Tourre Rests, Policing Bonus CoCos, Deloitte Ethics: Compliance

The U.S. Securities and Exchange Commission rested its case against Fabrice Tourre, the former Goldman Sachs Group Inc. (GS) vice president accused of civil fraud for his role in a failed $1 billion investment related to the housing market crash.

Tourre won’t call witnesses and also rested his case yesterday. The jurors in the case were sent home, and closing arguments in the trial are scheduled for today.

U.S. District Judge Katherine Forrest denied Tourre’s motion to dismiss the case against him yesterday, after the close of the SEC’s evidence.

The SEC claims Tourre intentionally misled participants in a 2007 deal known as Abacus about the role played by Paulson & Co., the hedge fund run by John Paulson. The SEC claims Tourre hid that Paulson helped choose the portfolio of subprime mortgage-backed securities underlying Abacus, then made a billion-dollar bet it would fail.

SEC lawyers questioned Tourre about e-mails in which he sent Abacus marketing materials to clients and members of Goldman Sachs’s sales staff. The SEC claims he broke the law by offering investments in Abacus without disclosing Paulson’s role in selecting the portfolio.

Paulson didn’t testify at the trial.

Tourre has kept a low profile since enduring the questions of a U.S. Senate subcommittee in April 2010 alongside other Goldman Sachs executives. The firm, which is paying Tourre’s legal fees, settled SEC allegations for $550 million, a record at the time.

The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).

Compliance Policy

EU Regulators Seek to Police Use of CoCos in Banker Bonuses

Banks in the European Union face limits on how they can use securities such as contingent convertible bonds in bonus awards, as regulators seek to crack down on any attempts by lenders to avoid the full force of EU pay curbs.

The European Banking Authority published draft rules that would prevent banks from offering staff dividends on contingent capital instruments, such as CoCo bonds, that are out of step with those available to outside investors, the agency said in an e-mailed statement yesterday. The measures would also require holders of the securities to face a real risk of losses if the bank’s performance plunges.

Securities issued as part of bonus awards “should take account of the institutions’ long-term interests and incentivize prudent risk-taking of staff,” the EBA said. “In this respect, these instruments must have a sufficient maturity to cater for deferral and retention arrangements.”

The EU this year bolstered its banker pay rules, already among the toughest in the world, to include a ban on bonuses more than twice as large as salaries. The updated law, set to take effect from January, gives banks more scope to use CoCos and other contingent capital to meet an existing EU requirement that at least half of a bonus award must be in shares or other non-cash instruments.

CoCos are a form of fixed-income security that automatically converts into ordinary shares if a bank’s capital falls through a pre-determined floor. This type of bond can mimic the clawback rules applied to cash bonus awards by ensuring bankers face losses if a company fails to perform as strongly as expected.

Banks have already taken nascent steps to use contingent capital instruments in pay packages. The EU legislation requires the EBA to define rules of the road to prevent such instruments being used in a way that undermines the bonus curbs. The draft EBA rules include minimum capital levels at which writedowns, or conversions of the debt into equity, must happen, in order to ensure that the risk of losses is real.

EU rules cover categories of staff identified by the bloc’s regulations as material risk takers. The EBA said it would seek views on the plans until Oct. 29, and hold a hearing on Oct. 3.

EU Bank-Capital Rules Face Compliance Probe by Basel Group

European Union bank-capital rules, already criticized by global regulators, face another international probe just months after they start to take effect next year.

The Basel Committee on Banking Supervision will review how well the EU has applied its standards, Wayne Byres, the group’s secretary general, said in an interview. An earlier investigation, based on a draft version of the EU plans, pointed to loopholes and triggered a rebuttal from Michel Barnier, the bloc’s financial services chief.

The EU emerged bruised from last year’s process that cast doubt on its claims to be fully in line with a global pact to beef up banks’ defenses against financial crises. While the Basel group has also indicated that the U.S. will face a follow-up review, the chances that the EU will be judged non-compliant because of the flexibility afforded to banks, Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc. said in an e-mail.

The EU is set to phase in its version of the Basel accord starting in January, and the rules will fully apply as of 2019. Basel III requires banks to hold capital equivalent to at least 7 percent of their risk weighted assets, while also meeting an indebtedness limit and liquidity requirements.

