Nasdaq-Facebook, Dodd-Frank, Glass-Steagall: Compliance

Nasdaq OMX Group Inc. (NDAQ), responding to criticism that it is offering too little to Wall Street firms hurt in Facebook Inc. (FB)’s public debut, said the compensation plan covers “objective, discernible” losses suffered by brokers.

The operator of the second-largest U.S. equity exchange has no plans to enlarge the pool, it said in a letter to the Securities and Exchange Commission posted on the agency’s website. Citigroup (C) Inc. said last month that it lost millions of dollars because of Nasdaq’s mishandling of the initial public offering and deserves greater reimbursement.

Nasdaq OMX, balancing its role as an organization with legal immunity against claims related to computer breakdowns with its obligation to members disadvantaged when it bungled Facebook’s May 18 IPO, proposed paying $62 million. The payout would be facilitated by a modification to rules governing exchange liability overseen by the SEC.

Nasdaq believes the “accommodation proposal establishes a fair, transparent and equitable method of identifying categories of members for whom Nasdaq’s system issues caused objective, discernible loss,” it wrote.

Delays and malfunctions on Nasdaq were the first signs of trouble in the Facebook IPO, which prompted lawsuits against the company, its exchange and the underwriters. Citigroup said losses in its equity market-making unit exceeded its portion of the pool proposed by Nasdaq OMX in July.

Scott Helfman, a spokesman for Citigroup, declined to comment beyond the letter submitted last month.

Nasdaq previously told the SEC it would determine how much to pay by comparing firms’ executions for Facebook to the average price, weighted by the number of shares traded in a 45- minute period on May 18. In its letter yesterday, Nasdaq said its calculation is the appropriate one.

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Compliance Policy

Impact of Basel Bank Liquidity Rule Must Be Weighed, EU Says

The European Commission said that while it remains committed to adopting a “detailed” bank liquidity ratio in 2015, possible negative effects need to be studied.

“Important discussions are going on at the level of the Basel Committee which will finalize its details on this in 2013,” commission spokesman Stefaan De Rynck said in an e-mail.

The measure, known as a liquidity coverage ratio, or LCR, would oblige banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze. The requirement was included by global regulators in an overhaul of bank rules that was agreed on by the Group of 20 nations following the collapse of Lehman Brothers Holdings Inc.

The commission has proposed delaying and weakening banks’ reporting of their compliance with the draft Basel liquidity rules, Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee, said in an interview.

Bowles said she would resist the compromise proposal that was made by the commission to spur negotiations on how to apply Basel rules in the 27-nation EU, because they would signal a watering down of the measures.

The commission compromise, obtained by Bloomberg News, would postpone EU decisions on what assets banks would be able to use to meet the LCR as well as agreements on other parts of the standard. These include the toughness of the stress scenario that banks would be measured against.

EU lawmakers and governments must agree on the final wording of the rules before they can take effect in the bloc.

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Compliance Action

Republican State AGs Resisting Cooperation With Consumer Bureau

A group of Republican state attorneys general has declined to sign cooperation agreements with the Consumer Financial Protection Bureau, part of an escalating Republican revolt against the agency that began in the U.S. Congress.

Richard Cordray, the agency’s director, asked all 50 states in March to sign a memorandum of understanding designed to protect confidential information shared among states and the bureau. To date, only 12 states -- all but one with Democratic attorneys general -- have signed, according to the bureau and documents obtained in a public records request.

Oklahoma Attorney General Scott Pruitt said in an interview that he is declining to sign the agreement because of legal objections to the law that created the consumer bureau, the 2010 Dodd-Frank Act.

The CFPB was created by Dodd-Frank to consolidate federal consumer protection authority in a single agency. It began work in July 2011. Cooperation with state attorneys general has been a signature effort of the consumer bureau since Harvard professor Elizabeth Warren began setting it up in late 2010.

Republicans opposed creation of the bureau, and Senate Republicans refused to confirm anyone to the position of CFPB director. That standoff led President Barack Obama to install Cordray as director on Jan. 4 using a process known as a recess appointment.

At least two Republican state attorneys general are preparing to file a lawsuit as soon as this week challenging the constitutionality of Dodd-Frank and the powers it granted to the bureau and its director.

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Markey Seeks High-Speed Trading Investigation After Oil ‘Crash’

Congressman Ed Markey, a Democrat from Massachusetts, called on the Commodity Futures Trading Commission to broaden its investigation into the Sept. 17 “flash crash” in oil prices.

Markey wants the commission to include in its inquiry the larger effects of high-frequency trading on the marketplace, according to an e-mailed statement.

“Wall Street computers could be manipulating the oil markets,” Markey wrote in a letter to Gary Gensler, Chairman of the commission.

High-frequency trading came under regulatory scrutiny after flash crash in May 2010.

