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JPMorgan, Credit Ratings, Volcker Rule: Compliance

JPMorgan Chase & Co., sued by the trustee for Bernard Madoff’s defunct firm for $6.4 billion for allegedly aiding the con man’s fraud, asked a judge to remove the case from bankruptcy court because it raises “novel and unsettled questions” beyond the court’s scope and expertise.

In a lawsuit unsealed last week, Madoff trustee Irving Picard accused JPMorgan of actively assisting Madoff’s crimes to protect earnings from his bank accounts, in the process violating federal banking law. The earnings were “wholly immaterial” and the allegations about law-breaking were “not the domain of bankruptcy law,” JPMorgan said yesterday.

Picard was appointed to liquidate the Madoff brokerage firm, JPMorgan said in a filing in U.S. Bankruptcy Court in Manhattan. Instead, he is mostly pursuing non-bankruptcy claims on behalf of Madoff’s customers, the bank said.

“The trustee is trying to pursue an enormous backdoor class action to recoup damages incurred by individuals and entities other than the firm to which he is the appointed successor,” said JPMorgan, the second-biggest U.S. bank.

Picard “falsely” accused the bank of complicity in the largest securities fraud in U.S. history, JPMorgan said. The New York-based bank said it has a right to a jury trial by law in an appropriate federal court.

The Madoff trustee’s suit against JPMorgan is “very aggressive,” bankruptcy lawyer Harvey Miller told Bloomberg Television yesterday. “He is pushing the envelope to the limit.”

According to a statement by Picard last week, JPMorgan had a “decades-long role” as Madoff’s primary banker, “aiding and abetting” the fraud. While the bank was warned Madoff may have been running a Ponzi scheme and “had a palpable concern that Madoff was a fraud for years,” it was not until October 2008 that it reported Madoff to government officials, the trustee’s lawyers said in the statement.

The banks’ executives didn’t restrict the Madoff firm’s bank account, “even though it was being used to launder money from the Ponzi scheme,” they said.

In response, JPMorgan said Picard’s interpretation of banking law “would impose broad investigative duties on banks that do not exist.”

While federal banking laws do provide “broad guidelines” for detecting money laundering, the guidelines have rarely been interpreted by the courts, it said.

Picard asserted a “novel claim” that JPMorgan committed a fraud on regulators including the U.S. Securities and Exchange Commission and the Federal Reserve by not alerting them to Madoff’s crimes, it said.

The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The adversary case is Picard v. JPMorgan Chase & Co., 10-AP-4932, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Compliance Action

U.K. Government, Banks Seal Bonus, Disclosure Accord

Chancellor of the Exchequer George Osborne yesterday announced an agreement by Britain’s biggest banks -- Lloyds Banking Group Plc, Barclays Plc, HSBC Holdings Plc and Royal Bank of Scotland Group Plc -- to lower compensation from last year’s levels. Under the agreement, the banks will disclose the remuneration details of their five most-senior employees below board level, without naming the individuals. The announcement came a day after the chancellor raised tax on the industry by 800 million pounds ($1.3 billion).

“Britain needs to move from retribution to recovery,” Osborne told the House of Commons in London. “The banks will lend more money, especially to small businesses, pay more taxes and pay smaller bonuses, be more transparent about bonuses they do pay and make a greater contribution to our regional economy.”

The deal follows two months of talks during which ministers have wrangled with bank chiefs over demands for lower bonuses as the government raises taxes and reduces spending to narrow a record budget deficit. Barclays Chief Executive Officer Robert Diamond said Jan. 11 the time for “apologies and remorse” from banks following the financial crisis was over. Britain’s bankers learn the size of their bonuses this month and next. Following the negotiations, known as Project Merlin, Lloyds, HSBC, RBS, Barclays and Banco Santander U.K. also agreed to make loans of about 190 billion pounds to companies to help bolster the economic recovery, Osborne said.

“The banks are the clear winners here,” said Ralph Silva, a strategist at London-based Silva Research Network, which provides research to financial companies. “The banks had already said they were going to increase lending to businesses and that was to be expected given that the economy is recovering. Coupled with that the salary disclosures are pretty pointless as we aren’t going to know what the star traders earn.”