In last year’s scorecard, published in October, the committee concluded that the EU’s proposals were not specific enough in limiting the range of instruments banks may count as core capital and also said lenders were given too much scope to label government debt as risk free -- so escaping holding capital against it.

The future impact of Basel rules on EU lenders was underscored by data published by the European Banking Authority in March. It said EU banks would have needed an extra 112.4 billion euros ($149 billion) in their core reserves to meet the Basel bank capital rules had the standards been enforced in mid-2012.

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Compliance Action

Deloitte Ignored Ethics Before MG Rover Collapse, Tribunal Says

Deloitte LLP disregarded ethical codes while advising on transactions involving the now-defunct U.K. car company MG Rover Group Ltd., an accounting tribunal said yesterday.

Deloitte and one of its former partners didn’t consider conflicts of interest and failed to safeguard against “self-interest” in advising both MG Rover and Phoenix Venture Holdings Ltd., its parent company at the time, the Financial Reporting Council Tribunal ruled, according to a statement on its website.

“Deloitte’s advice, which itself was not criticized, helped to generate over 650 million pounds ($998 million) of value for the MG Rover Group, keeping the company alive for five years longer than might have been the case and securing 5,000 jobs in the West Midlands during this period,” James Igoe, a spokesman for Deloitte, said in a statement on the tribunal’s decision.

MG Rover went bankrupt in 2005 with 1.3 billion pounds of debt and some 6,000 people lost their jobs. Nanjing Automobile Group Corp., a state-owned Chinese company, bought the assets of MG Rover in July of that year for about $97 million.

Barclays Said to Lose in Bid to Get More Time for Capital

Barclays Plc (BARC), Britain’s second-largest bank by assets, won’t get the extra time it was seeking to meet regulators’ demands to boost capital, according to a person with direct knowledge of the situation.

The Prudential Regulation Authority has told the lender it won’t get until the end of 2014 to increase capital to at least 3 percent of assets, said the person, who asked not to be identified because the move hasn’t been made public. The bank, which holds the least capital as a proportion of its assets of Britain’s four biggest banks, is considering selling new stock or contingent convertible bonds to plug the gap, two people with knowledge of the talks said.

To meet the ratio this year, the bank will have to raise either 7 billion pounds ($11 billion) in equity or cut 240 billion pounds of assets, analysts estimate. The bank was one of only two to miss the regulator’s target in June. Nationwide Building Society, the country’s biggest customer-owned lender, was given until the end of 2015 to make up the shortfall.

Barclays said in a statement it has held talks with the PRA and will update the market when it reports earnings today.

Deutsche Bank AG and Credit Suisse Group AG, Barclays’s corporate brokers, are already preparing for a potential share sale, according to another person with knowledge of the talks.

Officials at Barclays, Deutsche Bank, Credit Suisse and the PRA in London declined to comment.

Courts

Bharara Seeks Cohen Civil Case Stay Pending Criminal Outcome

Manhattan U.S. Attorney Preet Bharara asked an administrative judge to stay the Securities and Exchange Commission’s action against billionaire Steven A. Cohen until related criminal cases against his hedge fund and two former employees are resolved.

In a document dated July 26, Bharara said the SEC enforcement staff doesn’t object to postponing the administrative proceeding, which it filed on July 19 alleging that Cohen failed to supervise two portfolio managers who now face criminal insider trading charges.

Bharara last week announced related criminal charges against Cohen’s Stamford, Connecticut-based hedge fund SAC Capital Advisors LP, calling it “a veritable magnet for market cheaters” and saying the fund was being held responsible for insider trading by seven portfolio managers and analysts who worked there. Cohen hasn’t personally been charged criminally and has said that he will fight the SEC’s administrative action.

Bharara said in the motion that the civil and criminal proceedings will involve many of the same witnesses and other evidence. Therefore, having both proceed at the same time “will substantially prejudice the pending criminal prosecutions and hinder” the criminal enforcement of the securities laws at issue, Bharara said.

SEC spokesman John Nester and Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen & Co., declined to comment.

The SEC’s Chief administrative law judge Brenda P. Murray had scheduled an initial hearing in Cohen’s matter for Aug. 26.

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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