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Bank of America, Fannie Mae, Freddie Mac: Compliance

Bank of America Corp. former Chief Executive Officer Kenneth Lewis last week asked a judge to throw out the New York attorney general’s lawsuit accusing him of fraud when he led the bank’s purchase of Merrill Lynch & Co.

The allegations by Attorney General Andrew Cuomo are “implausible,” Lewis’s lawyers said in documents filed Aug. 18 with the state Supreme Court in Manhattan. The Merrill Lynch acquisition, they said in the answer to Cuomo’s complaint, has been proven to be of “major financial benefit to shareholders.”

“Some have looked to assign blame for every aspect of the financial crisis, even where there is no evidence of misconduct,” Lewis’s lawyers said. “This case is a product of that dynamic and does not withstand either legal or factual scrutiny.”

Cuomo sued Lewis, Bank of America and former Chief Financial Officer Joe Price in February, accusing them of misleading investors by failing to disclose losses at Merrill Lynch. The complaint also claims they manipulated the federal government into saving the deal with a taxpayer-financed bailout.

Cuomo spokesman Richard Bamberger said in a statement that the attorney general stands by the complaint.

Colby Smith, a lawyer for Lewis, couldn’t be reached for comment. William Jeffress, a lawyer for Price, declined comment. In the answer, Lewis asked the court to dismiss the complaint and award costs and attorney’s fees.

In a separate court filing on Aug. 18, Bank of America said Cuomo’s claims have no legal basis and are barred. Price, who is now the Bank of America’s head of consumer banking, also asked for a dismissal of the lawsuit.

The case is People of State of New York v. Bank of America, 450115-2010, State Supreme Court (Manhattan).

Compliance Policy

Frank Urges Obama to Push for Recovery of Fannie, Freddie Losses

U.S. Representative Barney Frank said the Obama administration must ensure the Federal Housing Finance Administration is using its full legal authority to recover money from banks that used fraud and deception to shift losses to Fannie Mae and Freddie Mac.

“Private companies sold Fannie and Freddie loans or securities based on fraudulent documents,” Frank, the Massachusetts Democrat who leads the House Financial Services Committee, wrote in a letter to President Barack Obama that was released Aug. 20. “These transactions created private profits at public expense, and they should be fought with every tool at the companies’ and the agency’s disposal.”

The FHFA has issued 64 subpoenas seeking information to determine whether banks should bear responsibility for mortgage investment losses suffered by Fannie Mae and Freddie Mac. The two companies have drawn almost $150 billion in U.S. aid since they were placed under federal conservatorship in September 2008. The agency has demanded that lenders buy back mortgages that failed to meet contractual representations and warranties.

Frank’s letter endorsed a similar one signed by lawmakers including Representative Paul Kanjorski, the Pennsylvania Democrat who leads the Financial Services capital markets subcommittee. Kanjorski’s panel plans to hold a hearing on FHFA oversight next month.

Compliance Action

ShoreBank, Seven Others Shuttered as 2010 Failures Reach

ShoreBank Corp., the Chicago lender operating under a Federal Deposit Insurance Corp. cease-and-desist order for 13 months, and seven other banks were shut by regulators as 2010 bank failures climbed to 118.

ShoreBank’s 15 branches, including those in Chicago, Cleveland and Detroit, will open as Urban Partnership Bank, according to statements from the FDIC.

Regulators also closed four banks in California, two in Florida and one in Virginia. All eight closures cost the FDIC’s deposit-insurance fund $473.5 million, the agency said yesterday. This year’s bank failures will surpass last year’s total of 140, FDIC Chairman Sheila Bair said last month in a Bloomberg Television interview.

The 15th bank failure in Illinois this year, ShoreBank was founded in 1973 and based on Chicago’s South Side. The lender raised more than $145 million from firms including Goldman Sachs Group Inc., General Electric Co., JPMorgan Chase & Co., and Citigroup Inc., and those funds will now be placed in the new bank, people familiar with the rescue efforts said. ShoreBank had $2.16 billion of assets on June 30.

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U.K.’s FSA Plans Recruitment as It Faces Breakup, Times Says

Britain’s Financial Services Authority will recruit 30 more lawyers and investigators to combat commercial crime, even as it faces being broken up, the London-based Times reported, without saying where it got the information.

The government intends to merge the regulator’s enforcement division with the Serious Fraud Office and part of the Office of Fair trading; however, lobbying by groups affected and differences between government departments may mean the FSA will retain its enforcement powers and become part of a planned new Consumer Protection and Markets Authority, the newspaper said.

Analysts say Margaret Cole, the FSA’s head of enforcement and financial crime, would like to run the new agency and take her division with her, according to the Times.

Los Padres Bank Closes; Pacific Western to Assume Deposits

Los Padres Bank of Solvang, California, was closed Aug. 20 by regulators and its deposits were assumed by Pacific Western Bank of San Diego, the Federal Deposit Insurance Corp. said in a statement.

