Muni Reform, Mortgage Disclosure, Cuban: Compliance

The U.S. Securities and Exchange Commission is moving to remake the regulations covering public officials and Wall Street underwriters that sell municipal bonds to investors.

SEC Chairman Mary Schapiro in May said regulators should consider requiring more timely disclosure of financial information, the adoption of mandatory accounting standards, and moves to ensure that borrowers such as real-estate developers who raise money through municipal entities provide adequate information to investors.

Schapiro appointed SEC Member Elisse B. Walter to lead hearings in San Francisco that began yesterday on improving regulations for the municipal bond market. The San Francisco hearing is the first of six planned.

Rules for the $2.8 trillion municipal bond market should afford investors protections similar to those in other U.S. securities trading, Walter said at the hearing.

Municipal securities investors “should have the same rights as investors in other types of securities to receive information that is not materially misleading and does not contain material omissions,” Walter said. The disclosures should include “financial and other material information that is not stale.”

Walter said new regulations would acknowledge the difference between the municipal and corporate securities markets. California Treasurer Bill Lockyer, California Treasurer Bill Lockyer, who testified at yesterday’s hearings, cautioned regulators against a uniform approach, saying the rules also should reflect the differences among the many government entities that raise money in the market.

Washington Treasurer James McIntire told the panel he opposed uniform issuance rules. “It could also have a dramatic impact on the access to the market by small municipalities, and could simply cause numerous infrastructure projects to grind to a halt,” he said.

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Compliance Policy

SEC’s Canellos Says Swaps Overhaul May Fuel Investigations

George Canellos, the head of the Securities and Exchange Commission’s Manhattan office, said new U.S. rules for clearing derivatives trades are likely to expose frauds tied to instruments including credit-default swaps.

“In history, there’s been one insider-trading case brought in the context of credit-default swaps, and it’s not because insider trading isn’t perpetrated,” Canellos said at a hedge-fund forum at Bloomberg’s New York headquarters yesterday. “It’s because of the lack of transparency.”

The Dodd-Frank Act, signed by President Barack Obama in July, requires most derivatives trades to be processed through third-party clearinghouses. Lawmakers gave regulators greater ability to monitor the market after some instruments, such as contracts insuring mortgage-backed bonds, fueled losses that led to the worst recession since the Great Depression.

The new rules will allow both investors and regulators to examine credit markets more closely, including credit-default swaps, Canellos said. In a credit-default swap, the buyer pays a fee to the seller, receiving a payout in the event of a default or another trigger.

From an enforcement perspective, “the most significant aspect of swap regulations will not be the regulations themselves, it’s going to be the greater transparency in the swaps market,” Canellos said.

A former federal prosecutor, Canellos heads the SEC’s largest office outside Washington, overseeing teams of investigators as well as examiners who perform periodic checks on investment advisers such as hedge funds.

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Executives to Face Court Reckoning as SEC Flexes New Power

Corporate executives are more likely to end up in court for their employees’ misconduct now that Congress has handed broader powers and more money to the U.S. Securities and Exchange Commission, former agency officials said.

Since the start of the financial crisis, lawmakers, investors and judges have criticized the agency for giving bosses a pass while accusing companies of wrongdoing. The Dodd-Frank regulatory act lowers the bar for filing fraud lawsuits against individuals and authorizes the SEC to double its spending within five years.

Under Dodd-Frank, which was signed into law in July, the SEC can sue an individual who “recklessly” aids a fraud even if the person isn’t aware of the wrongdoing. Previously, lawyers had to show the person knowingly assisted the misconduct. The law also allows the agency to sue senior officers, directors or other people directly or indirectly accountable for the fraud.

Robert Khuzami, the SEC’s top enforcement official, is scheduled to answer for the agency’s progress today before the Senate Banking Committee after Senator Ted Kaufman, a Delaware Democrat, told him in December he was “frustrated” that regulators hadn’t been able to prosecute more executives and bankers.