IILM Plans First Islamic Dollar Bills by Year-End After Delays

International Islamic Liquidity Management Corp., an institution formed by 12 central banks and two multinational bodies, said it plans to sell its first Shariah-compliant bills this year after two delays.

IILM was formed in January 2011 with a mandate to provide Shariah-compliant lenders with a broader range of instruments in which to park idle funds and boost returns. The Kuala Lumpur- based institution postponed its debut sale of Islamic notes last year and again in June as it awaited a credit rating.

Its first sale of three-month dollar bills will be around $300 million, Mahmoud AbuShamma, IILM’s chief executive officer, said in an interview in Kuala Lumpur. That’s lower than the original target of as much as $1 billion cited by Malaysia’s central bank Governor Zeti Akhtar Aziz on March 21, IILM’s then chairman.

IILM’s founding members include central banks from the Middle East, Southeast Asia, Africa, Turkey and Luxembourg, according to its website. It’s also backed by the Islamic Development Bank and Islamic Corporation for the Development of the Private Sector.

The Kuala Lumpur-based Islamic Financial Services Board estimates the $1.3 trillion Shariah-compliant finance industry will grow to $2.8 trillion by 2015.

About 85 percent of preparation work is complete, AbuShamma said. The work includes external agreement, approvals and regulations across 12 jurisdictions, he said.

Dubai Trader Fined After Hiding Currency Loss With Fake Trade

The Dubai Financial Services Authority sanctioned Credit Europe Bank (Dubai) Ltd. and its former head of treasury after he created a fake forward transaction to cover a money-losing foreign exchange trade.

Credit Bank agreed to pay the authority a fine equivalent to $50,000 and cease proprietary trading activities until weaknesses in its internal controls were addressed, according to a statement yesterday on the website of the DFSA. Ozkan Demirkaya, who created the transaction, agreed to pay a $20,000 fine and not to perform any financial services in Dubai’s International Financial Centre for three years, according to the statement.

Demirkaya disclosed the fake trade and the loss to CEBD in October after determining his earlier position was unlikely to recover, according to the statement. The DFSA’s investigation found that the bank did not have “appropriate systems and controls” in place to detect the fake forward transaction.’’

Eric Schroder, a spokesman for Credit Europe Bank, wasn’t immediately available to comment when contacted by Bloomberg News.

Courts

SEC Claims Australia Man Ran $53 Million Forex Trading Fraud

U.S. regulators accused an Australia man of raising at least $53 million from investors with false claims that he ran a group of elite foreign-exchange traders who could generate 78 percent annual returns.

Senen Pousa and his Brisbane, Australia-based firm, Investment Intelligence Corp., promised investors “unlimited” passive income from his strategy of making only a few select trades each month with no more than 3 percent of an investors’ capital at risk in any given trade, the Securities and Exchange Commission said in a lawsuit filed yesterday at federal court in Austin, Texas. The Commodity Futures Trading Commission filed a parallel lawsuit Sept. 18.

Pousa’s fraud came to light in May, when investors discovered their accounts had lost 63 percent of their value after about 200 trades had occurred in a two-day period, the SEC said. Pousa later encouraged them to add more capital to their accounts in order to “recoup the losses faster,” according to the complaint.

In February, Pousa began to market his strategy through Elevation Group Inc., an investment blog based in Austin.

The SEC and CFTC asked for a court order to freeze Pousa’s assets in the U.S., a step Australian regulators took in July, according to the lawsuit.

Brent Baker, an attorney for Elevation Group, said his client fully cooperated with regulators and “had nothing to do with the fraud.” Elevation Group “is looking forward to assisting in any way they can to get money back to investors,” he said in a telephone interview.

A phone number listed to Pousa’s company in Australia was disconnected.

The cases are Securities and Exchange Commission v. Investment Intelligence Corp. PTY LLC, 12-cv-0863, and U.S. Commodity Futures Trading Commission v. Pousa, 12-cv-0862, U.S. District Court for the Western District of Texas (Austin).

UBS Overlooked Limits When Trade Made Money, Adoboli Lawyer Says

Kweku Adoboli’s lawyers said UBS AG (UBSN) had a culture that overlooked trading limits and other rules “as long as you were making money.”

Adoboli lawyer Charles Sherrard said the bank became “more aggressive in terms of its desire to make profits” in 2011, during cross examination of one of Adoboli’s former bosses at a fraud trial in London today.

“The culture, practice at the bank you were working for, didn’t matter as long as you were making money,” Sherrard said to Ron Greenidge, who oversaw UBS’s exchange-traded-funds desk until April of last year.

Adoboli, 32, is on trial on charges of fraud and false accounting over unauthorized trades that lost $2.3 billion. Adoboli admitted he risked $5 billion on Standard & Poor’s 500 futures and a further $3.75 billion in the German futures market, Greenidge said in testimony yesterday.

