U.S. Securities and Exchange Commission Inspector General H. David Kotz is leaving the agency after four years to join a private investigative firm.
Kotz, who joined the agency in 2007, oversaw a range of investigations, including a probe of the SEC’s failure to catch Bernard Madoff’s multibillion dollar fraud and a review of the agency’s supervision of Bear Stearns Cos. He will stay through the end of January before becoming a managing director at Gryphon Strategies in Washington, the SEC said yesterday.
The resignation followed criticism of Kotz by current and former agency officials who claimed some of his probes were overly aggressive and lacked evidence of wrongdoing. Kotz also came under scrutiny for giving an extensive interview to the host of a paid radio show who posted it on a website and used it in marketing financial services.
“I am tremendously proud of the accomplishments of my office and the agency over the past four years,” Kotz said in a statement yesterday. “While I will miss doing this important work, I am gratified knowing that nearly every aspect of the SEC has been significantly improved in the four years since I was named Inspector General.”
In a statement yesterday, SEC Chairman Mary Schapiro said Kotz “has served the agency with great distinction” during his four-year tenure.
“His work helped us to identify areas where we needed to improve the way we operate, bolster our resources, and upgrade our technology,” she said.
U.S. Regulators to Defend Volcker Rule Ban on Proprietary Trades
U.S. House Republicans will press federal regulators on the merits of a proposal to ban banks from trading for their own account, as one regulator acknowledged the rule could put banks including Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. at a competitive disadvantage.
Acting Comptroller of the Currency John Walsh acknowledged that banks without U.S. operations could benefit from the rule, saying that foreign jurisdictions “have not adopted restrictions resembling those in the Volcker rule.”
“U.S. banks competing with these foreign banks will operate at a competitive disadvantage,” Walsh said in testimony prepared for today’s House Financial Services Committee hearing in response to a question from the panel’s Republican members.
Regulators have been on the defensive since the Federal Reserve and three other agencies released the first draft of the rule in October. Lawmakers, the largest banks and financial firms and international regulators have criticized the 298-page proposal as too complex and potentially damaging for financial markets.
The proposed rule, named for former Federal Reserve Chairman Paul Volcker, would ban banks from proprietary trading while allowing them to continue short-term trades for hedging or market-making. It also would limit banks’ investments in private-equity and hedge funds. Required by the Dodd-Frank Act, the rule must be in place by July 21.
Lawmakers included the rule in the law to cut down on the type of trading that may put banks with access to U.S. deposit insurance or the Fed discount window at risk. Financial firms, in comment letters to regulators and in public statements, have voiced concerns that the rule may restrict market liquidity, specifically in corporate bonds.
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Google Plans Home Page Protest Against U.S. Piracy Measures
Google Inc. (GOOG) is placing a link on its home page today protesting anti-piracy measures in the U.S. Congress, joining other Internet companies demonstrating against the Hollywood- backed legislation.
Google, owner of the world’s most popular search engine, and Facebook Inc. are among companies opposing House and Senate bills they say they will hurt the growth of the U.S. technology industry. Wikipedia, the online encyclopedia where users contribute entries, said it will shut the English version of its website for 24 hours today to protest the measures.
“We oppose these bills because there are smart, targeted ways to shut down foreign rogue websites without asking American companies to censor the Internet,” Samantha Smith, a Google spokeswoman, said in an e-mail yesterday.
The Stop Online Piracy Act in the House and the Protect IP Act in the Senate are backed by the movie and music industries as a means to crack down on the sale of counterfeit goods by non-U.S. websites. Hollywood studios want lawmakers to ensure that Internet companies such as Google share responsibility for curbing the distribution of pirated material.
A legislative push led by the Washington-based Motion Picture Association of America and the U.S. Chamber of Commerce, the nation’s largest business-lobbying group, has run into a backlash from Web companies that say the bills would saddle them with new liabilities and technology mandates.
Jimmy Wales, co-founder of Wikipedia, called the decision to shut the website an “extraordinary” action in response to the proposed laws, which “endanger free speech both in the United States and abroad, and set a frightening precedent of Internet censorship for the world.”
The so-called blackout day to protest anti-piracy legislation is “abuse of power given the freedoms these companies enjoy in the marketplace today,” Christopher Dodd, chairman of the Motion Picture Association of America, said yesterday in an e-mailed statement.