Los Padres had $871 million in total assets and $771 million in total deposits, the FDIC said.

Callan Unlikely to Face SEC Lawsuit, Gasparino Says

Erin Callan, Lehman Brothers Holdings Inc.’s former chief financial officer, hasn’t received a Wells Notice from the U.S. Securities and Exchange Commission and is thus unlikely to face a lawsuit by that agency, Fox Business Network’s Charles Gasparino reported.

SABMiller South African Antitrust Hearing Postponed to October

A South African Competition Tribunal hearing, which is probing the distribution practices of SABMiller Plc’s SAB Ltd. unit in the local market, has been postponed to between Oct. 20 and 22.

SABMiller is a brewing company, according to its website.

The hearing, which started Aug. 11 and was due to run till Aug. 27, was postponed after SAB made a request for documents from Metcash Trading and Picardi Rebel, the Pretoria-based Competition Tribunal said in an e-mailed statement today. The closing arguments will be heard on May 3, 4 and 5, it said.

U.S. Ends Probe of Hedge Fund ‘Idea Dinner,’ Reuters Says

The Antitrust Division of the U.S. Department of Justice has closed a six-month inquiry into a February dinner with traders, where some allegedly had swapped ideas on how to profit from shorting the euro, Reuters reports, citing 3 people close to some of the funds. The funds reportedly included Soros Fund Management, Greenlight Capital, Paulson & Co, SAC Capital Management. The Department of Justice declined to comment.

Shell, BASF Fined in Brazil Plant Contamination Case

The Brazilian units of BASF SE and Royal Dutch Shell Plc were fined a total of 622 million reais ($354 million) after former workers suffered health problems because of contamination at a plant in Paulinia, Sao Paulo state, from the 1970s to 2002.

BASF SA and Shell do Brasil will also have to pay 64,500 reais in damages to each former worker and any children born during or after their service at the plant, according to an e-mailed statement from the Paulinia Labor Court August 19. The payments cover medical treatment, exams and individual damages.

Shell and BASF must publish a statement this week on the decision on Brazil’s two largest television networks, according to the court. Former workers at the Paulinia plant then have 90 days to present health documents. BASF and Shell both said they will appeal the decision.

“We are of the opinion that the environmental damage was caused by Shell, and we will appeal the decision,” Jennifer Moore-Braun, a spokeswoman for BASF in Ludwigshafen, Germany, said in a telephone interview August 19.

The Paulinia unit was built by Shell in the late 1970s and in 1992 was sold to Cyanamid, which was later bought by BASF, according to the statement. The ruling includes former employees of Shell, BASF and Cyanamid.

“Active remediation at the site has been under way for a number of years,” Kim Blomley, a spokesman at Shell in London, said in an e-mailed statement, adding there “is no link” between the company’s operations and people’s health.


CFTC’s Gensler Says Regulators Won’t Succumb to Bank Lobbying

Commodity Futures Trading Commission Chairman Gary Gensler said U.S. regulators won’t succumb to Wall Street efforts to weaken financial-market oversight as they implement the biggest rules overhaul since the Great Depression.

“Wall Street would like to keep these markets dark, and Congress has said there has to be transparency,” Gensler said in an interview for Bloomberg Television’s “Political Capital with Al Hunt,” that aired this past weekend. “Congress has been very specific, and we are going to follow it.”

CFTC and Securities and Exchange Commission staff members met in Washington Aug. 20 to discuss derivatives regulation, and invited representatives from Morgan Stanley, JPMorgan Chase & Co. and industry trade groups to attend. Under the Dodd-Frank Act, regulators must ensure that most swaps are processed by clearinghouses and traded on exchanges.

Gensler, 52, said the SEC, the Federal Reserve and the Federal Deposit Insurance Corp. will be as open as possible in publicly disclosing meetings with banks and their lobbyists related to the rules overhaul. The FDIC has already announced plans to post reports of meetings on its website.

“We are still sorting through this,” said Gensler, a Democrat who worked at the Treasury Department during President Bill Clinton’s administration. “We are already posting any memos or documents that are handed to us by the various outside parties, so we are very similar. I think that the next step is just to post the actual meetings.”

Efforts to boost oversight of derivatives follow the collapse of the U.S. housing market, which sparked a credit-market freeze in 2008 that led to the worst financial crisis since the 1930s. Private swap deals complicated efforts to stem the meltdown, because regulators couldn’t easily determine how much the contagion had spread among different firms.

Wall Street will be motivated to continue lobbying over the derivative provisions in the Dodd-Frank law, because they have a duty to shareholders to maintain profits, said Gensler, a former Goldman Sachs Group Inc. partner.

Gensler also addressed the May 6 market crash, in which $862 billon was erased from U.S. stocks in 20 minutes before equities rebounded. Regulators must ensure that markets dominated by computers trading thousands of shares in seconds “work for small investors,” he said.

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