James H. Simons, a former Cold War code breaker, later in his life deployed an unusual tax strategy at Renaissance Technologies LLC, saving hundreds of millions of dollars in taxes for himself and other investors, said people with knowledge of the matter.
The U.S. Internal Revenue Service is challenging the technique, which it called “particularly aggressive,” without identifying the hedge fund that is the subject of the dispute. The agency is demanding more tax payments from investors in Renaissance’s $10 billion Medallion fund, the people said.
Renaissance sought to convert profit from Medallion’s rapid trading into long-term capital gains, said the people, who spoke on condition of anonymity because the dispute hasn’t been made public. The top federal rate on long-term gains is about half that on short-term.
Versions of the strategy, which involved shifting ownership of Medallion’s portfolio to banks including London-based Barclays Plc (BARC), were used for most of the past decade, one person with knowledge of the matter said.
The case highlights how hedge-fund and private-equity managers use loopholes to exploit the government’s preferential treatment for long-term investing income. If East Setauket, New York-based Renaissance prevails in its legal dispute with the IRS, dozens of other funds would probably take steps to mimic the firm’s strategy, according to tax advisers.
Jonathan Gasthalter, a spokesman for Renaissance, declined to comment, saying “the dispute is ongoing and being handled in the appropriate forum.”
Kerrie Cohen, a spokeswoman for Barclays, declined to comment. The IRS declined to comment, citing confidentiality laws.
Simons, 75, didn’t respond to a written request for comment.
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BOE’s Tucker, Bailey Say 3% Bank Leverage Ratio Should Apply Now
Bank of England deputy governors Paul Tucker and Andrew Bailey said it’s right for U.K. regulators to impose a 3 percent leverage ratio immediately on banks, five years earlier than plans agreed by global regulators.
Bailey told lawmakers in Parliament in London today that a three percent leverage ratio “is a sensible minimum point.”
Barclays Plc Chief Executive Officer Antony Jenkins said last month the bank may cut lending if the BOE’s Prudential Regulation Authority forces the lender to speed up plans to increase its leverage to 3 percent by 2015. The PRA last week ordered Barclays to increase the ratio, a measure of its proportion of debt to equity funding, to at least 3 percent from about 2.5 percent. The lender has to agree its plan with the regulator by the end of July.
Banks presented plans to the PRA before the end of June and Bailey said regulators are now examining the proposals.
Global regulators included a provisional version of the leverage limit in an overhaul of banking rules in the wake of the 2008 financial crisis. The rule differs from other capital requirements set by the Basel committee because it gives banks no scope to take into account the riskiness of their investments when working out the reserves they need.
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Iosco Says Behavioral Economics, Social Media May Bolster Probes
The International Organization of Securities Commissions said regulators should use behavioral economics and social media to bolster supervision of financial markets.
“Board members agreed to embed behavioral economics in Iosco’s approach to regulatory work going forward, as a means to enhance the effectiveness of market regulation,” the group said in a statement yesterday.
“Members also agreed that social media could serve as a vehicle to influence investor behavior, gather market intelligence and identify market trends, thereby furthering Iosco’s effort to be proactive and forward looking,” the group said in the statement.
Citigroup Will Pay Fannie Mae $968 Million on Faulty Loans
The agreement includes 3.7 million mortgages originated from 2000 to 2012 and sold to Fannie Mae, New York-based Citigroup said today in a statement. While payments are covered by existing reserves, the lender set aside an additional $245 million in the second quarter.
The biggest U.S. banks face pressure to resolve demands they buy back flawed mortgages sold to Fannie Mae and Freddie Mac, the U.S.-owned firms that took a $187.5 billion bailout after the financial crisis. While Citigroup and Bank of America Corp. paid lump sums to settle repurchase claims, others such as Wells Fargo & Co. (WFC) haven’t announced deals with the firms.
The accord resolves “substantially all potential future repurchase claims” with Fannie Mae, Jane Fraser, head of Citigroup’s mortgage unit, said in the statement. The bank will focus on producing “high-quality mortgage loans,” said Fraser, named by Chief Executive Officer Michael Corbat, 53, to run the operation in May.
The deal doesn’t release Citigroup from liability tied to servicing the loans. The agreement also excludes a group of fewer than 12,000 loans made from 2000 to 2012, the bank said. Citigroup had set aside $1.42 billion at the end of March to cover demands to buy back bad mortgages, according to an April 15 presentation.