The agreement was criticized as having no real effect. Andrew Tyrie, the Conservative head of Parliament’s cross-party Treasury Committee, said little progress had been made on bonuses in the accord.

“Without further transparency on bonuses we will never know whether banks are fueling risks and mistakes for which one day we may have to pay as a result of the way they misallocate risk,” Tyrie told lawmakers.

Ed Balls, who speaks for the opposition Labour Party on financial affairs, said the agreement is “vague, toothless and not a substitute for proper competition.”

The agreement is the latest occasion that RBS and Lloyds have accepted the need to show restraint on bonuses, with both banks first making the pledge in 2009. The state has majority stakes in the two lenders after the previous Labour government provided about 1 trillion pounds in bailouts and guarantees to support the financial system.

For more, click here.

Fed Confirms Banks Would Have 2 Years to Adapt to Volcker Rule

The Federal Reserve confirmed yesterday that banks would generally have two years to comply with the Volcker Rule, which bars bank holding companies from trading for their own accounts, once its provisions become effective.

The Fed yesterday announced approval of a final rule to implement the provisions of the Volcker Rule. It said in a statement that the final rule is “substantially similar” to a proposal published in November. The Volcker Rule hasn’t yet been completed.

SEC Seeks Comment on Cutting Credit-Rating References

The U.S. Securities and Exchange Commission is proposing to replace references to credit ratings in forms used to register securities.

SEC commissioners voted 5-0 yesterday to seek comment on a rule that would remove credit ratings from a list of criteria that could qualify issuers for expedited sale of non-convertible securities. Ratings would be replaced by a new test tied to the amount of debt an issuer has sold in the preceding three years.

“The global community has continued to express concern with credit-rating reliance being embedded into regulatory frameworks,” SEC Chairman Mary Schapiro said in a statement. “We believe that having issued $1 billion of registered non-convertible securities over the prior three years would generally correspond with a wide following in the marketplace.”

The Dodd-Frank Act requires federal regulators including the SEC to replace references to credit ratings in their rules by July 21. The regulatory overhaul enacted last year calls on agencies to replace the reference with an “appropriate” new standard for measuring creditworthiness.

Lawmakers took aim at credit-rating companies after firms including Moody’s Corp. and McGraw-Hill Cos.’ Standard & Poor’s unit gave top rankings to subprime mortgage bonds whose collapse sparked the worst financial crisis since the Great Depression.

The Financial Crisis Inquiry Commission, assigned by Congress to find the causes of the meltdown, said in its final report last month that poor performance by credit-rating firms was a significant contributor to the collapse.

The SEC is seeking comment through March 28 on the proposed rule, which would also remove credit ratings from other agency documents related to the short-form registrations. The proposal is the first of a series of steps the SEC is taking under the Dodd-Frank requirement to remove all references to ratings.

SEC Commissioner Troy Paredes, one of two Republicans on the panel, said he would be “keenly interested” in comments on the number of firms that might be inconvenienced by the change.

The rules “could hinder capital formation by making it more difficult for some public companies to use the streamline registration form,” said Bradley J. Bondi, a law partner at Cadwalader, Wickersham & Taft LLP in Washington, in an e-mail.

“It will be important for any affected companies to comment on the SEC’s proposed changes,” said Bondi, who investigated credit-rating firms for the FCIC.

An SEC staff study, however, found that fewer than 5 percent of issuers from 2006 through 2008 would have been prevented from using short-form registration if the proposed rule had been in place.

SEC Said to Probe Insider Trading Through Exchange-Traded Funds

The U.S. Securities and Exchange Commission is investigating whether exchange-traded funds are being used to hide insider trading, a person with knowledge of the probe said.

The funds, which usually track an index and trade like stocks, enable buyers to bet on price changes without trading futures. An investor with non-public information about a company may be able to hide illegal orders by trading in a fund that includes that stock instead of buying or selling the equity directly, the person said.

The number of exchange-traded funds has surged since they were created in 1993, widening investors’ access to different assets, including commodities. The SEC has said it is using data-driven techniques to find patterns of insider trading and market manipulation.

The probe was previously reported by the Financial Times.

Bank of England, Finance Regulator Propose Bank Auditor Rules

The Bank of England and the Financial Services Authority proposed rules that would require auditors to share information with regulators.

