Curbing DVA, Dexia Probe, Lehman Rascals: Compliance

Global regulators are seeking to curb banks’ (SX7P) use of an accounting rule allowing lenders to boost their profits and capital by writing down the value of their own debt and derivatives when market prices fall.

The rule, known as debt or debit-valuation adjustment, says that banks can book financial gains when the value of their own bonds and derivatives falls, under the theory that a profit would be realized if the liabilities were repurchased at a discount.

Banks shouldn’t be able to count such gains toward their capital reserves, the Basel Committee on Banking Supervision said in a statement published on its website. The committee is seeking “full deduction” of debit-valuation adjustments from lenders’ core reserves, including that arising from derivatives.

Citigroup Inc., JPMorgan Chase & Co. (JPM), and Morgan Stanley (MS) each booked more than $1.5 billion of gains from DVA in the third quarter as bank credit spreads widened.

Global regulators agreed last year to more than triple the core capital that lenders must hold to guard against insolvency and also to force them to stockpile easily sellable assets to survive a short-term funding squeeze. They will be expected to have core capital equivalent to seven percent of their assets, weighted according to their riskiness, by 2019.

Under Basel rules, a bank’s core capital consists mainly of retained earnings and ordinary shares. The Basel committee will seek views on its decision until Feb. 17, it said.

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Compliance Policy

Basel Regulators Seek to Close Loopholes in Bank-Liquidity Rules

Global regulators are targeting possible loopholes in draft rules to bolster banks’ liquidity as they push for agreement on parts of the standard by March, a member of the Basel Committee on Banking Supervision said.

Discussions are under way about what assets lenders should be allowed to count toward their minimum liquidity reserves and on how to prevent banks from using “regulatory arbitrage” to get around aspects of the measure, Sabine Lautenschlaeger, vice president of Germany’s central bank, said in a telephone interview this week.

Banks have argued that a draft of the so-called liquidity coverage ratio published last year may curtail loans by forcing them to hoard cash and buy up government bonds. Under the plans certain assets, such as covered bonds, would be allowed to account for a maximum of 40 percent of a bank’s total LCR buffer.

Bank watchdogs say the liquidity requirements are needed to prevent a repeat of the collapses of Lehman Brothers Holdings Inc. (LEHMQ) and Dexia SA that were blamed in part on the lenders running out of short-term funding. The standard is scheduled to take effect in 2015.

The Basel group’s LCR would require lenders to hold enough easy-to-sell assets to survive a 30-day credit squeeze. The ratio was discussed at a meeting of the Basel committee last week and some parts of the measure may be fine-tuned as soon as March, Lautenschlaeger said.

SEC Adopts Dodd-Frank Rules on Accredited Investors, Mine Safety

The U.S. Securities and Exchange Commission adopted a pair of final Dodd-Frank Act rules that set asset requirements for “accredited investors” and require mining companies to disclose safety information, according to statements released yesterday by the agency.

The new standard for accredited investors, who are allowed to make higher-risk investments not available to the general public, requires individuals to have at least $1 million in net worth, not including their primary residence. The agency must review the standard regularly to decide whether it needs further adjustments.

The second rule calls for mining companies to include “mine-by-mine” safety and health information in routine public disclosures.

Dodd-Frank directed the SEC to write about a hundred rules in an effort to overhaul the U.S. financial system in the wake of the 2008 credit crisis.

Compliance Action

EU Approves Capital Injection for National Bank of Greece (ETE)

The European Commission gave temporary approval for a 1 billion-euro capital injection to National Bank of Greece.

It said the approval is temporary and that the authorities must submit a restructuring plan to the Brussels-based regulator.

Daimler Truck Criminal Cartel Probe Dropped by U.K. Regulator

Britain’s antitrust regulator said it doesn’t have enough evidence to continue a criminal probe in a suspected truck- manufacturing cartel that resulted in the arrest last year of a Daimler AG (DAI) executive.

The criminal case, started in September 2010, was dropped yesterday by the Office of Fair Trading after a “thorough investigation,” the watchdog said on its website. The OFT, which prosecutes competition violations, is continuing a civil probe of at least five companies including Daimler’s U.K. Mercedes-Benz unit and Volvo AB. (VOLVB)

The European Union’s antitrust regulator in Brussels is still probing the companies for possible competition violations. Ian Jones, the head of the U.K. Mercedes-Benz truck division, was detained by police and then released on bail when the probe began last year. Daimler, the world’s largest truck maker, said at the time that the OFT raided its offices in Tongwell, England. The civil probe also includes Fiat SpA (F)’s Iveco unit, Scania AB (SCVB) and Volvo and Renault truck-making subsidiaries.

