SEC Whistle Blowers, Sweden ‘Bail-In’, Oil Manipulation Suit: Compliance

The U.S. Securities and Exchange Commission will let corporate whistle-blowers collect as much as 30 percent of penalties when they report financial wrongdoing, even when they bypass companies’ internal complaint systems.

SEC commissioners voted 3-2 yesterday in Washington to establish a whistle-blower program to “reward individuals who provide the agency with high-quality tips that lead to successful enforcement actions.” The program, part of the SEC’s rulemaking under the Dodd-Frank Act, expands a bounty system that was previously limited to insider-trading cases.

Companies had asked the SEC to require whistle-blowers to report problems though internal compliance programs before going to the agency. While rejecting that approach, the SEC increased incentives for internal complaints by permitting bounties for people whose tips are passed on to the agency and expanding the time whistle-blowers can maintain their place in line at the SEC while reporting to the company first.

Dodd-Frank called for the SEC to establish the expanded bounty system, which has been active since the regulatory overhaul was enacted in July. The commission proposed the program in a unanimous vote on Nov. 3.

For more, click here, and see Interviews section, below.

For video of the SEC meeting, click here.

Compliance Policy

Sweden FSA Wants Bail-In to Be Priority in Crises, Frisell Says

Sweden’s financial regulator wants the government to make senior bank creditor losses a priority in insolvencies as the largest Nordic economy redesigns its crisis-handling tools.

Sweden wants to emulate bail-in rules first tested in Denmark even as banks warn the model may raise funding costs. The Feb. 6 failure of regional Danish lender Amagerbanken A/S forced a 41 percent loss on unsecured senior bonds, setting a European Union precedent amid a region-wide debate on burden sharing. Moody’s Investors Service has since downgraded Denmark’s biggest banks twice as it factors out the likelihood of state support. The rating company has also warned Denmark’s lenders face a long-term rise in funding costs.

Sweden’s government has said its financial crisis committee will finish its proposals in August next year at the latest.

A push for tougher bank insolvency rules marks Sweden’s latest step to impose some of the world’s harshest financial regulatory standards. Finance Minister Anders Borg and Riksbank Governor Stefan Ingves have both said they want Sweden to target tougher capital requirements than those set by the Basel Committee on Banking Supervision and enforce the rules earlier.

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BofA Unit’s Utah Foreclosures Illegal, State Says in Letter

A Bank of America Corp. (BAC) unit conducting home foreclosures in Utah is violating the law, the state’s attorney general said.

ReconTrust Co. isn’t meeting requirements for carrying out foreclosures in the state, Utah Attorney General Mark Shurtleff said in a letter to Bank of America Chief Executive Officer Brian Moynihan. The letter, dated May 19, was released yesterday by Shurtleff’s office.

Jumana Bauwens, a Bank of America spokeswoman, didn’t immediately return a phone message and an e-mail seeking comment.

The focus on ReconTrust comes as federal officials and attorneys general in all 50 states are scrutinizing how the largest mortgage servicers, including Bank of America, handle home loans and conduct foreclosures. New York Attorney General Eric Schneiderman is investigating banks’ mortgage securitization, and California Attorney General Kamala Harris has announced a mortgage fraud task force.

Earlier this year, Shurtleff raised the same allegations against ReconTrust in a homeowner’s lawsuit against the company.

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Compliance Action

U.S. Comptroller Proposes Limits on Pre-empting State Laws

The Office of the Comptroller of the Currency issued a proposed rule that would require subsidiaries of national banks to follow state consumer protection laws.

The OCC’s notice of proposed rulemaking, required by the Dodd-Frank Act, would require the agency to consult with the new Consumer Financial Protection Bureau prior to making the decision to pre-empt some state consumer laws.

Some congressional Democrats and consumer advocates have pushed for tighter curbs on the OCC’s power to pre-empt state banking laws for national banks. A compromise agreement reached in Congress during negotiations over Dodd-Frank allowed the OCC to retain much of its pre-emption authority.

The OCC will recognize the authority of state attorneys general to enforce any non-preempted state laws against nationally chartered banks, the rule said. The rule will be published in the Federal Register today and calls for a 30-day comment period, the OCC said yesterday in a press release.

German Lenders Said Likely to Pass New Round of EU Stress Tests

All 13 German lenders tested in the second round of European Union stress tests are likely to pass after boosting and converting capital and shifting risky assets into bad banks, three people familiar with the process said.

