-running bank frauds in the U.S. that duped some of the country’s largest financial institutions, targeted the federal bank bailout program and contributed to the failures of Taylor Bean and Montgomery, Alabama-based Colonial Bank.

Assistant Attorney General Lanny Breuer, head of the Justice Department’s criminal division, said Farkas’s fraud “poured fuel on the fire” of the financial crisis.

Farkas, who denied any wrongdoing, testified on his own behalf and called two former Taylor Bean employees and a forensic accountant in his defense.

William Cummings, one of Farkas’s lawyers, said the defense team is disappointed with the verdict.

“We fought hard,” said Cummings, a former U.S. attorney in Virginia. “Getting six former colleagues to plead guilty and testify is a difficult obstacle to overcome.”

For more, click here.

Compliance Policy

U.K. Bank Bonuses ‘Inappropriate’ Amid Public Aid, Lawmakers Say

A cross-party panel of British lawmakers said it is “inappropriate” for banks to award staff large bonuses and reap excessive profits while they rely on support from taxpayers.

British banks, which have received more than 1 trillion pounds ($1.6 trillion) of government bailouts guarantees since 2008, benefit from an “implicit expectation” that taxpayers will rescue them, the House of Commons Public Accounts Committee said in a report published in London today. No new mechanism has been developed that would transfer that risk to shareholders and bondholders, the committee said.

“It is inappropriate for banks dependent on taxpayer support to be generating excessive incomes, unnecessary bonuses or dividends at the expense of exiting public support,” Margaret Hodge, a lawmaker from the opposition Labour Party who chairs the panel, said in a statement.

Prime Minister David Cameron’s government is urging banks to show restraint as it pushes through the deepest cuts in public spending since World War II. Public backing for banks was reduced to 512 billion pounds as of December, Hodge said.

Barclays Plc (BARC) gave its chief executive Robert Diamond as much as 10.1 million pounds in salary, bonuses and stock, while HSBC Holdings Plc planned to pay Chief Executive Officer Stuart Gulliver as much as 13.3 million pounds this year.

In a separate report, the same parliamentary committee called for the Treasury to take steps to safeguard taxpayers’ interests in one of the support programs known as the Asset Protection Scheme, which insured potentially toxic bank loans.

Deals

Nasdaq Offers to Pay NYSE $350 Million Should Takeover Fail

Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE) said they are willing to pay NYSE Euronext $350 million if antitrust authorities block their proposed takeover, an offer they say is now based on “fully committed financing” of $3.8 billion.

The statements were included in a letter to NYSE Euronext (NYX)’s board, which on April 10 rejected the unsolicited $11.3 billion proposal and affirmed its February agreement to merge with Deutsche Boerse AG (DB1) for $9.5 billion in stock. The agreement with Deutsche Boerse includes a payout of 250 million euros ($358 million) should that deal fall apart. Nasdaq OMX and ICE said they received $3.8 billion in commitment letters from lenders.

The so-called reverse breakup fee is designed to allay concerns the U.S. government will reject a Nasdaq OMX-NYSE Euronext takeover because it would create a monopoly in stock listings. Nasdaq OMX and ICE would divide NYSE Euronext, giving Atlanta-based ICE the Liffe derivatives markets and Nasdaq OMX, based in New York, the listings, equities and options businesses, saving costs on overlapping units and technologies.

“NYSE shareholders are probably very concerned about antitrust issues, and here they’ve done a couple things to try to address their concerns,” said Ed Ditmire, a New York-based analyst at Macquarie Group Ltd. “That’s at the heart of what will decide their fate.”

NYSE Euronext said it received the proposal and the board will review it “in due course,” according to a statement on its website. Frankfurt’s Deutsche Boerse said it is committed to the merger agreement and is moving forward with plans, according to an e-mailed statement yesterday.

Robert Greifeld, Nasdaq OMX’s chief executive officer, and ICE CEO Jeffrey Sprecher said they are in discussions with the antitrust division of the U.S. Justice Department. In an interview, they said they have begun buying NYSE Euronext stock in the open market to trigger the government’s procedure for vetting antitrust concern. NYSE Euronext’s annual shareholder meeting is April 28, where owners will vote on board members and the right to call special meetings.