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FDIC Proposes Rules for Self-Administered Bank Stress Tests
The Federal Deposit Insurance Corporation proposed regulations that would require banks with assets in excess of $10 billion to conduct self-administered stress tests each year.
Under the proposal, the FDIC by mid-November each year would provide banks with three economic scenarios for the future. By Jan. 5, banks would send the FDIC a report on how the institution would cope with the scenarios. The reports would be published 90 days after that.
The rule closely tracks one proposed by the Federal Reserve last year that outlines how Fed examiners will administer stress tests to institutions with assets of more than $50 billion.
“Both the FDIC and the institutions being tested will benefit from the forward-looking results that the stress tests will provide,” acting FDIC Chairman Martin J. Gruenberg said. “The results will assist in ensuring an institution’s financial stability by helping to determine whether it has sufficient capital levels to withstand a period of economic stress.”
Richard Cordray, the director of the Consumer Financial Protection Bureau, voted for the proposal on stress tests in his first appearance on the FDIC board.
“Not only will they help protect consumer depositors but the system as a whole,” Cordray said at the meeting.
The FDIC will be taking public comments on the proposal for 60 days.
EU Tells Clinton It Won’t Abandon Carbon Limits for Airlines
The European Union won’t abandon its curbs on carbon dioxide discharges by international airlines and sees the program as an incentive toward a global solution, the bloc’s executive told U.S. Secretary of State Hillary Clinton.
The 27-nation EU is ready to discuss the exemption of incoming flights from the U.S. from its emissions trading system should the world’s largest economy introduce “equivalent measures” to cut pollution by the aviation industry, according to a letter sent by the bloc’s transport and climate commissioners to Clinton.
The European law will also be reviewed and amended when countries worldwide reach an agreement to limit greenhouse gas discharges from airlines, the EU said in the letter seen by Bloomberg News.
The inclusion of airlines in the EU cap-and-trade program as of this year has sparked opposition from countries including the U.S., China and Russia, which said Europe should let the United Nations’ International Civil Aviation Organization decide on greenhouse-gas limits for the industry. Clinton told the EU in a letter last month that the U.S. will be compelled to take appropriate action unless the bloc abandons its plan.
“We see the inclusion of aviation in the EU ETS as an important contribution to, and a catalyst, towards global action, rather than an obstacle,” according to the EU response to Clinton dated Jan. 16. “We believe there’s now a growing recognition of the need to move forwards in ICAO to develop a global solution and we hope that the U.S. shares our view that we must seize this opportunity.”
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Hedge Fund Employees Said to Be in Custody in Insider Probe
Two hedge-fund employees are in custody in the U.S. probe of insider trading that has already snagged Galleon Group LLC co-founder Raj Rajaratnam, and about 50 others, according to a person familiar with the matter.
One person was arrested in Boston today by the Federal Bureau of Investigation and another in New York, according to the person, who asked not to be identified because the arrests haven’t been made public. Two more people will also surrender to authorities later today, the person said.
Securities fraud charges stemming from the probe will be announced today by the office of Manhattan U.S. Attorney Preet Bharara, the person said. Ellen Davis, a spokeswoman for the office, declined to comment on the arrests.
Bharara’s office has charged at least 56 people with insider-trading and more than 50 have pleaded guilty or been convicted after trial since 2009. They included Rajaratnam, who was convicted in May and is serving 11 years in prison.
Last month, another person familiar with the matter said employees of Neuberger Berman Group LLC, Level Global Investors LP and Diamondback Capital Management LLC could be facing criminal charges as part of the probe.
The identities of the people arrested or expected to surrender today haven’t been publicly disclosed.
Steve Bruce, a spokesman for Stamford, Connecticut-based Diamondback, declined to comment on the probe when it was reported by the Wall Street Journal. Rich Chimberg, an outside spokesman for Neuberger Berman, said at the time of last month’s report that the firm was unaware of any probe involving an employee identified by the newspaper as an analyst for the firm.
Level Global told clients last February that it was shutting, eight years after David Ganek and Anthony Chiasson founded the hedge fund, because of the U.S. probe. They said at the time that Level Global wasn’t a target of the investigation nor had it been alleged to have engaged in any misconduct.