The lenders have passed the examinations based on preliminary results from data handed in by the individual companies to regulators, said the people, who declined to be identified because the information isn’t public. Preliminary results of the stress tests have been submitted by lenders to the European Banking Authority, and are being analyzed, said Franca Rosa Congiu, a spokeswoman for the EBA.

The data is subject to a “rigorous peer review validation and quality assurance process” by experts from the EBA, European Central Bank and national regulators, Congiu said in an e-mailed statement yesterday. “The process is on-going and no country can be sure of the outcome of the exercise before the actual publication of the results” in June, she said.

The 90 European banks tested are expected to maintain a core Tier 1 capital ratio of at least 5 percent under scenarios that include a review of how lenders would handle a 0.5 percent economic contraction in the euro area in 2011 as well as a 15 percent drop in European equity markets.

Die Zeit newspaper reported earlier that all 13 German lenders passed the stress tests, citing unidentified people from the financial industry.

Italy’s 5 Biggest Banks Need EU11.4 Billion to Meet Basel Rule

Italy’s five biggest banks will need 11.4 billion euros ($16 billion) in capital to reach a 7 percent common-equity target under so-called Basel III rules, according to research institute Prometeia.

The calculation is based on the banks’ results last year and the rights offerings approved so far, Prometeia said yesterday at a Milan presentation. The gap will decrease to 5.3 billion euros if saving shares would be converted to common stock and if UniCredit SpA (UCG)’s 3 billion euros of cashes bonds are renegotiated and then considered as core capital.

Italian lenders are boosting capital reserves before the implementation of new rules requested by central bankers to avert a repeat of the financial crisis. Intesa Sanpaolo SpA (ISP), Monte dei Paschi di Siena SpA, Unione di Banche Italiane ScpA (UBI), and Banco Popolare SC (BP) have asked investors for a total of 10.5 billion euros this year to strengthen finances. UniCredit, the No. 1 bank in the country, is the only lender facing stress tests that is not asking for money from investors.

The Basel Committee on Banking Supervision will force lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Lenders will have as long as eight years to comply in full with the requirements.

Barclays Among Banks Breaking Privacy Rules, Consumer Group Says

Barclays Plc (BARC), Banco Santander SA (SAN) and six other lenders are suspected of breaking rules on protecting customer data a total of more than 500 times in one year, the U.K. consumer rights group Which? said.

Complaints filed through August 2010 with Britain’s privacy watchdog, the Information Commissioner’s Office, include claims that banks failed to give customers copies of data held on them, failed to follow security rules and gave data to third parties, the consumer group said yesterday in a statement.

The customer rights group said the problem could be much worse, since 87 percent of U.K. citizens haven’t heard of the privacy watchdog and therefore can’t file complaints.

Elizabeth Holloway, a spokeswoman for London-based Barclays, said the figures supplied by Which? are too high because about half of the complaints were found to not be violations.

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SEC Said to Investigate Fifth Third Hybrids for Insider Trading

U.S. regulators are examining whether investors made illegal trades in Fifth Third Bancorp. (FITB)’s trust preferred securities after the volume of transactions spiked 54-fold before the bank said it would redeem the instruments, a person with knowledge of the inquiry said.

The Securities and Exchange Commission is looking for evidence of insider trading prior to a May 18 announcement by the bank that it would redeem the investments for less than market value, the person said, asking not to be named because the investigation isn’t public. Cincinnati-based Fifth Third said separately that it will compensate investors who bought the so-called TruPS in the two-days before the redemption offer.

Cathy Quel, a spokeswoman for Fifth Third, didn’t return an e-mail seeking comment and Rich Rosen in the investor relations department, didn’t immediately return a call left at his office after regular business hours. John Nester, an SEC spokesman, declined to comment.

Fifth Third released a regulatory filing May 18 saying it would repurchase the shares. Nasdaq Stock Market halted trading in the hybrids about 4 minutes after the regulatory filing was issued, according to its records.

Fifth Third informed Wilmington Capital, trustee for the securities, on May 16 of its intention to redeem the securities, spokeswoman Debra DeCourcy said in a May 23 e-mailed statement in response to questions from Bloomberg News. Fifth Third released a regulatory filing with the SEC and a news release two days after notifying Wilmington Capital.

