Federal regulators fined the Chicago Board Options Exchange (CBOE) $6 million, saying its staff interfered with its three-year investigation of short-selling at a member firm in an unprecedented breakdown of trading supervision.
The settlement, which calls for immediate remedial actions, is the first ever assessed by the U.S. Securities and Exchange Commission for violations related to regulatory oversight, according to a statement. On June 7, an administrative law judge ruled that CBOE member OptionsXpress Inc., a unit of Charles Schwab Corp. (SCHW), helped facilitate sham transactions that violated U.S. securities laws known as Regulation SHO.
While actions against traders and investors are common at the SEC, exchanges enjoy legal protections in their capacity of self-regulatory organizations. In the CBOE’s case, oversight suffered when it transferred responsibility for Regulation SHO enforcement from one department to another in 2008, the SEC wrote.
During the investigation of OptionsXpress, it became apparent that CBOE staff didn’t know enough about the law to adequately enforce it, according to the SEC statement. Not only did they fail to detect violations, they “took misguided and unprecedented steps” to assist the firm that was under investigation.
As part of its response to the SEC inquiry, the CBOE said in January it planned to exclude trading industry directors from its board, bringing its governance in line with other exchange operators.
“This settlement marks a significant step in putting the SEC matter behind us,” CBOE said in an e-mailed statement. “All actions either required or recommended by the SEC, as well as those resulting from our rigorous self-review, have been or are now being implemented.”
Gail Osten, a spokeswoman for the Chicago-based market operator, declined to comment beyond the statement. CBOE said in a filing in February that it expected to pay as much as $10 million to settle the SEC’s investigation.
OptionsXpress says it did nothing wrong. Stephen Senderowitz, a lawyer representing OptionsXpress, yesterday disputed the interpretation of events in the June 7 ruling by Brenda P. Murray, the chief administrative judge for the SEC. He said OptionsXpress is reviewing the decision for the purposes of an appeal.
“We believe the evidence at trial demonstrated that OptionsXpress at all times acted consistent with all regulations and bought in the shorts and delivered securities as required,” Senderowitz said in an e-mailed statement. “The firm was in touch with regulators regarding the transactions, no one was harmed, and the transactions were neither novel nor exotic.”
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South African Law Changes to Raise Miners’ Costs, Law Firm Says
The Mineral and Petroleum Resources Development Amendment Act, or MPRDA, became effective June 7 after being signed into law by President Jacob Zuma.
South Africa, with the largest known reserves of platinum and chrome, as well as gold, iron and diamonds, is bringing in changes even as it plans a further amendment bill this year. Higher expenses will further squeeze profits at mining companies already contending with above-inflation cost increases for wages and energy, while labor disputes and slumping commodity prices have forced some producers to suspend shafts or cut jobs.
The changes stipulate that the mines minister must refuse an application for prospecting rights should those rights concentrate resources under the control of one company, restricting “equitable access,” according to the law firm, which said the vague phrasing leaves the rule open to interpretation.
The changes also allow the minister to impose stricter conditions on mining rights where the land is occupied, which may go beyond the requirements of the Mining Charter.
The alterations may be superseded by an amendment bill after it’s introduced to parliament later in June.
EU Races to Meet End-June Deadline on Bank Creditor-Loss Rules
European Union finance ministers will grapple next week over how far the bloc should standardize its approach to writing down failing banks’ creditors as they seek agreement on a blueprint to end state bailouts.
While there is a “broad measure of agreement” on the draft creditor-loss rules, governments have just over a week to resolve their differences before the ministers convene in Luxembourg on June 21, according to an EU document prepared for the meeting and obtained by Bloomberg News.
Nations are divided over how much flexibility regulators should be given to exempt some creditors from writedowns, according to the document prepared by Ireland, which holds the EU’s rotating presidency. Some governments contend that uniform rules are needed while others want nations to have more discretion, the document shows.
The EU’s 27 governments are racing to meet an end-June deadline to agree on the plans, which leaders have said will be a first step toward more ambitious moves to centralize bank interventions in the 17-nation euro area.
Under draft plans presented last year by Michel Barnier, the EU’s financial services chief, losses at a crisis-hit bank would be absorbed first by wiping out its capital, then writing down unsecured debt holders in order of seniority.