RBS Insurance Units Fined $3.3 Million for Altering Forms
Royal Bank of Scotland Group Plc (RBS) was fined 2.17 million pounds ($3.3 million) after its insurance units, which the bank is planning to sell, altered complaint forms before showing them to the U.K.’s finance regulator.
Managers at Direct Line Insurance Plc and Churchill Insurance Co. failed to prevent employees from changing 27 of 50 closed customer-complaint forms before they were sent to the Financial Services Authority, which had requested them, the regulator said in a statement today.
“This is a serious breach,” said Tracey McDermott, the FSA’s acting head of enforcement. “The firms failed to give clear instructions resulting in staff making inappropriate alterations, with one individual even forging the signatures of colleagues. The firms’ management did not know what changes had been made or when.”
RBS, the U.K.’s biggest home and motor insurer, has been given until the end of this year to sell its insurance business by the European Union in return for receiving a 45.5 billion- pound government bailout in 2008 and 2009. The division, which is planning an initial public offering, reported a profit last year after posting a loss in 2010 because of surging personal injury claims.
U.K. Insurance Ltd., the general insurance underwriter of RBS Insurance that owns Direct Line and Churchill, cooperated with the FSA and received the regulator’s standard 30 percent discount for settling early.
“We very much regret the findings of the FSA investigation,” RBS Insurance Chief Executive Officer Paul Geddes said in a statement. “Since becoming aware of this issue well over a year ago, we have taken action to address these issues and to ensure we avoid such breaches in the future.”
Russian Father-Son Team Accused of Online Fraud by U.S.
Federal prosecutors charged a Russian father and son from Moscow with taking part in a scheme to gain illegal computer access to U.S. bank accounts through bogus e-commerce websites.
Vladimir Zdorovenin and his son, Kirill, were named in an indictment unsealed yesterday in federal court in Manhattan that alleges they and unknown others controlled U.S.-registered companies. The two men also operated a business that bought and sold securities.
The defendants took unauthorized charges on customers’ credit cards, prosecutors said. They also got credit-card numbers by either buying them from unidentified people who had obtained them illegally or by so-called malware the defendants surreptitiously installed on victims’ computers, the U.S. alleged.
“Mr. Zdorovenin’s egregious behavior illustrated the true colors of the cyber underground, as he and his son allegedly defrauded consumers of hundreds of thousands of dollars,” Janice K. Fedarcyk, the head of the FBI’s New York office, said in a statement. “This should serve as a stark reminder to anyone who believes he can commit cyber crime and hide behind the safety and anonymity of a Russian IP address; you are not beyond the reach of the FBI.”
Vladimir Zdorovenin was arrested last March in Zurich and arrived in New York Monday following his extradition by Swiss authorities, Manhattan U.S. Attorney Preet Bharara’s office said in a statement.
At his arraignment yesterday before U.S. Magistrate Judge Gabriel Gorenstein, Vladimir Zdorovenin pleaded not guilty to the charges through his lawyer, Sabrina Shroff. She declined to comment on the case after court. Assistant U.S. Attorney James Pastore, who is prosecuting the case, said U.S. District Judge Paul Gardephe scheduled a Jan. 19 conference in the case.
The case is U.S. v. Zdorovenin, 07-cr-00440, U.S. District Court, Southern District of New York (Manhattan).
Rubin Pleads Guilty to Moving Illegal Online Poker Payments
Ira Rubin, who was accused of helping process billions of dollars in payments for illegal online gambling businesses, pleaded guilty to conspiracy charges.
Rubin, 53, was accused of illegally processing payments for PokerStars, Full Tilt Poker and Absolute Poker, the leading online poker sites doing business with U.S. customers. Facing nine criminal counts, he admitted yesterday to three charges of conspiracy in Manhattan federal court.
According to a plea agreement with prosecutors, Rubin faces a prison term of 18 to 24 months under non-binding federal sentencing guidelines.
Prosecutors allege that after the U.S. enacted a law in 2006 barring banks from processing payments to offshore gambling websites, PokerStars, Full Tilt and Absolute worked around the ban to continue operating in the U.S.
The government claims Rubin worked from Costa Rica, where he lived since fleeing to avoid a U.S. arrest warrant in 2008, helping offshore poker companies move “billions of dollars in illegal gambling proceeds” disguised as payments to phony Internet merchants. The shell companies Rubin created included a fake golf store and electronics business, prosecutors said.