The rules would apply to auditors when they are dealing with firms regulated by the FSA and require the external auditors of “certain firms” to have formal meetings with the regulator, the FSA said in a statement today.

“This increased coordination will enhance the ability of the FSA to scrutinize specific accounting practices and related judgments in order to understand fully their implications and to highlight emerging problems,” the FSA said in the statement.

The London-based regulator said last year that bank auditors must pay more attention to possible management bias in the banking industry after accounting firms failed to uncover problems before the financial crisis. Investors lost confidence in banks’ financial reporting during the early stages of the credit crunch because they didn’t reflect the reality of emerging problems, the FSA said.

The FSA and the Financial Reporting Council, which regulates accounting firms, said in a separate statement that they reached an agreement to share more information to improve oversight of audits at finance firms.

There are concerns “some auditors may not be exercising sufficient professional skepticism in their approach to the audit of key areas of management judgment,” said Richard Thorpe, the FSA’s accounting and auditing section leader. “The FSA relies on audited financial information to meet its regulatory objectives and it is imperative that we have confidence in the information provided.”

The Bank of England will oversee prudential regulation by the end of 2012 in an overhaul of the current regulatory structure. The FSA will be replaced by an independent Consumer Protection and Markets Authority.

Compliance Policy

Senators Urge Regulators to Move Cautiously on Derivatives Rules

A bipartisan group of U.S. senators urged regulators implementing derivatives measures under the Dodd-Frank Act to move cautiously so the rules can be “completed without unintended consequences.”

The senators, in a Feb. 8 letter signed by 13 members of the Senate Banking and Agriculture committees, warned Treasury Secretary Timothy F. Geithner, Federal Reserve Chairman Ben S. Bernanke and two other top officials against “overly prescriptive rules” that might push market participants abroad. “If the major overhaul of our derivatives market is implemented hastily, agency rulemakings could have negative effects on our economy at a time when we can least afford it,” the lawmakers said in the letter signed by three Democrats and 10 Republicans including Senator Mike Johanns of Nebraska, who serves on both the Banking and Agriculture committees.

The Securities and Exchange Commission and the Commodity Futures Trading Commission are leading efforts to regulate the $583 trillion over-the-counter derivatives market after largely unregulated trades helped fuel the credit crisis. SEC Chairman Mary Schapiro and CFTC Chairman Gary Gensler also were sent copies of the letter.

The lawmakers urged regulators to exempt “end-users” -- non-financial firms that use derivatives to hedge business risk -- from margin requirements stipulated by Dodd-Frank. Failing to do so would “blatantly disregard” the law’s intent, they said.

Swaps and other derivatives are financial instruments whose value is based on an underlying security or benchmark, such as a stock option. Companies may use them to hedge risks and other investors employ them to bet on markets.

The letter was signed by Republican Senators Pat Roberts of Kansas, Thad Cochran of Mississippi, Ron Johnson of Wisconsin, David Vitter of Louisiana, Mike Crapo of Idaho, Kay Bailey Hutchison of Texas, Roger Wicker of Mississippi, John Boozman of Arkansas and Jerry Moran of Kansas as well as Johanns. Democrats Max Baucus of Montana, Herb Kohl of Wisconsin and Jon Tester of Montana also signed the letter.

Republican Threat to Cut SEC Funding May Delay Fiduciary Rules

Republicans in the U.S. Congress may withhold funds from the Securities and Exchange Commission, delaying a new standard for brokers and registered investment advisers, said Representative Barney Frank.

The SEC’s potential budget shortfall “will have the effect of either delaying or slowing down at best” fiduciary rulemaking, Frank of Massachusetts, the senior Democrat on the Financial Services Committee, said in a telephone interview. The agency was asked by Congress to look at the effectiveness of existing rules governing brokers and investment advisers as part of the Dodd-Frank financial services overhaul law enacted July 21.

Without money for staff to help implement a common standard and follow up on complaints, the SEC won’t be able to enforce it, said Frank, a coauthor of the legislation. The SEC, which can make the rules without additional Congressional approval, recommended in a staff report delivered to Congress Jan. 21 that brokers and registered investment advisers who give personalized investment advice follow a uniform fiduciary standard.

