Theflyonthewall Unblocked, CoCos, Jiau Verdict: Compliance

Barclays Plc (BARC), Bank of America Corp. (BAC)’s Merrill Lynch and Morgan Stanley can’t use New York law to block Theflyonthewall.com, an online financial news service, from issuing immediate reports about changes in their stock ratings, a federal appeals court ruled.

The appeals panel yesterday in Manhattan reversed a lower court ruling that had blocked Theflyonthewall.com, based in Summit, New Jersey, from reporting the upgrades or downgrades of stocks for two hours or until half an hour after the opening of the New York Stock Exchange.

The injunction U.S. District Judge Denise Cote in Manhattan issued last year relied on New York state law, which permits plaintiffs to sue based for the misappropriation of so-called hot news. Judge Robert Sack, writing for the three judge panel, concluded that a firm’s ability to make news by issuing a recommendation likely to affect the market price of a security “does not give rise to a right for it to control who breaks that news and how.”

In a statement, Theflyonthewall.com called the ruling “a complete victory in its long-running battle with the investment firms.”

Glenn Ostrager, lead counsel for Theflyonthewall.com, said in the statement that he is pleased the appeals court clarified the law governing the publication of hot news.

Merrill Lynch spokesman Bill Halldin and Morgan Stanley (MS) spokeswoman Sandra Hernandez had no immediate comment on the ruling. Barclays spokesman Mark Lane declined to immediately comment.

The case is Barclays Capital Inc. v. Theflyonthewall.com Inc., 10-1372, 2nd U.S. Circuit Court of Appeals (Manhattan).

For more, click here.

Compliance Policy

Danish Central Bank Opens Door to CoCos to Help Lenders

Denmark’s central bank is open to letting the Nordic country’s biggest lenders resort to contingent convertible bonds to help them meet extra capital requirements designed to prevent insolvency.

The comment was made by central bank Governor Nils Bernstein, 68, in an interview in Copenhagen yesterday.

The Basel Committee on Banking Supervision may let lenders use so-called CoCos, which convert into equity at a given trigger, to fulfill tougher capital rules, Lars Frisell at Sweden’s bank regulator and a member of the Basel committee said last month.

The securities have been criticized by Oswald Gruebel, chief executive officer at Switzerland’s biggest bank UBS AG (UBSN), for diluting regular shareholders’ investments. Peter Straarup, the CEO at Denmark’s biggest lender Danske Bank A/S, has said he’s open to using CoCos. Nordea Bank AB (NDA) CEO Christian Clausen said in April the securities can be “good” if used “in the right way.”

The Basel committee may require the biggest banks to hold as much as 3.5 percentage points in extra capital if they grow, two people familiar with the talks said this month. Members of the Basel group are unlikely to agree at this week’s meeting whether the surcharge should be made up only of common equity or whether part of it could contain CoCos, one of the people said.

German Bank Group Says Investor Help on Greece Needed

The agreed-upon voluntary participation of bondholders in a Greek aid package is necessary to avoid a “dangerous chain reaction,” according to the Association of German Banks, which called for additional incentives for investors.

Banks are “aware of their responsibility” and plan to push for a “sustainable solution,” the association’s general manager, Michael Kemmer, said in an e-mailed statement yesterday. Additional incentives such as higher ratings through certain guarantees as well as wide political support for Greek reforms would help, he said.

Telephone Companies to Face Proposed FCC Rules on Billing

A U.S. regulator said he would propose rules to keep unauthorized charges off subscribers’ monthly telephone bills.

Federal Communications Commission Chairman Julius Genachowski made the remarks about the rules yesterday in a speech in Washington. Genachowski said he would send fellow FCC members his proposal for new rules today. The regulations will call for more disclosure on phone bills, the agency said in a news release.

The FCC proposed on June 16 a total of $11.7 million in fines against four telephone companies it said had charged thousands of consumers for services that they never wanted, ordered or used, a practice known as cramming. In a June 16 advisory, the agency said it would not tolerate the practice.

Korea, Tokyo Exchanges Study Cross-Trading, Economic Daily Says

Korea Exchange Inc. and Tokyo Stock Exchange Inc. are studying ways to enable cross-trading at each other’s bourse, the Seoul Economic Daily reported, citing unidentified industry officials.

Euro Area Scraps ESM Seniority for Greece, Ireland, Portugal

Euro-area governments stripped their permanent debt-crisis mechanism of preferred-creditor status for any loans to Greece, Ireland and Portugal to help the countries return to bond markets. They also expanded their current 440 billion-euro ($630 billion) fund.

