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JPMorgan, Credit Cards, Morgan Stanley: Compliance

The New York lawsuit over mortgage- backed securities filed Monday against JPMorgan Chase & Co. (JPM) will serve as a template for suits against other issuers, state Attorney General Eric Schneiderman said.

Schneiderman alleged that the Bear Stearns business that JPMorgan took over in 2008 deceived mortgage-bond investors about the defective loans backing securities they bought, leading to “monumental losses,” according to a complaint filed yesterday in New York State Supreme Court.

The Bear Stearns mortgage unit packaged $212 billion in mortgage bonds from 2003 through 2006, according to the complaint. Losses on $87 billion of those bonds packaged during just two of those years total $22.5 billion so far, it estimated. Schneiderman said he wants the bank to disgorge all money it obtained in connection with or as a result of the alleged fraud.

“This is a workable template for future actions against issuers of residential mortgage-backed securities that defrauded investors and cost millions of Americans their homes,” Schneiderman said in a statement.

New York hasn’t fully identified the losses in the JPMorgan case, Schneiderman said yesterday in a teleconference.

Schneiderman is co-chairman of a state-federal group formed to investigate misconduct in the bundling of mortgage loans into securities leading up to the financial crisis. The group includes officials from the Justice Department, the Securities and Exchange Commission, the FBI and other federal and state officials.

Joe Evangelisti, a JPMorgan spokesman, said the New York- based bank would contest the complaint, which is “entirely about” conduct by Bear Stearns. JPMorgan acquired Bear Stearns in March 2008 after a run on what was then Wall Street’s fifth- largest securities firm.

The case is People of the State of New York v. J.P. Morgan Securities, 451556-2012, New York State Supreme Court, New York County (Manhattan).

For more, click here.

Compliance Action

JPMorgan Joins BofA to End Card Adds-Ons as CFPB Cracks Down

JPMorgan Chase & Co., Bank of America Corp. and American Express Co. (AXP) are among credit-card lenders retreating from a $2.4 billion market as regulators seek curbs on deceptive marketing of products including debt cancellation.

Scrutiny from the Consumer Financial Protection Bureau has led to fines against banks including Capital One Financial Corp. (COF) and Discover Financial Services (DFS), prompting them to curtail sales of so-called add-ons that offer to help customers pay card bills if they get sick or lose their jobs, or to monitor their credit.

American Express also is cooperating with regulators amid an “industrywide review” of the products, said Michael O’Neill, a spokesman for the New York-based lender.

AmEx, the biggest U.S. credit-card issuer by purchases, said on Monday that it will pay $112.5 million to settle claims it violated consumer safeguards from marketing to collections in products sold to about 250,000 customers. That case didn’t involve add-on products.

The crackdown is CFPB Director Richard Cordray’s first enforcement campaign after the Dodd-Frank Act consolidated regulation of retail financial products under one federal agency. With U.S. banks already complaining that regulation has squeezed revenue, the bureau is considering new limits on payday lending and fees for checking overdrafts, and has proposed an overhaul of mortgage practices.

For more, click here.

SEC Questions Revenue Disclosures of Real Estate Site Zillow

Zillow Inc. (Z), the real estate website, fell yesterday after the U.S. Securities and Exchange Commission asked the company to respond to questions about how it reported revenue.

Seattle-based Zillow declined 4.21 percent to $39.11 in New York. Before the release of the SEC’s letter, the stock had gained 82 percent this year.

The SEC asked in a letter dated Aug. 30 why the company didn’t report the percentage increase in the average price paid for so-called Premier Agent subscriptions in its most recent financial report, according to a regulatory filing. Zillow said it would revise disclosures in its next quarterly report, according to the filing.

In addition, the SEC asked why total marketplace revenue growth appears to be slowing while Premier Agent subscription revenues look to be increasing. In response, Zillow said in the filing that it would start disclosing the average monthly Premier Agent revenue per subscriber.

“This letter was in response to an early 2012 10-K filing submitted by Zillow, and we have since responded to the SEC’s satisfaction,” Katie Curnutte, a Zillow spokeswoman, said in an e-mailed statement.

Separately, the SEC also asked Zillow to disclose the number of unique users by domain name for different websites the company operates, including Zillow.com and RentJuice.com, according to a second letter released in a regulatory filing.

Former Madoff Employees to Be Tried Next Year, Judge Says

Five longtime employees of Bernard L. Madoff’s investment firm will go to trial Oct. 7, 2013, charged with participating in history’s biggest Ponzi scheme, a judge said.

U.S. District Judge Laura Taylor Swain set the date yesterday after the former Madoff employees, Daniel Bonventre, Annette Bongiorno, Joann Crupi, Jerome O’Hara and George Perez, pleaded not guilty to new charges.

