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Deutsche Boerse-NYSE, Dodd-Frank, KB Home: Compliance

Updated on

Deutsche Boerse AG will likely face an in-depth review by European Union antitrust regulators of its $9.53 billion bid for NYSE Euronext, a deal that would create the largest owner of equities and derivatives markets, lawyers said.

Authorities may also demand changes before approving a deal that would leave more than 90 percent of the region’s exchange-traded derivatives market in the hands of one organization, according to the lawyers.

Gaining approval “is likely to be complicated and will take a long time,” said Simon Holmes, a partner at SJ Berwin LLP, in a telephone interview from London. A two-stage probe lasting as long as five months is “likely,” said Matthew Hall, a Brussels-based lawyer with McGuire Woods LLP.

Frankfurt-based Deutsche Boerse already sparred with the EU antitrust agency in its aborted attempt to buy Euronext in 2006. That deal risked competition in derivatives trading as well as clearing and settlement of transactions, people familiar with the EU review said at the time. After saying it was ready to make “far-reaching proposals” to regulators, the German company withdrew its offer and Euronext accepted a rival bid from NYSE Group Inc. to form the first trans-Atlantic exchange.

This week’s plan would combine NYSE Euronext’s Liffe and Eurex, the exchange jointly owned by Deutsche Boerse and the Swiss Stock Exchange.

Amelia Torres, a spokeswoman for the commission’s antitrust unit, declined to comment yesterday on a deal which regulators hadn’t yet been asked to approve.

Deutsche Boerse’s merger plans may also be challenged over any attempt to shift Frankfurt’s stock exchange out of Germany, said the exchange’s regulator, the economy ministry of Hesse, on Feb. 11.

Separately, a shareholder of NYSE Euronext has sued to block the merger in Delaware Chancery Court in Wilmington. The all-stock transaction is “grossly inadequate” and resulted from a flawed process, lawyers for shareholder Samuel T. Cohen claimed in the complaint made public yesterday. The proposed sale values NYSE at less than targets in similar deals, such as London Stock Exchange Group Plc’s purchase of Canada’s TMX Group Inc., according to the lawsuit.

“There appears to have been no sales process, and the proposed transaction did not emerge from an auction,” Cohen’s lawyers said in the complaint. “A board that provides a would-be acquirer with an exclusive opportunity to bid on a company and fails to conduct a market-check, does not act in the interests of shareholders.”

Investors said in another lawsuit, filed yesterday in New York Supreme Court, said the sale will result in New York Stock Exchange shareholders owning 40 percent of the acquired company, with the remaining 60 percent held by Deutsche Boerse AG. The sale offers “no meaningful premium to NYSE’s public shareholders” and will “result in a loss of control of the company and its prospects,” according to the complaint.

Ray Pellecchia, a spokesman for New York-based NYSE Euronext, had no immediate comment on the Delaware complaint. Pellecchia didn’t immediately return another call after regular business hours seeking comment on the New York case.

The case is Cohen v. NYSE Euronext, CA6198, Delaware Chancery Court (Wilmington). The New York case is KT investments II LLC v. Jan-Micheiel Hessels, 650407, New York State Supreme Court (Manhattan).

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Compliance Policy

Senate Republicans Seek More Time, Cost Analysis on Dodd-Frank

U.S. regulators implementing Dodd-Frank Act rules must conduct “rigorous” cost-benefit analysis and allow adequate time for public comment to ensure the law doesn’t do more harm than good, Republican lawmakers said.

“The potential harm to our already-weak economy and the public from ill-conceived rules cannot be underestimated,” Senate Banking Committee members wrote in a letter dated Feb. 15 to regulators including Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner.

Bernanke and Geithner are scheduled to testify today at a Banking Committee hearing marking a half year since passage of Dodd-Frank, the biggest financial rules overhaul since the 1930s. In advance of the hearing, the panel’s 10 Republicans -- led by Senator Richard Shelby of Alabama -- asked the regulators for responses to six questions about implementation of the law, including whether they’re giving at least 60 days for public comment on proposed rules and studies.

Senator Tim Johnson, the South Dakota Democrat who leads the Banking Committee, plans to make Dodd-Frank implementation a primary focus of the committee, according to a draft agenda sent to members on Feb. 2.

The panel is planning to conduct oversight of derivatives rules being written by the Securities and Exchange Commission and the Commodity Futures Trading Commission, the Fed’s plan to cap debit-card “swipe” fees and the Volcker rule barring banks from proprietary trading, according to the agenda.

“The scope and pace of agency rulemakings under the Dodd-Frank Act make it more important than ever that agencies engage in deliberative and rational rulemaking,” the Republicans wrote in their letter, which was also sent to SEC Chairman Mary Schapiro, CFTC Chairman Gary Gensler, Federal Deposit Insurance Corp. Chairman Sheila Bair, and Acting Comptroller of the Currency John Walsh.