The decision by finance ministers today marks a policy reversal from a March agreement to give the European Stability Mechanism preferred status covering aid for all euro-area countries. Such seniority would have given the ESM, due to be established in mid-2013, priority over private investors in any payout after a default.

Irish Finance Minister Michael Noonan told reporters after the decision in Luxembourg that the amendment is “not good news for Ireland.”

European Union governments are seeking to ease the return to debt markets of the three euro countries that have received aid totaling 256 billion euros since last May from the euro area and International Monetary Fund. Greece has abandoned plans under its 110 billion-euro rescue to tap markets in 2012, forcing the EU and IMF to prepare a second rescue.

The Irish government, which is funded under its 67.5 billion-euro bailout until the second half of 2013, will test the debt market in the third quarter of 2012, Noonan said.

Separately, the International Monetary Fund isn’t negotiating a second rescue package for Greece while it weighs whether to approve the next payment of the country’s initial program, acting IMF head John Lipsky said.

For more on ESM seniority, click here.

For more on the IMF, click here.

Compliance Action

Insurers’ Credit Helped by New Regulation Delay, Moody’s Says

U.S. life insurers, a group led by MetLife Inc. (MET) and Prudential Financial Inc. (PRU), may be bolstered by a Commodity Futures Trading Commission proposal to delay tighter rules on derivatives.

Life insurers use derivatives to boost investment returns and guard against fluctuations in interest rates and currencies. The CFTC said last week it needed to postpone a regulation passed in the Dodd-Frank Wall Street reform law. The agency would have six more months to write rules aimed at reducing risk and boosting transparency.

“The Dodd-Frank rules’ margin requirements would potentially soak up significant amounts of liquidity and create volatility in available liquidity for life insurers,” the Moody’s analyst said. Life insurers are seeking so-called end- user exemptions that would protect them from the new rules, according to the report.

Republicans Want Details on Warren Role in Foreclosure Talks

U.S. House Republicans pressed the Treasury Department for details on Elizabeth Warren’s role in talks to settle federal and state claims that mortgage servicers improperly processed foreclosures.

Representatives Spencer Bachus of Alabama, chairman of the Financial Services Committee, and Darrell Issa of California, head of the Oversight and Government Reform committee, requested copies of “any and all” communication between Warren, the White House adviser setting up the Consumer Financial Protection Bureau, and any state attorneys general or representatives of their offices since September 2010.

“It appears the CFPB has been deeply involved in the mortgage-servicing settlement negotiations and that role goes far beyond the mere offering of ‘advice’ under the Merriam- Webster’s definition or any other reasonable interpretation of that term,” the lawmakers wrote in the letter sent yesterday to Treasury Secretary Timothy F. Geithner.

“We provided advice to federal and state officials regarding a potential servicing settlement,” Warren wrote in her April 4 response. “In doing so, we have been an active participant in inter-agency discussions, sharing our analysis and recommendations in support of a resolution that would hold accountable any servicers that violated the law.”

House Republicans have been sparring for months with Warren over her role in the settlement negotiations.

For more, click here.

Courts

Hedge Fund Expert-Networker Convicted in Insider Trade Case

Winifred Jiau, a former consultant with expert networking firm Primary Global Research LLC, was convicted in the third trial to result from a U.S. government crackdown on insider trading tied to hedge funds.

Jiau, 43, who provided industry information to financial clients, was convicted of one count each of conspiracy and securities fraud in Manhattan federal court for passing inside tips about Nvidia Corp. (NVDA) and Marvell Technology Group Ltd. (MRVL) to hedge fund managers.

A sentencing date was scheduled for Sept. 21. Jiau’s lawyer, Joanna Hendon, said she would file an appeal after the sentencing.

Jiau, of Freemont, California, was one of several dozen people charged in overlapping insider rings stemming from the probe of New York-based hedge fund Galleon Group LLC. The cases implicated hedge funds, banks, technology firms and consultants such as Jiau.

Jiau’s lawyer unsuccessfully argued before trial that her client’s indictment was flawed, saying there was no evidence that any “insider” breached a fiduciary duty not to disclose material non-public information.

Galleon co-founder Raj Rajaratnam was convicted May 11 of directing the largest hedge fund insider trading ring and faces almost 20 years in prison at his July 29 sentencing. Ex-Galleon trader Zvi Goffer was convicted with two others June 13 on related charges and faces a similar sentence Sept. 21.

The case is U.S. v. Jiau, 11-cr-00161, U.S. District Court, Southern District of New York (Manhattan).

For more of this story, click here.

For Bloomberg Television video report, click here.