The company is “voluntarily taking this step” and regrets any “inadvertent harm” that may have been caused as a result of the notification process involved in this redemption, Fifth Third said in a statement.

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Courts

Billionaire Fredriksen Says Oil Manipulation Suit ‘Rubbish’

The lawsuit against Arcadia Petroleum Ltd. and Parnon Energy Inc. by the U.S. futures regulator for oil-market manipulation is “rubbish,” billionaire John Fredriksen said.

The Commodity Futures Trading Commission yesterday filed a complaint against two traders, James T. Dyer and Nicholas J. Wildgoose, and their employers Parnon and Arcadia, claiming the alleged scheme generated $50 million in unlawful profits and pushed crude oil prices higher nationwide. Parnon and Arcadia, affiliated companies, are subsidiaries of Farahead Holdings, which is indirectly controlled by trusts set up by Fredriksen.

“This came as a surprise to me, I wasn’t aware of it,” Fredriksen said in an interview outside Oslo yesterday. “Those who work with buying and selling oil, that’s how they operate all of them. It’s completely normal.”

In the lawsuit filed May 24 in U.S. District Court of New York, the CFTC said the traders, who had no commercial need for crude oil, made the “economically irrational” move of holding their physical position to lull the market into believing that the oil had been stored or put to commercial use, with “the secret intent to surprise the market later” by dumping their position and driving prices back down.

The traders then used derivatives to sell short, driving the price down and generating profits on their short position, according to the complaint.

The suit is the first anti-manipulation case filed or settled by the CFTC since April 29, 2010, according to the agency.

Morgan Crucible Wins Dismissal of U.K. Civil Claims Over Cartel

Morgan Crucible Co., the maker of carbon materials for medical and transportation equipment, won its dismissal from a U.K. lawsuit filed by Deutsche Bahn AG and 30 other European rail companies over a defunct graphite cartel.

The price-fixing, which lasted from 1988 to 1999, caused customers to pay too much for graphite-based goods used for transferring electricity in train motors. While Windsor, England-based Morgan Crucible won immunity from EU fines by being the first to cooperate, its former Chief Executive Officer Ian Norris was sentenced to 18 months in prison in a parallel U.S. case.

One of the rail companies’ lawyers, Lianne Craig of Hausfeld & Co. LLP, declined to comment when reached yesterday by phone.

The case is Deutsche Bahn AG & Others v. Morgan Crucible Co. & Others, 1173/5/7/10, Competition Appeal Tribunal (London).

Interviews/Speeches

World Needs ‘A New IMF,’ Chile President Sebastian Pinera Says

Chilean President Sebastian Pinera called for an overhaul of leadership at the International Monetary Fund.

“The world has changed so much since” the IMF’s inception, Pinera said yesterday in an interview with Bloomberg Television in Paris. “We need a new IMF and for that we need new leadership,” he said.

Chile hasn’t made a decision on who to support as a candidate to head the fund, Pinera said, urging “a broad and strong agreement” on Dominique Strauss-Kahn’s replacement.

Geithner Sees ‘War of Attrition’ Against Financial Overhaul

U.S. Treasury Secretary Timothy F. Geithner said some lawmakers and bankers are waging a “war of attrition” against efforts to strengthen regulation of the financial system.

“You’re seeing some people run a war of attrition against the reform act,” Geithner said at an event yesterday in Washington, without identifying the people. “They’re trying to starve the agencies of funding so they can’t enforce protections for investors.”

Geithner also said opponents of the Obama administration are trying to block presidential appointments to regulatory agencies “as a way to get leverage over the outcome, and they’re trying to slow down so that they can weaken over time the thrust” of the Dodd-Frank financial overhaul law. “We’re not going to let that happen.”

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Frenkel Says New SEC Whistle-Blower Rule ‘Unfortunate’

Jacob Frenkel, a partner at Shulman Rogers Gandal Pordy & Ecker, discussed the decision by the U.S. Securities and Exchange Commission to let corporate whistle-blowers collect as much as 30 percent of penalties when they report financial wrongdoing, even when they bypass companies’ internal complaint systems.

The program, part of the SEC’s rulemaking under the Dodd- Frank Act, expands a bounty system that was previously limited to insider-trading cases. Frenkel spoke with Mark Crumpton on Bloomberg Television’s “Bottom Line.”

For the video, click here.

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

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

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