A call to Daimler’s press office wasn’t immediately returned.

Dexia Faces EU Probe Over Belgian, French, State Guarantees

Dexia SA, the French-Belgian lender that’s being broken up, faces a European Union investigation into as much as 45 billion euros ($59 billion) in guarantees from Belgium, France and Luxembourg.

The European Commission gave temporary approval for the guarantees and said final authorization would be based on a restructuring plan that the governments must submit within three months, the Brussels-based commission said in a statement yesterday.

The temporary guarantees for Dexia and its unit Dexia Credit Local “mark a significant change compared with” EU conditions for a 2008 bailout, the regulator said. Belgium’s credit rating was cut two steps by Moody’s Investors Service last week, which said rising borrowing costs, slowing growth and liabilities from Dexia’s breakup threaten to inflate the euro area’s fifth-highest debt load.

The EU approval means Dexia can use the guarantees to raise funding from Dec. 22, the bank said in an e-mailed statement. “The implementation of the guarantee will enable the Dexia Group to reduce the amount of its central bank refinancing and, gradually, the financing” for Dexia Bank Belgium which was taken over by the Belgian government in October.

The guarantees will cover loans with maturities of as much as three years and will expire on May 31 unless the EU and the three governments agree to an extension, Dexia said.

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Separately, Dexia SA (DEXB) and its former chief executive officer Pierre Marinai are being sued by Lynx Capital Sprl over claims they provided “false information” about the value of the bank’s shares it purchased on Sept. 5 before the bank was rescued by the Belgian, French and Luxembourg governments, Lynx said in court filing last week.

Ulrike Pommee, a spokeswoman for Dexia in Brussels, declined to comment on behalf of Dexia and Mariani.

Facebook to Change European Service After Data-Privacy Probe

Facebook Inc., the world’s biggest social networking site, will overhaul its service in Europe over the next six months as a result of an investigation into how the social network handles personal data.

Facebook “has agreed to a wide range of best practice improvements” to its service that will get a formal review in July, the Irish data-protection agency said yesterday, after concluding a three-month audit. Facebook’s Ireland operation is responsible for all the Palo Alto, California-based company’s users outside the U.S. and Canada, the agency said.

The report said there has to be “increased transparency and controls for the use of personal data for advertising purposes” and “the deletion of data held from user interactions with the site much sooner.”

The agency began reviewing Facebook’s compliance with Irish and European Union data-protection rules three months ago and conducted an on-site audit of the U.S. company’s offices there.

Facebook agreed to improve the information users get on what happens to deleted or removed content and to simplify explanations of its privacy policies. The company said it would work closely with privacy commissioners and regulators to demonstrate its compliance with legal requirements.

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Courts

Chinese Company Citing Racism Gets Court to Bar Nasdaq Delisting

Nasdaq Stock Market was blocked from delisting a Chinese maker of wind towers after the company sued in New York state court, claiming the procedures for kicking it out are marred by racism.

CleanTech Innovations Inc. (CTEK), based in Tieling, China, alleged the exchange violated its own rules and the company’s right to due process in “arbitrarily and capriciously” seeking to remove it. New York State Supreme Court Justice Melvin Schweitzer put the delisting on hold and set a hearing next month for Nasdaq to show why the court shouldn’t let the suit proceed with expedited pretrial evidence gathering.

Joseph Christinat, a spokesman for New York-based Nasdaq OMX Group Inc. (NDAQ), the parent company of the Nasdaq exchange, declined to comment.

CleanTech has been fighting removal since January, when Nasdaq asserted that the company intentionally withheld material information about $20 million in financing during its listing application. The company says it provided all necessary information in a timely manner. CleanTech has retained as counsel former U.S. Senator Arlen Specter.

The court action is part of the fallout from a series of cases alleging fraud involving China-based companies.

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SEC’s Court Troubles in Citigroup Settlement Echo in Wisconsin

The U.S. Securities and Exchange Commission, facing growing judicial scrutiny over how it resolves enforcement matters, was asked by a federal judge in Milwaukee to provide a “factual predicate” for a proposed settlement with a company accused of accounting fraud.

Certain provisions of the SEC’s settlement with Milwaukee- based Koss Corp. (KOSS) were “vague,” U.S. District Judge Rudolph T. Randa said in a filing yesterday. The settlement also didn’t provide enough information to show that penalties against chief executive officer Michael Koss were fair, the judge wrote.

Randa asked the SEC to respond by Jan. 24.