Greenidge, who worked at UBS for 19 years, said today he was dismissed for gross misconduct because of Adoboli’s trades. He said he felt the bank was making him a scapegoat.

Adoboli is charged with falsifying records on ETF transactions and other documents needed for accounting purposes as early as October 2008, according to his indictment. Prosecutors also charged him with fraud for abusing his senior trader position “by causing or exposing UBS Bank to losses intending thereby to make a gain for himself.”

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Interviews/Speeches

EU’s Barroso Is ‘Prudent’ on Timing of Banking Union

European Commission President Jose Barroso talked about the region’s debt crisis, the importance of Greece remaining in the euro, joint bank oversight for the 17-nation currency area and the role of political integration in Europe’s future.

Barroso said he is “prudent” about the pace at which common banking supervision should be established in the euro area. He spoke in an Internet interview with Euronews in Brussels yesterday.

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FDIC’s Hoenig Says Banks May Return to Pre-2008 Risky Behaviors

If big U.S. banks are not forced to sever their investment arms from traditional banking, they will return to behavior that led to the 2008 credit crisis, said Federal Deposit Insurance Corp. board member Thomas Hoenig.

“The behavior and practices leading to this crisis will soon reemerge and these highly complex, more vulnerable firms will have an even more devastating effect on the economy,” Hoenig said in remarks prepared for delivery yesterday at the Exchequer Club in Washington. “Activities leading to the crisis continue today -- and continue to be subsidized -- well after the lessons should have been learned.”

The Glass-Steagall Act should be revived to separate commercial banking from brokerage operations, Hoenig has argued repeatedly since before joining the FDIC in April. The banking industry’s public safety net should not protect trading risks, according to the former president of the Federal Reserve Bank of Kansas City, who said yesterday firms show signs of returning to risk-taking without such a move.

He said the 2010 Dodd-Frank Act and its so-called Volcker rule to ban banks from proprietary trading was insufficient and that the government safety net will still cover swaps trading and market making, “much of which could become veiled prop- trading.”

The big banks won’t “come along willingly” but should be forced to, Hoenig said.

SEC’s Gallagher Says Retail Bond Investors Fighting ‘Headwinds’

The U.S. Securities and Exchange Commission should scrutinize corporate bond markets to determine if retail investors can find fair prices, said Commissioner Daniel Gallagher.

Gallagher, a Republican on the five-member commission that regulates securities trading, called for the agency to look at the imbalance of information available to retail investors and institutional traders in a speech yesterday at a financial- markets conference hosted by Georgetown University’s McDonough School of Business in Washington.

He said the SEC issued a report this year on the state of the municipal securities market and should consider a similar effort with the corporate bond market. That doesn’t necessarily mean more regulation, he said.

Comings and Goings

Vietnam’s Asia Commercial Bank Chairman, 2 Vice-Chairmen Resign

The board of Vietnam’s Asia Commercial Bank (ACB) has accepted the resignations of Chairman Tran Xuan Gia, a former minister, and two vice-chairmen, according to a statement on the lender’s website yesterday.

Gia and the two vice-chairmen, Le Vu Ky and Trinh Kim Quang, were allegedly “involved in approving” former chief executive officer Ly Xuan Hai’s alleged authorization of 19 bank staff to deposit 718 billion dong ($34 million) of ACB’s funds at Vietnam Joint-Stock Commercial Bank for Industry and Trade, or VietinBank (CTG), according to the statement. Quang declined to comment when contacted by Bloomberg News.

Police arrested the lender’s co-founder Nguyen Duc Kien on Aug. 20, triggering a wave of withdrawals at the bank and speculation of more arrests in the financial industry. Vietnam police have announced the arrests of five others since then for financial violations. Hai was arrested Aug. 24 for alleged economic mismanagement, police said.

The board of ACB accepted the resignations Sept. 18, according to the statement. ACB, the nation’s fourth-biggest lender by market value, has taken legal action against VietinBank to secure the return of its deposits, Tran Mong Hung, former chairman and now adviser to ACB’s management board, said in an interview with Saigon Tiep Thi newspaper published on the lender’s website Sept. 18.

ACB’s board has appointed Tran Hung Huy as chairman and Julian Fong Loong Choon and Luong Van Tu as vice-chairmen. The resignations became effective yesterday, Nguyen Thanh Toai, ACB’s deputy chief executive said by telephone, declining to give any further details. Gia and Ky could not be immediately reached for comment, and Nguyen Van Thang, VietinBank’s general director declined to comment.

Vietnam will clean up its banking system and any individuals found in violation will be dealt with strictly, leaving “no restricted areas,” Vu Duc Dam, chairman of the government office, said in a statement on the state website earlier this month.

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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