Prosecutors in the office of U.S. Attorney Preet Bharara in Manhattan on Oct. 1 filed a new indictment alleging the five joined a conspiracy to defraud investors that got its start in the early 1970s. The charges add to the 17 criminal counts filed against the former employees in November 2010, for a total of 33 counts.

Bonventre, 65, and Bongiorno, 64, worked for Madoff for 40 years. Bongiorno rose to the level of supervisor and account manager. Crupi, 51, an employee since 1983, tracked daily bank account activity, prosecutors said. Perez, 46 and O’Hara, 49, started at the firm in the early 1990s.

Assistant U.S. Attorney Lisa Baroni told Swain yesterday that the prosecution case against the five will take about two months. Swain said she will set aside 3 1/2 months for the entire trial.

Madoff, 74, pleaded guilty to fraud in 2009 for cheating investors out of $20 billion in principal. He is serving a 150- year term in federal prison in North Carolina.

The case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).

Florida Man Pleads Guilty to Phony Facebook Share Scam

A South Florida man charged with running an $11 million scam involving nonexistent shares in companies including Facebook Inc. (FB) and Groupon Inc. (GRPN) was taken into custody after pleading guilty to criminal charges.

John Mattera, 50, who operated Praetorian Global Fund Ltd., pleaded guilty yesterday in Manhattan to three criminal counts -- conspiracy, securities fraud and wire fraud -- and tried to plead guilty to a fourth, money laundering. U.S. District Judge Richard Sullivan declined Mattera’s request to remain free on bail, ordering him jailed after a two-hour hearing.

In a plea agreement, Mattera and prosecutors said federal sentencing guidelines call for a term of 10 to more than 12 years in prison. Sullivan may disregard the guidelines in sentencing Mattera.

In the SEC case, U.S. District Judge Kevin Castel in New York found that Mattera sold a Lamborghini automobile for $28,000, which he passed to his mother, in violation of a court- ordered asset freeze. Mattera also borrowed $114,000 and transferred money to his mother to pay his expenses, also in violation of the order, Castel said.

Carl Schoeppl, Mattera’s lawyer, declined to comment on the case after the hearing.

The case is U.S. v. Mattera, 11-CR-2947, U.S. District Court, Southern District of New York (Manhattan).

Courts

Morgan Stanley Loses Appeal in $245 Million Citigroup Suit

A federal appeals court in Manhattan upheld a ruling against Morgan Stanley & Co. (MS) in a breach-of-contract suit in which it’s accused of failing to pay a Citigroup Inc. (C) unit $245 million under a swap agreement.

Citibank NA arranged the swap for protection in the event that a collateralized debt obligation based on a line of credit provided to an entity called Capmark defaulted, according to the ruling yesterday.

Citibank sued in 2009, alleging that Morgan Stanley refused to pay the shortfall owed under the swap after Capmark defaulted on its loan agreements and the $366 million CDO was liquidated. In 2011, U.S. District Judge Shira A. Scheindlin ordered Morgan Stanley to pay $245 million plus interest.

The appeals court rejected Morgan Stanley’s argument that it wasn’t obligated to pay because Citibank NA ordered the CDO liquidated without Morgan Stanley’s permission.

Lauren Onis, a spokeswoman for New York-based Morgan Stanley, declined to comment on the appeals court ruling.

“We are pleased with the decision of the Second Circuit of Appeals affirming the judgment in our favor,” Danielle Romero- Apsilos, a spokeswoman for New York-based Citigroup, said in an e-mailed statement.

The case is Citibank N.A. v. Morgan Stanley & Co. International Plc, 11-2592, U.S. Court of Appeals for the Second Circuit (Manhattan).

U.S. Role in Lehman Collapse Allowed in Reserve Trial

The U.S. government’s role in the collapse of Lehman Brothers Holdings Inc. will be allowed as evidence in the Oct. 9 trial over allegations that Reserve Primary Fund misled investors in 2008, a federal judge in Manhattan ruled.

The company will be permitted to present evidence that its confidence in Lehman’s finances were based in part on the U.S. Securities Exchange Commission’s oversight of the investment bank under a voluntary regulatory program, according to the decision by U.S. District Judge Paul Gardephe.

A trial is scheduled to begin Oct. 9 in the SEC’s case alleging that the company misled investors about the safety of the fund after it suffered losses in Lehman investments. The fund, which held $785 million in debt issued by Lehman, became the first money fund in 14 years to expose investors to losses when Lehman filed for bankruptcy protection in September 2008.

“Defendants intend to argue that Bent Sr. believed that Lehman’s financial reports were sound, and this belief was critical to his state of mind on September 15 and 16,” Gardephe said in his ruling, referring to Reserve Partners founder and Chief Executive Officer Bruce R. Bent, a defendant along with his son, Bruce Bent II.

The judge excluded evidence regarding government actions following Lehman’s bankruptcy filing and the beginning of Reserve Primary Fund’s collapse, including government bailout programs and the SEC’s investigation of Lehman and other financial firms.