Rubin’s criminal record dates to the 1970s, according to prosecutors, and includes at least 24 different crimes.
The case is U.S. v. Rubin, 10-CR-336, U.S. District Court, Southern District of New York (Manhattan).
Deutsche Boerse-NYSE Veto Said to Be Backed By National Agencies
National regulators in the European Union backed plans by the region’s top antitrust official to block the merger of Deutsche Boerse AG (DB1) and NYSE Euronext (NRX), according to a person with knowledge of yesterday’s vote.
Representatives of national competition agencies supported the European Commission’s proposed merger ban, said the person who couldn’t be identified because the vote is private. The commission isn’t obliged to follow the advice of the officials from the 27-nation bloc.
EU regulators have told the two companies that they plan to veto the deal to create the world’s largest exchange because it would monopolize derivatives trading in the region, according to two people on Dec. 31. The EU’s Competition Commissioner Joaquin Almunia said the Brussels-based authority will decide on the deal on Feb. 1. Companies can appeal a merger ban at the EU courts.
Reuters earlier reported the result of the yesterday’s vote among national watchdogs.
Olympus Clears KPMG in Fraud, Faults Internal Auditors
Olympus Corp. (7733), the Japanese camera maker that hid $1.7 billion in losses, faulted five internal auditors for the fraud and said KPMG Azsa LLC and Ernst & Young ShinNihon LLC weren’t responsible.
A panel the company set up to investigate the fraud determined that five internal auditors are culpable for 8.4 billion yen ($109 million) in costs related to the cover-up of losses, Olympus said yesterday in a statement. The company filed a lawsuit in Tokyo District Court against the internal auditors seeking a combined 1 billion yen in damages, Olympus said in a separate statement yesterday.
President Shuichi Takayama is scheduled to disclose what else the company will do in response to the panel’s findings, Tokyo-based Olympus said. The company, also the world’s biggest maker of endoscopes, last week sued 19 current and former executives including Takayama over their roles in concealing losses in a scandal that has led to a drop of about $4 billion in Olympus’s market value.
The panel’s probe found Minoru Ota, a former internal auditor at Olympus who headed its accounting unit until 2001, responsible for 3.7 billion yen of fees and other costs related to the cover-up, the largest amount among the five people, Olympus said in the statement.
The other four auditors, Tadao Imai, Makoto Shimada, Yasuo Nakamura and Katsuo Komatsu, didn’t fulfill their duties and were responsible for the remaining 4.7 billion yen of cover-up expenses, the company said.
Dart’s Fund May Get Top Court Review on Argentine Judgment
Two funds, one controlled by billionaire Kenneth Dart, may get a U.S. Supreme Court (1000L) hearing in their legal fight to collect at least $2 billion owed by the government of Argentina.
The justices yesterday asked the Obama administration for advice on an appeal by Dart’s EM Ltd. and NML Capital Ltd., an affiliate of the New York-based hedge fund Elliott Associates LP, in a multi-pronged dispute stemming from Argentina’s 2001 default on $95 billion of bonds.
The funds, which refused to exchange their securities in a 2005 Argentine debt swap, are seeking to enforce $2 billion in judgments they have won in U.S. court cases.
In the case acted on yesterday, EM and NML are trying to seize $100 million in Argentine central bank assets being held at the Federal Reserve Bank in New York. A federal appeals court said that money is shielded under the U.S. Foreign Sovereign Immunities Act.
Argentina believes the U.S. will support its position, said an official at the country’s central bank who declined to be identified because he isn’t authorized to speak publicly.
Dart is president of Mason, Michigan-based Dart Container Corp., the world’s largest maker of foam cups. He gave up his U.S. citizenship in the 1990s to avoid taxes and moved to the Cayman Islands.
Justice Sonia Sotomayor didn’t take part in yesterday’s order. She was involved in the litigation over Argentina’s bonds as an appeals court judge.
The case is EM Ltd. v. Republic of Argentina, 11-604.
TD Bank (TD) Aided Rothstein Fraud, Investors’ Lawyer Tells Jury
TD Bank helped Scott Rothstein, the convicted Florida attorney, keep his $1.2 billion Ponzi scheme afloat by assuring victims their money was safe while Rothstein depleted the accounts, a lawyer for investors told a jury.