Ex-Langbar CEO Gets One Year in Jail for Misleading Market

Geoffrey Stuart Pearson, the former chief executive officer of a Bermuda-based investment company at the center of a fraud scandal, was sentenced to a year in prison for making misleading statements about its assets.

Pearson, 63, was found guilty of three counts of making misleading statements to the financial markets after a five-week trial at a London criminal court, according to a statement yesterday from the U.K. Serious Fraud Office, which prosecuted the case. Pearson, who was acquitted of 10 other charges, was also barred from working as a company director for five years, the SFO said.

Pearson’s lawyer, Shula de Jersey, said the former CEO has helped to recover 38 million pounds in a related civil lawsuit.

The judge recognized that Pearson was himself a victim of deception by the principals in the fraud for a “substantial part of time,” and this was the basis on which he was sentenced.

For more, click here.

JPMorgan, RBS Sued by Federal Agency Over Mortgage Bonds

JPMorgan Chase & Co. (JPM) and Royal Bank of Scotland Group Plc (RBS) units were sued by the federal agency that regulates credit unions, seeking to recover money lost on mortgage-backed securities.

The National Credit Union Administration Board, or NCUA, accused the institutions of packaging and selling mortgage bonds with loans that didn’t meet underwriting guidelines. The bonds, sold to federally chartered credit unions, caused more than $800 million in losses, according to the agency.

The agency plans to sue between five and 10 additional banks related to the mortgage bonds, David Small, an NCUA spokesman, said in an interview. Agency officials are in settlement talks with the banks, he said.

Michael Geller, a spokesman for Edinburgh-based RBS, and Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, didn’t immediately return calls for comment yesterday.

The cases are National Credit Union Administration Board v. J.P. Morgan Securities LLC, 11-cv-02341, and National Credit Union Administration Board v. RBS Securities Inc., 11-cv-02340, U.S. District Court, District Of Kansas (Kansas City).

David Lerner Associates Sued Over $6.8 Billion in REITs

David Lerner Associates Inc. was sued by investors who claimed it acted negligently in the sale and underwriting of more than $6.8 billion in shares of the Apple Real Estate Investment Trusts.

The brokerage firm, known for its founder’s “Take a tip from Poppy” advertising slogan, misstated the business model of the REITS and misrepresented the value of shares and returns for investors, according to a complaint filed yesterday in federal court in Newark, New Jersey.

During the past seven years, the firm has collected more than $600 million in fees and commissions while five Apple REITs have made more than $6 billion in proceeds, according to the complaint. The firm has marketed the REITs as appropriate for conservative investors and claims they have never lost money by investing in hotels, the complaint said.

Joseph C. Pickard, the firm’s general counsel, said in an e-mailed statement that the claims are “frivolous” and were filed by “attorneys seeking a quick payday,” adding the company expects to be “vindicated in a court of law.”

The 35-year-old firm, based in Syosset, New York, has underwritten Apple REITs for 19 years, Pickard said.

The investors are seeking class-action status for the case.

The firm last month was accused by the Financial Industry Regulatory Authority of overcharging customers on sales of municipal bonds and mortgage securities.

The case is Kronberg v. David Lerner Associates Inc., U.S. District Court, District of New Jersey (Newark).

Interviews/Speeches

Bank of Spain Says Capital Rules Enough in Adverse Scenario

Bank of Spain Governor Miguel Angel Fernandez Ordonez said bank capital rules approved in February are sufficient even in unlikely “adverse scenarios” and the state bailout fund will act as a backstop if lenders fail stress tests.

Fernandez Ordonez made the remarks to a parliamentary committee in Madrid today.

“European stress tests will show to what extent lenders need more capital to face the extreme scenarios contemplated in these tests,” he said. “If as a consequence of this exercise it turned out that some Spanish lenders needed extra capital” that can’t be raised privately, the country’s Fund for the Orderly Restructuring of Banks, or FROB, would step in.

Spain tightened capital requirements for lenders, offering incentives for savings banks to convert into commercial lenders and to list on the stock market. The Bank of Spain identified a capital shortfall of as much as 15.2 billion euros ($22 billion) in March and the government has given lenders until September to plug it themselves or face partial nationalization.

Grant Says New Regulations ‘Asphyxiating’ U.S. Banks

James Grant, editor of Grant’s Interest Rate Observer, talked about the impact of new regulations on the ability of U.S. banks to offer credit.

Grant also discussed the exposure of U.S. money market mutual funds to the sovereign debt crisis in Europe and the outlook for resolution of the crisis. He spoke with Pimm Fox on Bloomberg Television’s “Taking Stock.”

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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