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Swiss Re, Lloyd’s Among Insurers Probed by N.Y. on Iran Sanction
Swiss Reinsurance Co. (SREN) and Lloyd’s of London, the world’s oldest insurance market, are among companies being probed by a New York regulator about their compliance with an expanded Iran sanctions law.
The state Department of Financial Services is asking the insurers about their procedures to avoid violations of the Iran Freedom and Counter-Proliferation Act of 2012, according to a letter from the department obtained by Bloomberg News.
The department, led by Superintendent Benjamin Lawsky, said it learned that several insurers issued coverage that applied to trades made with Iran, including one policy issued by a group of European domiciled companies, according to the letter. The policy and the resulting claim payment “would likely violate the IFCPA,” the department said, referring to the act.
“Swiss Re is aware of its legal obligations and has a robust program in place to assure full compliance,” Michael Gawthorne, a spokesman for the Zurich-based company, the world’s second-biggest reinsurer, said in an e-mail. “Any suggestion that Swiss Re is in violation of trade sanction laws against Iran is without merit.”
“Lloyd’s will comply with any applicable sanctions, as it always has done,” said a spokeswoman, Caroline Harris-Gibson, at Prosek Partners.
Besides Lloyd’s and Swiss Re, companies contacted by the Financial Services Department include Hannover Re Ltd., XL Insurance Ltd. and Assured Guaranty Re Ltd. Representatives of those companies either declined to comment or couldn’t be reached for comment.
The probe was reported earlier by the Wall Street Journal.
Lawsky almost a year ago broke ranks with other regulators and threatened to rescind Standard Chartered Plc (STAN)’s banking license in New York over money transfers involving Iran. He has since expressed frustration with the slow pace of the investigation.
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Banks Accused of Harming CDS Market as EU Seeks Libor Deal
Thirteen of the world’s biggest investment banks were accused by the European Union of colluding to curb competition in the $10 trillion credit derivatives industry.
The EU sent a complaint, or statement of objections, to 13 banks, data provider Markit Group Ltd. and the International Swaps & Derivatives Association over allegations they sought “to prevent exchanges from entering the credit derivatives business between 2006 and 2009,” the European Commission said.
The probe is one of several by the Brussels-based commission into the financial industry, including whether banks colluded to manipulate U.K. and European benchmark interest rates. Joaquin Almunia, the EU antitrust chief, said he’s seeking to settle the probes into Libor and Euribor with some of the same banks in the CDS case by the end of the year.
The EU in April 2011 opened a probe into whether banks colluded by giving market information to Markit, a data provider majority-owned by Wall Street’s largest banks. Earlier this year, the EU extended its investigation to include ISDA.
The banks in the CDS probe are Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Citigroup Inc., Credit Suisse Group AG (CSGN), Deutsche Bank AG (DBK), Morgan Stanley (MS), Barclays Plc, Bank of America Corp., HSBC Holdings Plc (HSBA), Royal Bank of Scotland Group Plc, BNP Paribas SA (BNP) and UBS AG (UBSN), the commission said. Bear Stearns, which is now a unit of JPMorgan, was also named by the EU authority.
ISDA is cooperating with the EU and “is confident that it has acted properly at all times,” the New York-based organization said in an e-mailed statement.
Officials at Deutsche Bank, Goldman Sachs, HSBC, RBS, Bank of America, Morgan Stanley, JPMorgan, Credit Suisse and Citigroup declined to comment. Officials at Markit couldn’t be immediately reached to comment on the statement of objections.
The EU investigation follows a similar probe by the U.S. Justice Department related to Markit. The Justice Department declined to comment beyond confirming that it is conducting the probe.
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Ex-Primary Global Consultants Avoid Jail for Insider Trading
Two men who worked as consultants for expert networking firm Primary Global Research LLC avoided prison terms in the U.S. government’s five-year investigation of insider trading.
Mark Anthony Longoria, 47, a former Advanced Micro Devices Inc. employee, and Walter Shimoon, 41, an ex-Flextronics International Ltd. (FLEX) executive, both received sentences of two years’ supervised release yesterday by U.S. District Judge Jed Rakoff in Manhattan. Rakoff cited Longoria’s and Shimoon’s cooperation with the government in giving them no prison time.