John Dellaportas, a lawyer for the defendants, and SEC attorney Nancy A. Brown didn’t immediately return calls for comment on the ruling.

The case is SEC v. Reserve Management Co. Inc. 09-cv- 04346, U.S. District Court, Southern District of New York (Manhattan).

Playboy Enterprises to Settle Investor Case for $5 Million

Playboy Enterprises Inc. agreed to pay $5.25 million to settle a lawsuit over claims its founder, Hugh M. Hefner, shortchanged investors in a going-private buyout in March.

Stockholders sued beginning in 2010 over the offer, which started at $5.50 a share and increased to $6.15 a share the following year. The parties agreed to the settlement partly to avoid continued litigation, according to Delaware Chancery Court papers made public yesterday in Wilmington. Playboy, based in Chicago, denied any wrongdoing.

“Plaintiffs’ counsel have concluded that the settlement is fair and adequate and that it is reasonable,” the parties wrote in their memorandum. The agreement requires a judge’s approval.

Playboy expanded globally in the 1960s and 1970s when Hefner, now 86, ran the company. The company went public in 1971 and circulation reached 7.2 million for one issue in 1972. Hefner is the company’s chief creative officer.

Teri Thomerson, a spokeswoman for Playboy, and plaintiffs’ lawyer Carmella Keener didn’t immediately respond to e-mail messages seeking comment on the settlement.

The case is In Re Playboy Enterprises Inc. Shareholders Litigation, CA5632-VCN, Delaware Chancery Court (Wilmington).

ResCap Mortgage Holders Seek Details on Servicing Unit Sale

Residential Capital LLC, the bankrupt mortgage unit of Ally Financial Inc. (ALLY), should be barred from selling its loan servicing unit until the company provides more information about the deal, investors who bought ResCap mortgages said in court papers.

Fannie Mae and Freddie Mac, the two government-chartered mortgage buyers, on Monday objected to the sale, claiming that without changes the proposed deal may threaten contracts they have with ResCap to service loans.

The unit being sold collects payments and provides foreclosure services on more than 1 million loans Fannie and Freddie bought from ResCap. Because they own a large share of the 2.4 million loans that ResCap services, the two mortgage holders said in court papers filed in Manhattan, they expected ResCap to be more cooperative.

ResCap, based in New York, filed for bankruptcy in May with plans to sell most of its assets and resolve legal claims related to residential mortgage-backed securities.

The company said last month that it is working to resolve objections to the proposed sale.

ResCap plans to hold an auction for the mortgage servicing business, with a unit of Fortress Investment Group LLC (FIG) as the lead bidder. The unit, Nationstar Mortgage Holdings Inc. (NSM), has agreed to buy the servicing business for more than $2.4 billion unless it is outbid.

In separate filings, Fannie Mae and Freddie Mac said they would support the sale if ResCap and the winning bidder provide enough information to ensure that their servicing contracts are not disrupted.

The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Speeches and Conferences

SEC Holds Conference on Trading Technology and Crisis Management

The U.S. Securities and Exchange Commission yesterday held two roundtable discussions on trading and efforts to prevent errors. Led by Robert Cook, director of the agency’s trading and markets division, the first session focused on market technology and efforts to prevent trading errors. Participants in that panel included Chris Isaacson, chief operating officer of Bats Global Markets Inc.; Jamil Nazarali, head of Citadel Execution Services at Citadel LLC; Lou Pastina, an executive vice president at NYSE Euronext; and Jonathan Ross, chief technology officer of Getco LLC.

The second session focused on market responses once errors have occurred. Participants included David Bloom of UBS AG, Chad Cook of Lime Brokerage LLC, Anna Ewing of Nasdaq OMX Group Inc. and Lou Steinberg of TD Ameritrade Holding Corp.

To view the first panel discussion, click here. To view the second panel’s discussion, click here.

Miliband Seeks Tighter U.K. Merger Rules Against ‘Predators’

U.K. opposition leader Ed Miliband pledged to tighten takeover rules and end quarterly reporting for companies, saying that would encourage longer-term thinking and businesses that are “producers” rather than “predators.”

In his keynote speech yesterday to his Labour Party’s annual conference in Manchester, England, Miliband laid claim to the “one nation” model of politics defined by Conservative Prime Minister Benjamin Disraeli in 1872 and said banks and other businesses should be bound to similar tenets. He said David Cameron, the current Tory leader and premier, had abandoned “one nation” policies.

Miliband said Labour is now the party best able to represent people of all backgrounds and incomes, and that recent British governments, including those headed by Labour’s Tony Blair and Gordon Brown, in which he was a minister, failed to hold the powerful to account.

To view the speech, click here.

To contact the reporter on this story: Ellen Rosen in New York at erosen14@bloomberg.net.

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

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