Forged Comment Letters Sent to Regulators Writing Swaps Rules

U.S. Representative Edward Markey
U.S. Representative Edward Markey said at a hearing on Oct. 29, 2009 that his investigators found more than a dozen forged letters sent to U.S. lawmakers as part of a campaign run by the Washington-based political consulting firm Bonner & Associates, under contract with the American Coalition for Clean Coal Electricity. Photographer: Joshua Roberts/Bloomberg

Forged comment letters purportedly from an H.J. Heinz Co. executive, a Burger King Co. franchise and at least five other Arkansas-based officials or businesses were sent to the Commodity Futures Trading Commission.

Some of the letters to the agency, which is writing rules for derivatives trading, contain identical passages criticizing banks for their “cartel-like control” of the $583 trillion swaps market. They include signatures from a circuit court judge, a county sheriff and a mental health counselor. All were forgeries, according to interviews conducted by Bloomberg News.

The letters were among 152 formal comments received by the CFTC on a proposed rule that would limit the ownership of banks and other financial firms in clearinghouses meant to reduce risk in the over-the-counter swaps market. The proposal stems from the Dodd-Frank finance-regulatory overhaul enacted in July.

“This is completely fraudulent,” said Terra Brace, treasurer of Springdale, Arkansas-based L.W. Clark, Inc., which operates nine Burger King franchises. “This is not our letterhead. It looks like someone has just stolen a Burger King logo and stuck our address underneath.”

The letters, which were posted on the CFTC’s website, carry no clues about their true origin. In response to questions from Bloomberg News, a commission spokesman said yesterday that the agency had removed at least one letter and was checking the authenticity of others.

A letter supposedly from Wayne Callahan, president of global Wal-Mart Stores Inc. business for Heinz, told regulators that the rule they were considering was not restrictive enough. “It is likely that banks will try to exploit such a loophole to continue their cartel-like control of the derivatives market,” the letter said.

Unknown Person

“Heinz has determined that the letter was written by an unknown person or entity. This letter falsely uses the name and title of a Heinz executive,” Michael Mullen, Heinz’s vice president of corporate and government affairs, said in an e-mail to Bloomberg News. “The letter was written and filed with the Commodity Futures Trading Commission without the knowledge or consent of the Heinz executive.”

Dallas County, Arkansas, Sheriff Donny Ford, asked whether he’d sent an opinion to Washington about derivatives, said, “What’s that?” After reviewing a faxed copy of the letter, he said in a telephone interview, “That’s not my signature. This is not my letterhead, either.”

‘Not My Signature’

Washington County, Arkansas judge Marilyn Edwards, whose name appeared on one of the letters, said she didn’t send it. “I have had nothing to do with that,” she said. “That is certainly not my signature on the bottom. I am not a very happy camper about this.”

Edwards said she had given a copy of the forged letter to the prosecutor in her county. She said she was particularly concerned that Arkansas Senators Blanche Lincoln and Mark Pryor were copied at the bottom of the letter. “It makes those folks think that’s the way we want them to vote,” she said.

Other Arkansas residents who said that letters carrying their names were forgeries included Lance Lee, a lawyer based in Texarkana, William P. Allison, a lawyer based in Little Rock, and Dan Moore, a Fordyce mental health counselor.

Political campaigns, public relations firms and consultants sometimes use form letters to generate apparent grass-roots support for their points of view from individuals, small businesses and citizen groups.

Climate Change Letters

A case of fraudulent letters surfaced a year ago during the debate over energy and climate change legislation. U.S. Representative Edward Markey, a Massachusetts Democrat, said at a hearing on Oct. 29, 2009 that his investigators found more than a dozen forged letters sent to U.S. lawmakers as part of a campaign run by the Washington-based political consulting firm Bonner & Associates, under contract with the American Coalition for Clean Coal Electricity.

Some of the letters from Arkansas contained the same wording as at least six other letters signed by people in Rhode Island.

The author of one of the Rhode Island letters said she sent a copy of the letter after receiving the text from Advocacy Solutions, a Providence-based public affairs firm.

“We should be doing as much as we can to control the power of big banks, and closing the loophole in the derivatives clearinghouses is incredibly important,” said Kate Brock, an organizer for Ocean State Action, a Cranston, Rhode Island-based group that describes itself as pro-union.

Brock said the text of her letter came from a “sign-on letter” circulated by Advocacy Solutions. Frank McMahon, president of Advocacy Solutions, didn’t respond to requests for comment.

Jan. 14 Deadline

The derivatives rule in question was proposed in October by CFTC commissioners, who requested public comments by Nov. 17. The CFTC must complete a rulemaking by Jan. 14.

Derivatives are financial contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.

The Dodd-Frank law aims to move over-the-counter swaps trades to clearinghouses, in order to reduce risk in the financial system by requiring parties to post collateral. The law directs regulators to write rules for the clearinghouses to limit conflicts of interest.

The CFTC’s proposed regulation would allow clearinghouses to choose between two types of ownership restrictions. Under the first, there would be a 20 percent cap on a clearinghouse member’s equity stake or voting control and a 40 percent cap on the collective stake that members and restricted non-member companies could hold in one clearinghouse.

Restricted Companies

The restricted companies would include bank holding companies with at least $50 billion in assets, non-bank financial companies supervised by the Federal Reserve, swap dealers, major swap users and their affiliates.

The second option would impose a 5 percent cap on the ownership stake and control any clearinghouse member or non-member could have. The second option wouldn’t include an aggregate cap.

The Securities Industry and Financial Markets Association, which represents banks, securities firms and other companies, said in a Nov. 12 comment letter to the CFTC and the Securities and Exchange Commission that it does not believe there is a requirement in the law for regulators to impose aggregate ownership limits.

‘Beyond What is Necessary’

The proposed regulations “go beyond what is necessary to effectively mitigate conflicts of interest, and would have the effects of limiting access to necessary capital and stifling innovation,” the association said in the letter.

Bloomberg LP, parent of Bloomberg News, intends to register as a swap execution facility, Ben Macdonald, global head of fixed income at Bloomberg LP, said in a Nov. 17 comment letter to the CFTC on the proposed regulation. The Bloomberg LP letter doesn’t comment specifically about the proposed ownership limits for clearinghouses.

The seven forged public comment letters identified by Bloomberg News oppose the second part of the proposal.

“I urge the commission to eliminate the 5 percent alternative, to ensure that banks cannot use it as back door to continue their dominance of clearing facilities, continuing their high profits in an anticompetitive market,” reads the letter purportedly from Moore. The letter claiming to be from Allison includes the identical sentence.

“I have zero interest in the politics of the issue, and I’m really quite ignorant on it,’ Moore said in a telephone interview. ‘‘It didn’t originate from me.”

Allison said in an e-mail to Bloomberg News that the letter is a “forgery.”

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