Rakoff also sentenced both men to time served -- the day that each spent in custody after they were arrested. Longoria must also forfeit $170,000 while Shimoon forfeits $45,500.
Longoria and Shimoon both pleaded guilty in 2011. Neither spoke in their sentencing hearings today.
Longoria pleaded guilty to two counts of conspiracy, a count of securities fraud and making false statements to U.S. Federal Bureau of Investigation agents.
Longoria admitted passing confidential information about AMD’s gross margins and revenue to hedge fund managers in 2009. He also said he provided inside information about Western Digital Corp., a hard-drive maker based in Irvine, California, when he worked for that company in 2006.
The Shimoon case is U.S. v. Shimoon, 10-mj-2823, U.S. District Court, Southern District of New York (Manhattan); The Longoria case is U.S. v. Longoria, 11-cr-00032, U.S. District Court, Southern District of New York (Manhattan).
Former KPMG Auditor London Pleads Guilty to Insider Trading
A former senior KPMG LLP partner, Scott London, pleaded guilty to leaking confidential information about the audit firm’s clients to a friend who made more than $1 million trading on the inside information.
London, 50, admitted to one count of securities fraud at a hearing yesterday in federal court in Los Angeles. He faces as long as 20 years in prison at his sentencing scheduled for Oct. 21 before U.S. District Judge George Wu.
As part of his plea agreement, London, the former head of KPMG’s audit business in the Southwest U.S., admitted he leaked information to a friend about at least 14 separate earning announcements or acquisitions by KPMG clients before they were made public.
The friend, Bryan Shaw, pleaded guilty on May 20 to one count of conspiracy. He began cooperating with prosecutors in February and secretly recorded conversations with London. Shaw, who made about $1.3 million from the illegal trades, faces as long as five years in prison.
The case is U.S. v. London, 13-mj-01058, U.S. District Court, Central District of California (Los Angeles.)
Carney Must Change Culture of BOE, Blanchflower Says
David Blanchflower, a Bloomberg Television contributing editor and former Bank of England policy maker, talked about the task facing Mark Carney as he assumes the job as the central bank’s governor and the outlook for U.K. monetary policy.
Blanchflower spoke with Erik Schatzker and Sara Eisen on Television’s “Market Makers.”
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Levitt Calls Parts of Dodd-Frank ‘Waste of Time’
Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, said rules on compensation and shareholder rights in Dodd-Frank legislation “have done nothing.” Levitt talked with Bloomberg’s Tom Keene and Michael McKee on Bloomberg Radio’s “Bloomberg Surveillance.”
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Comings and Goings
SEC Names New Heads of Asset Management Enforcement Unit
Julie M. Riewe and Marshall S. Sprung were named as co-chiefs of the Division of Enforcement’s Asset Management Unit, which focuses on misconduct by investment advisers, investment companies and private funds, U.S. Securities and Exchange Commission announced yesterday in e-mailed statement.
Riewe and Sprung have been deputy chiefs of the unit since May 2012; they succeed Bruce Karpati, the unit’s inaugural chief, who left in May.
Riewe led SEC’s insider-trading case against investor Mark Cuban, owner of Dallas Mavericks.
Chicago Office Chief Gillette Leaving SEC to Become Law Partner
Merri Jo Gillette will step down as director of the U.S. Securities and Exchange Commission’s Chicago office to join the law firm of Morgan, Lewis & Bockius LLP as a partner, the agency said in a statement yesterday.
Gillette will leave the SEC later this month after more than 25 years of service, the agency said.
Sommers Will Leave CFTC July 8 After Leading Review of MF Global
Jill E. Sommers, the U.S. Commodity Futures Trading Commission member who oversaw the agency’s investigation into the collapse of MF Global Holdings Ltd., will step down from the agency next week.
Sommers, one of two Republicans on the five-member panel, has served as a commissioner since 2007, spanning a period when the agency won new authority to regulate the swaps market and implement rules required under the Dodd-Frank Act. She will leave the agency on July 8, she said yesterday.
J. Christopher Giancarlo, executive vice president at interdealer broker GFI Group Inc. (GFIG), is the top candidate for a Republican appointment to the CFTC this year, according to three people briefed on the matter.
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