The judge’s decision comes less than a month after a federal judge in New York rejected the agency’s $285 million settlement with Citigroup Inc. (C), saying he hadn’t been given enough facts to approve the agreement.

The Citigroup ruling by U.S. District Judge Jed Rakoff, which Randa cited in his opinion, challenged settlement practices the SEC has had in place for decades and sparked a debate over whether the agency is reaching expedient agreements that lack tough sanctions. The SEC has appealed Rakoff’s ruling.

The SEC in October accused Koss Corp., a manufacturer of stereo headphones, of making materially inaccurate financial statements for fiscal years 2005 through 2009.

The case is U.S. Securities and Exchange Commission v. Koss Corp., 11-cv-00991, U.S. District Court, Eastern District of Wyoming (Milwaukee).

Lehman Swiss Unit Loses Bid for $1.5 Billion Rascals Assets

Lehman Brothers Holdings Inc.’s former Swiss unit lost its bid to seize some of the $1.5 billion of securities frozen at the bank’s London operation after its failure.

The U.K. Court of Appeal rejected Switzerland-based Lehman Brothers Finance SA’s claim to the so-called Rascals assets, which were caught up in the bank’s internal-settlement system when it collapsed into administration in September 2008.

While the Swiss unit said it was the owner of securities acquired on its behalf, Judge Timothy Lloyd ruled the assets should remain with Lehman Brothers International Europe and its administrators PricewaterhouseCoopers LLP.

Lehman used internal repurchase agreements and stock loans to avoid regulatory charges on securities held by its European units, a system Lloyd described as “a mess” in his written judgment. Securities were purchased through the U.K unit and placed into the “Regulation and Administration of Safe Custody and Global Settlement” system, known as Rascals, before being sold to clients, according to the judgment.

Lehman filed bankruptcy in September 2008, plunging global financial markets into turmoil. The status of the Rascals assets and billions of dollars in other funds frozen at the time has been the subject of lawsuits. The Swiss unit can still appeal against yesterday’s decision at the U.K. Supreme Court.

The case is: In the Matter of Lehman Brothers International (Europe)(In Administration), case no. 7942/2008, High Court of Justice, Chancery Division (London).

Six Men Guilty of Tax Evasion in Deutsche Bank CO2 Trades

Six men were convicted of tax evasion by a German court yesterday following a fraud linked to the sale of carbon- emission certificates to Deutsche Bank AG.

The six helped to start a chain of trades with the sole purpose of evading value-added tax, Presiding Judge Martin Bach said at a hearing yesterday as he sentenced them to as long as seven years and 10 months in jail. Deutsche Bank, which bought the securities, should have known the trades were illegal, he said, noting the sales “had no economic sense.”

The case is part of the biggest crackdown on emissions- related tax crimes since Europe began its cap-and-trade system in 2005. The men in court yesterday worked at small trading companies that bought certificates from suppliers overseas and resold them.

Christian Streckert, a spokesman for Deutsche Bank, declined to comment on the case, saying the bank was without access to the public prosecutor’s files. He said an internal investigation by an outside law firm has so far shown no sign of criminal involvement by the bank’s employees.

Germany changed its rules in 2010 to end the tax evasion practice, Bach judge said.

Comings and Goings

Fortress CEO Mudd Takes Leave Amid SEC’s Fannie Mae (FNMA) Lawsuit

Daniel Mudd will take a leave of absence as chief executive officer of Fortress Investment Group LLC (FIG) after he was sued by the U.S. Securities and Exchange Commission over his role as former CEO of Fannie Mae.

Fortress co-founder Randal A. Nardone will take over as interim CEO effective immediately, the New York-based manager of buyout and hedge funds said yesterday in a statement.

Mudd said in the statement that he requested the leave of absence “to ensure that any time or attention I need to focus on matters outside of Fortress will not affect the business or operations of the company.”

Mudd and former Freddie Mac CEO Richard Syron were sued Dec. 16 for understating by hundreds of billions of dollars the subprime loans held by the firms. In a statement the day the lawsuit was filed in Manhattan federal court, Mudd denied the charge, saying the U.S. government and its investors were aware of “every piece of material data about loans held by Fannie Mae.”

Fortress said in a Dec. 16 statement that the complaint against Mudd “does not relate to Fortress, and this matter has not impacted our company or our business operations.”

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Turner to Stand Down as Head of U.K. Climate Change Committee

Adair Turner, the first chairman of the U.K.’s Climate Change Committee, will step down from spring 2012 to focus on his role as chairman of the Financial Services Authority.

A new chairman of the committee, which advises government on greenhouse gas limits set in law, is expected to be appointed by the end of March, the committee said yesterday in an e-mailed statement.

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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