The provisions “increase the likelihood of litigation” with fewer quietly settled cases, said David Kornblau, who was the SEC’s top prosecutor from 2000 to 2005.

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Compliance Action

Sime Darby to Take Legal Action on Project Misconduct

Sime Darby Bhd., the world’s biggest publicly traded palm oil producer, plans to start legal proceedings and lodge reports with the authorities after finding evidence of misconduct in four of its energy-related projects.

The company completed an audit and had evidence of inappropriate conduct and breaches of duties and obligations, it said in a stock exchange filing in Kuala Lumpur on Sept. 20. The board was advised by counsel to keep the details of the report confidential, Sime Darby said.

The projects reviewed were Sime Darby’s engineering works at the Bulhanine and Maydan Mahzam fields for Qatar Petroleum, a Maersk Oil Qatar project including the construction of ships, and Malaysia’s Bakun hydroelectric dam project.

Originally an operator of rubber plantations, Sime Darby has diversified into businesses ranging from cars and shipbuilding to property development. It made an unsuccessful foray into banking in the 1990s. The group will be reorganized starting Jan. 1, reverting to a previous structure where each division would be its own separate company, Group Chief Executive Officer Mohd Bakke Salleh told reporters on Aug. 26.

Geithner Says Mortgage Forms Show Financial Overhaul Progress

Treasury Secretary Timothy F. Geithner said efforts to improve consumer access to mortgage information show progress in implementing the financial regulatory overhaul that Congress passed earlier this year.

“Wherever possible, we are committed to expediting completion of the law’s requirements ahead of statutory deadline,” Geithner said at a Treasury Department forum on mortgage disclosure. “Simplifying these forms is a prime example of where we can and will accelerate our efforts to deliver real benefits to consumers as soon as possible.”

Elizabeth Warren, the Harvard law professor named last week as a special adviser to Geithner on consumer protection issues, said families will be able to make better choices if banks improve the way they market their products.

The Treasury Department released a summary of their remarks at the forum.


SEC’s Cuban Insider-Trading Suit Is Revived by Court

Mark Cuban, the billionaire owner of the Dallas Mavericks, must face insider-trading allegations by the U.S. Securities and Exchange Commission that were thrown out last year by a lower-court judge, an appeals court ruled.

The U.S. Court of Appeals in New Orleans overturned the lower-court ruling in a decision yesterday. In a 2008 lawsuit, the SEC accused Cuban of trading on confidential information when he sold his stake in Inc., a Canadian Internet search company, just before it announced a private placement of shares.

Cuban argued he had no legal obligation to refrain from selling the stock after Guy Faure, then’s chief executive officer, told him of the impending private offering of below-market shares in a 2004 telephone call. Cuban sold ahead of the deal, which diluted the company’s shares by 8.5 percent.

“The allegations, taken in their entirety, provide more than a plausible basis to find that the understanding between the CEO and Cuban was that he was not to trade, that it was more than a simple confidentiality agreement,” the appellate panel said.

The agency claimed Cuban agreed with Faure at the beginning of their call to keep the information confidential and told Faure after learning details of the plan, “Well, now I’m screwed. I can’t sell.”

The appeals judges stopped short of saying that a confidentiality agreement implicitly contains a duty not to trade and said the final outcome of the case depends on the evidence to be gathered.

Stephen Best, one of Cuban’s attorneys at Dewey & LeBoeuf LLP, said it appears the appeals court accepted the argument that a confidentiality agreement alone isn’t proof of wrongdoing.

“The uncontradicted record in this case is devoid of any information suggesting any agreement imposing a fiduciary-like responsibility on Cuban,” he said.

The SEC is “pleased” with the decision, spokesman John Nester said in a statement.

The case is SEC v. Cuban, 09-10996, 5th U.S. Circuit Court of Appeals (New Orleans).

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EU Court Says Access to Legal Documents Limited Until Judgment

European Union agencies can restrict public access to documents they file in lawsuits until after cases are decided, the EU’s highest court ruled.