For more, click here.

Speeches/Interviews

Wolin Says Treasury Will Resist Efforts to Slow Dodd-Frank

Deputy Treasury Secretary Neal Wolin says the Obama administration will resist efforts to slow the changes required by the Dodd-Frank overhaul of U.S. financial regulations.

“We must move forward with implementing this law,” Wolin said at the Pew Charitable Trusts in Washington yesterday, according to prepared remarks distributed to reporters. “We are doing so quickly, carefully and responsibly. We will continue to do so in the face of these criticisms. And we will continue to oppose efforts to slow down, weaken, or repeal these essential reforms.”

The Dodd-Frank bank regulation law, enacted last year, created a council of regulators to toughen oversight of the country’s biggest financial institutions in an effort to prevent future financial crises. The law also makes changes to government supervision of derivatives, along with consumer protection and other financial regulatory issues.

The Office of Financial Research, created by the law to help agencies collect and coordinate information, is “hard at work” even though it doesn’t have a director, Wolin said. He also said he expects a voting member who specializes in insurance oversight to be named “quite soon” to the Financial Stability Oversight Council.

Wolin said regulators are taking steps to make derivatives markets more resilient and transparent, in order to reduce the risk and costs of a potential crisis. Proposed new rules take into account that commercial end-users who use derivatives contracts to hedge operations rather than to speculate pose lower risks.

For more, click here.

Georgia Joins Dissenters to State Foreclosure Writedown Effort

Georgia Attorney General Sam Olens said he has “significant concerns” about a proposal to reduce loan balances for some homeowners as part of a settlement of a nationwide foreclosure probe, joining at least seven other states that have criticized such a plan.

A deal with the top mortgage servicers in the U.S. that includes writedowns could encourage homeowners who are current on their loans to stop making payments, Olens, a Republican, said yesterday in a telephone interview.

“You’re declaring in advance who the winners and losers are,” Olens said. “I’m a little concerned that this process disengages the normal market forces.”

Republican attorneys general in Virginia, Texas, Florida, South Carolina, Oklahoma, Nebraska and Alabama have signed letters opposing the imposition of writedowns, which proponents call the most effective way to modify a home loan.

State and federal agencies, including the U.S. Justice Department, last month submitted proposed settlement terms to five banks as a starting point for negotiations to set standards for mortgage service and foreclosure. The 50-state effort began last year after homeowners complained of faulty foreclosure practices in the housing collapse.

The state-federal proposal calls in part for monetary payments by banks to go toward a loan-modification program that includes principal reductions.

Supporters of the proposal include attorneys general from Iowa, Connecticut and Illinois, according to representatives in their offices. Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, who is leading negotiations for the states, had no immediate comment on Olens’s remarks.

RBS Says U.K. Commission’s Report Won’t Make Banks Safer

Royal Bank of Scotland Group Plc (RBS), Britain’s biggest government-controlled bank, said the Independent Commission on Banking’s plan to create fire breaks around lenders’ retail units won’t make them safer.

Chief Executive Officer Stephen Hester said in a brief interview at the lender’s annual shareholder meeting in Edinburgh yesterday “It’s not obvious to us that” the proposal, known as subsidiarization, “is the right answer.”

The government-sponsored commission last week recommended the U.K.’s biggest banks should boost capital, implement plans for an orderly bankruptcy and erect fire breaks around their consumer units to boost the stability of the financial system.

“The best way to make sure the banks are safe for the future is the global Basel III reforms,” said Hester. It is “not clear to me that the U.K. on its own needs a special extra something.”

The Basel Committee on Banking Supervision said last year that all banks had to maintain a Core Tier 1 capital ratio, a measure of financial strength, of at least 7 percent. The largest U.K. consumer banks would need to hold at least 10 percent under the commission’s proposals.

“We will have to work hard to mitigate the impact of additional costs arising from the ICB changes,” RBS Chairman Philip Hampton said in a statement. “It seems inevitable that customers and shareholders will be impacted by additional costs.”

To contact the reporter on this story: Ellen Rosen in New York at erosen14@bloomberg.net.

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.

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