David Mandel, an attorney for Coquina Investments, in closing arguments yesterday after a trial in Miami, pointed to letters in which bank Vice President Frank Spinosa said Rothstein’s account was locked and the money in it could be disbursed only to Corpus Christi, Texas-based Coquina.
Coquina Investments’ Rothstein lawsuit is the first such case against the bank to go to trial. Attorneys representing other investors have been watching it closely.
“This case is very significant,” said William Scherer, an attorney representing a group that lost $180 million. “This is the canary in the coal mine for our case.”
Scherer is also suing TD Bank, a unit of Toronto-Dominion Bank, claiming it had a direct role in the fraud.
Mandel asked for $32 million in compensatory damages and $140 million in punitive damages.
Holly R. Skolnick, a lawyer for TD Bank, said Coquina must have realized that investments earning almost 50 percent in a few months were too good to be legitimate.
Rothstein told victims of his fraud that they were buying stakes in sexual and employment discrimination settlements that his law firm, Rothstein Rosenfeldt Adler PA, was handling. The settlements were fictional.
Skolnick disputed the idea that Coquina relied on the letter Spinosa wrote, noting that it said Rothstein still controlled the account.
“This letter took on a new meaning, became the hook after Ponzi scheme exploded when they were looking for somebody with deep pockets to sue,” she said.
Rothstein pleaded guilty to five counts of wire fraud, conspiracy and racketeering and was sentenced to 50 years in prison in 2010.
The scheme collapsed in October 2009 and Rothstein briefly fled to Morocco before returning to the United States to turn himself in. He is cooperating with authorities and attorneys as they sue alleged enablers of the fraud.
The case is Coquina Investments v. Rothstein, 0:10- cv-60786, U.S. District Court, Southern District of Florida (Miami).
Credit Suisse Judge Tosses Claims Bank Misled on AOL (AOL) Stock
Credit Suisse First Boston and four of its former executives, including technology investment banker Frank Quattrone, won dismissal of a lawsuit alleging they deceived investors into buying AOL Time Warner (TWX) stock.
U.S. District Judge Nathaniel Gorton in Boston threw out both of the claims in the class-action complaint against the bank and the executives after finding that a study by the plaintiffs’ expert witness was flawed, according to a Jan. 13 ruling. The case was set to go to trial in March.
The case was brought by individuals and a pension fund that bought stock in AOL Time Warner Inc. from the time of its merger in January 2001 until a disclosure in July 2002 of an investigation of its accounting practices. They claimed that 35 research reports issued by the Credit Suisse Group AG (CSGN) unit over that period recommended buying the stock and set unattainable financial projections even as the analysts knew the company couldn’t reach those results.
The failure by the expert witness, Scott Hakala, to “isolate the effect of defendants’ alleged fraud from other industry- and company-specific news reported on event days confounds his event study and renders it unreliable,” Gorton said in his ruling.
The case is In re: Credit Suisse-AOL Securities Litigation, 02-12146, U.S. District Court, District of Massachusetts (Boston).
Amazon.com Sued by Customer Over Hackers’ Theft of Zappos Data
Amazon.com Inc. (AMZN) was accused in a lawsuit by a customer of its Zappos.com unit of violating federal consumer credit laws by failing to protect her personal information after the company said hackers stole account numbers and other data.
Theresa Stevens, a resident of Beaumont, Texas, said that as a result of the breach, she and other Zappos customers are more likely to receive e-mails from spoof websites and unknowingly give away personal information to hackers, according to her complaint filed Jan. 16 in federal court in Louisville, Kentucky. The customers will also incur expenses for credit monitoring and suffer emotional distress and loss of privacy, according to the complaint.
Stevens seeks to represent 24 million Zappos customers whose personal information was compromised, according to the complaint. She received an e-mail from the online shoe retailer Jan. 16 saying her information was stolen as part of a data breach. Hackers gained access to Zappos.com’s internal network through unprotected computer servers located in Shepherdsville, Kentucky, according to the complaint.
Stevens seeks unspecified damages and a court order requiring Amazon.com to pay for credit monitoring and identity theft insurance. Drew Herdener, a spokesman for Seattle-based Amazon, didn’t immediately return a voice-mail message seeking comment yesterday about the lawsuit.
The case is Stevens v. Amazon.com, 12-cv-00032, U.S. District Court, Western District of Kentucky (Louisville).
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