The European Commission and other EU agencies pleading cases at the European Court of Justice can withhold their filings until a final judgment is issued, the Luxembourg-based court ruled yesterday.

The commission, the EU’s executive agency can “refuse an application for access to documents, without being under an obligation to undertake a specific examination,” an 11-judge panel said.

Lawyers for the International Press Association, which represents foreign reporters in Belgium, initiated the case arguing that access to such documents is in the public interest. The group rejected as “purely hypothetical” the commissions’ concerns that release of the documents may “adversely affect” judicial proceedings. In 2007, a lower EU court clarified the document restrictions may be lifted once a ruling is given.

The court rejected the lower court’s position that the commission and other EU bodies may be under an obligation to give access to their filings after a hearing and before a final ruling, saying that could undermine pending cases.

The not-for-profit association, which represents reporters from news organizations including Bloomberg LP, said it still believes document access before hearings would improve transparency and allow for more informed reporting, according to an e-mailed statement.

The cases are C-514/07 P Sweden v. API and Commission, C-528/07 P API v. Commission, C-532/07 P Commission v. API.

Sportingbet Forfeits $33 Million in Deal With U.S. Prosecutors

Sportingbet Plc, the U.K. Internet gambling company that agreed to forfeit $33 million in proceeds that the company provided to U.S. customers, might resume U.S. operations one day if the law changes, its lawyer said.

According to a statement by Sportingbet filed as part of the agreement, the company said that from 1998 until Oct. 12, 2006, it offered Internet gaming to players located in the U.S., including real-money sports betting as well as wagering on poker and casino games.

As part of a non-prosecution agreement entered yesterday between the company and Bharara’s office, Sportingbet said it would maintain a permanent restriction on providing Internet gambling services to U.S. customers as required by U.S. law, unless the law changes, according to the agreement.

The company, incorporated in England and Wales, also agreed to cooperate with the U.S. Federal Bureau of Investigation and with an ongoing probe by prosecutors in Bharara’s office.

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SEC Insider Trading Case Against Obus Thrown Out

Hedge fund manager Nelson Obus won dismissal of case by the U.S. Securities and Exchange Commission claiming he made $1.34 million from an illegal tip about a 2001 merger.

U.S. District Judge George Daniels on Sept. 20 threw out the case against Obus, president of Wynnefield Capital Inc., and two other defendants, Thomas Strickland and Peter Black.

The SEC suit alleged that in May 2001, Strickland, a General Electric Capital Corp. employee, tipped his friend Black, a Wynnefield analyst, that SunSource Inc. was to be acquired by Allied Capital Corp. Black passed the tip on to Obus, who used the information in his decision to buy SunSource stock for three hedge funds that he controlled, the SEC said.

“The SEC has not produced facts sufficient to prove that Strickland breached a duty to his employer, nor has it demonstrated the requisite degree of deceptive conduct on the part of any defendant,” Daniels said in a written opinion.

SEC spokesman John Heine had no immediate comment on the ruling.

The case is Securities and Exchange Commission v. Obus, 06-CV-3150, U.S. District Court, Southern District of New York (Manhattan).


CFTC’s Gensler Plans European Trip to Talk Derivatives

Commodity Futures Trading Commission Chairman Gary Gensler spoke about his plans to travel to Europe to discuss derivatives regulation proposals with the European Commission.

Under two separate initiatives announced Sept. 15, frequent traders of some OTC derivatives in Europe will have to use central clearinghouses to close sales, and naked short-sellers would be required to submit proof they can access underlying securities to settle trades. Gensler spoke yesterday in Washington at a U.S. Chamber of Commerce event.

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Comings and Goings

White House Announces Summers Departure, Return to Harvard

The White House said Lawrence Summers, director of the National Economic Council, will leave the administration and return to Harvard University at the end of the year.

Summers, chief adviser to President Barack Obama on the development and implementation of economic policy, previously served as Treasury secretary during the Clinton administration.

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