Nations would also be required to build up standing funds, financed with bank levies, which would be tapped to cover restructuring costs at failed lenders. Compromise texts drawn up by Ireland would give regulators the power to exempt derivatives from writedowns, if including them would cause more harm than good.
The plans must be approved by governments and by the European Parliament before they take effect.
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Weidmann Says OMT Blurs Boundary Between Monetary, Fiscal Policy
The European Central Bank’s OMT program blurs the boundary between monetary and fiscal policy, Bundesbank President Jens Weidmann said at a hearing of the Federal Constitutional Court in Karlsruhe.
Outright Monetary Transactions, or OMT, is a program of the central bank allowing it to make outright transactions in the secondary sovereign bond markets, according to the bank’s website.
“I see significant stability problems in the Eurosystem’s government-bond purchase programs, as well as in other crisis measures, that blur the boundary between European monetary policy and the fiscal policy of individual nation states,” Weidmann said.
As hearings on the OMT at Germany’s top court began yesterday, the Stoxx Europe 600 Index fell 1.2 percent to 291.74 at the close of trading and the benchmark gauge earlier sank as much as 2.1 percent, reaching a seven-week low.
Peter Buergler, a trader at Luzerner Kantonalbank AG in Lucerne, Switzerland, said some of the uncertainty in the market is “still connected to the fear of stimulus being reduced by the Federal Reserve, and some of it is connected to the federal court hearings in Germany.”
The ECB’s OMT program violates European laws and the constitutional principle of democracy, Dietrich Murswiek, a lawyer for lawmaker Peter Gauweiler, told the Federal Constitutional Court in Karlsruhe yesterday. The court is reviewing seven cases filed over the OMT and the European Stability Mechanism at a two-day hearing.
The as-yet-unused OMT foresees potentially unlimited purchases of bonds of debt-stricken countries that sign up to adjustment programs. German Finance Minister Wolfgang Schaeuble defended the government’s policies, saying that Germany itself insisted on giving the ECB independence and “needs to be respected by the court.”
The plaintiffs include opposition political party Die Linke and political group Mehr Demokratie e.V., German for “More Democracy.”
Ex-WellCare CEO Found Guilty in $40 Million Medicaid Scheme
WellCare Health Plans Inc. (WCG)’s former Chief Executive Officer Todd Farha, 45, and Chief Financial Officer Paul Behrens, 51, were each found guilty of two counts of health-care fraud by a jury in Tampa, Florida, June 10.
Behrens was also found guilty of two counts of making false statements. The convictions were announced in a statement by the U.S. Justice Department.
The executives were charged in March 2011 with devising a scheme to defraud the Florida Medicaid program and making false, fraudulent statements on expenses for behavioral health-care services.
From 2003 through 2007, Tampa-based WellCare failed to pay the state $40 million in refunds, prosecutors said. A whistle-blower at the company told the Federal Bureau of Investigation about the plot. WellCare has paid out at least $427 million in settlements to government agencies and shareholders since 2007.
“The company acted swiftly in October 2007 upon learning of the wrongdoing and separated the individuals involved,” Jack Maurer, a spokesman for WellCare, said in an e-mailed statement. “Over the past five years we have cooperated fully with state and federal authorities in their investigations, and resolved all of the issues that directly involved the company.”
WellCare sued its former executives and that action was stayed pending the outcome of the criminal trial, Maurer said.
“We have made significant changes to the governance of our company to help ensure that this never happens again,” he said.
The case is U.S. v. Farha, 11-cr-00115, U.S. District Court, Middle District of Florida (Tampa).
Chemical Makers Lose Court Challenge to Train Safety Rules
Chemical makers failed to show any harm from a rule boosting safety requirements for shipping dangerous substances by rail, a U.S. appeals court said, throwing out a lawsuit challenging the 2012 regulation.
The Arlington, Virginia-base Chlorine Institute argued that the Federal Railroad Administration rule would constrain or eliminate chemical makers’ ability to ship products by rail.
The Chlorine Institute also didn’t argue that any carrier actually diminished any individual member’s shipping ability, “only that it could do so,” Henderson wrote.
Frank Reiner, president of the institute, said the group was reviewing the decision and had no immediate comment.
The case is Chlorine Institute Inc. v. Federal Railroad Administration, 12-1298, U.S. Court of Appeals for the District of Columbia (Washington).
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