Broker-dealers currently are held to a suitability standard that calls for advice that meets their clients’ needs when a product is sold, instead of the fiduciary duty followed by registered investment advisers to put their clients’ best interests first. Rulemaking is scheduled for between April and July, according to the SEC’s website.

“A dramatic spending increase to fund the SEC and CFTC, as envisioned by the authors of the Dodd-Frank legislation, would further the mindset that our nation’s problems can be solved with more spending, not more efficiency,” Representative Scott Garrett, chairman of the Financial Services subcommittee that oversees the SEC, said Jan. 25 in a statement.

For more, click here.

Wells Fargo Says Fiduciary Standard May Narrow Customer Choice

Wells Fargo & Co.’s head of brokerage operations said banks may reduce the number of investment products offered to customers if regulators impose a fiduciary standard on brokers.

The U.S. Securities and Exchange Commission’s proposal for a common fiduciary standard for brokers and registered advisers may increase the need for due diligence from banks and advisers, Senior Executive Vice President David Carroll said yesterday at a Miami investor conference.

The SEC’s plan would make all brokers and registered investment advisers who provide personalized investment advice adhere to a common standard when dealing with clients. Broker-dealers currently must ensure only that an investment product and accompanying advice is suitable for their clients’ needs. A fiduciary duty would mean putting clients’ best interests first, which might require passing up choices with bigger commissions.

“It’s going to cause the investment menu to narrow,” Carroll said. “We won’t have 6,000 mutual funds in our network probably two years from now like we do today.”

Wells Fargo, with $1.2 trillion in client assets and based in San Francisco, is the third-largest among U.S. brokerages, behind Morgan Stanley Smith Barney and Bank of America Corp.’s Merrill Lynch.

The process of developing the standard is moving along the way Wells Fargo would like because it’s being developed by regulators “and not by congressional staff,” he said.

“We have been driving our brokerage business toward a fiduciary model starting back in 2004,” Carroll said. “So we’re pretty pleased with where this is headed.”

For more, click here.


Freeman Told Judge Inside Tips Came From Taiwan

Former SAC Capital Advisors LP portfolio manager Noah Freeman told a judge this week that his illegal inside tips came from sources in California, New York, Texas and Taiwan, according to a court transcript.

Freeman, 35, pleaded guilty on Feb. 7 and agreed to cooperate with Manhattan federal prosecutors in their probe of insider trading by hedge funds. A transcript of his guilty plea, which was initially under seal, was made public today.

In his plea, Freeman said he worked at two hedge funds between 2005 and 2010, which he didn’t identify, and on several occasions paid insiders for “detailed financial information including revenues and, on some occasions, gross margins and earnings per share.”

“Some of the people with whom I -- from whom I received information were based in other states including California, New York and Texas, and others were abroad including in Taiwan,” Freeman said, according to the transcript.

The case is U.S. v. Barai, 11-mag-00332, U.S. District Court, Southern District of New York (Manhattan).

Activision Blizzard Loses EU Court Challenge to Antitrust Fine

An Activision Blizzard Inc. unit lost a bid to have the European Union’s highest court reduce an antitrust fine levied on a cartel involving Nintendo Co.

The European Court of Justice, the 27-nation EU’s top tribunal, today dismissed the appeal, ruling that the documents EU regulators had relied on “constituted sufficient evidence of the existence of an agreement between Activision Blizzard and Nintendo which was contrary to EU law.”

The European Commission, the EU antitrust agency, fined Nintendo and seven distributors 167.8 million euros ($228.9 million) for colluding between 1991 and 1998 to raise prices of games and consoles. Nintendo won an appeal to the EU’s second-highest court in 2009 cutting its fine by 20 percent to 119.2 million euros from 149.1 million euros.

The Belgian unit of Germany’s CD-Contact Data GmbH, which has since become Activision Blizzard Germany, was the only company in the cartel to appeal its fine to the EU’s top court. The lower EU court in 2009 halved its 1 million euro-fine to 500,000 euros because of the company’s “passive role.” CD-Contact became Nintendo’s importer for Belgium in 1997, according to the commission.

The case is C-260/09 P, Activision Blizzard Germany (anciennement CD-Contact Data) v European Commission.

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