Bankers’ Warning on U.S. Credit-Card Law Refuted as Rates Drop

Almost a year after new U.S. credit-card regulations took effect, industry warnings of higher interest rates and tighter credit haven’t come to pass, according to a report by the Center for Responsible Lending.

President Barack Obama signed the Credit Card Accountability Responsibility and Disclosure Act in May 2009, calling the rules limiting fees and abrupt contract rate changes “common sense reforms, designed to protect consumers.” The provisions were phased in, with most, including prohibitions on interest-rate increases in most cases during the first year an account is opened, taking effect Feb. 22, 2010.

An executive of the American Bankers Association told Congress in March 2009 that the law might force issuers to raise rates, reduce credit lines and impose more fees. The impact has been more muted. The average rate on existing credit-card balances fell to 13.67 percent in November from 14.37 percent a year earlier, Federal Reserve data show. More households are receiving card offers, according to researchers at Mintel Comperemedia.

“Every time there’s been an attempt to regulate banking, the industry tries to scare people by saying prices will skyrocket and credit will be rationed,” said Josh Frank, a senior researcher for the Center for Responsible Lending, a Durham, North Carolina-based consumer-protection group. “The unintended consequences didn’t happen, and we actually see evidence of a positive consequence, which is transparency.”

The difference between stated and actual interest rates narrowed to 0.2 percentage points in the fourth quarter from 2.3 percentage points at its peak in the third quarter of 2005, according to the report released yesterday by the consumer group, which used data from the Fed and banks.

“I think the CARD Act has been largely good for consumers, but there have been trade-offs,” said Kenneth J. Clayton, senior vice president of the American Bankers Association in Washington, which represents the industry. “Some consumers who used to have access to credit have lost that access or are paying higher prices for it, but it’s hard to pinpoint what has resulted from the economy versus changes to the regulatory structure.”

It was Clayton who told a panel of the House Financial Services Committee March 19, 2009, that “because the rules are so strong, card lenders may have to increase interest rates in general, lower credit lines, assess more annual fees and reduce credit options for some customers.”

Interest rates may have declined because cards are being offered to more creditworthy consumers, Clayton said. It may be too soon to determine whether rates will rise and annual fees will be imposed, he said.

The Consumer Financial Protection Bureau, which officially begins work in July, will have a unit that will research and write rules for credit cards. Elizabeth Warren, the special adviser in charge of setting up the consumer bureau, has made credit-card disclosure simplification one of her top two priorities, alongside mortgages. She wants to reduce the length of card agreements, and enable consumers to comparison-shop.

The bureau will host a conference on the CARD Act in Washington on Feb. 22 to analyze how the industry has reacted and how consumers are responding, Warren said Feb. 15 in remarks prepared at a Consumers Union event in Hastings-on-Hudson, New York.

For more, click here.


Starr Lawyer Says Restitution Deal Reached With U.S.

Kenneth I. Starr, the money manager who admitted to defrauding his celebrity clients of as much as $50 million, has reached a restitution agreement with the U.S. government, his lawyer said in a letter to a federal judge.

The amount to be repaid to the victims wasn’t specified in the Feb. 8 letter from Flora Edwards, Starr’s lawyer, to U.S. District Judge Shira Scheindlin in Manhattan. Starr, who pleaded guilty in September to wire fraud, money laundering and investment adviser fraud, faces 121 to 151 months in prison when he’s sentenced March 2.

Starr, 67, was arrested in May and accused of defrauding clients including heiress Rachel “Bunny” Mellon and actors Sylvester Stallone and Wesley Snipes. Edwards and the government agreed, for sentencing purposes, that the amount lost in the fraud totaled from $20 million to $50 million.

“Mr. Starr has been unable to prepare a financial affidavit because the receiver appointed in the SEC case has refused to turn over his personal records,” Edwards said in the letter, referring to a civil suit brought against her client by the U.S. Securities and Exchange Commission.

Starr’s capacity to compensate his victims is uncertain, according to court papers.

The criminal case is U.S. v. Starr, 10-00520, U.S. District Court, Southern District of New York (Manhattan). The civil suit is SEC v. Starr, 1:10-CV-04270, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Allstate Sues JPMorgan Over Mortgage-Backed Securities

Allstate Corp., the largest publicly traded U.S. home and auto insurer, sued JPMorgan Chase & Co. alleging the bank fraudulently sold residential mortgage-backed securities.

Allstate, based in Northbrook, Illinois, bought more than $700 million of the securities from JPMorgan and other defendants, including WaMu Asset Acceptance Corp. and Bear Stearns Asset Backed Securities LLC, according to the lawsuit filed yesterday in New York state Supreme Court in Manhattan.

“Allstate was made to believe it was buying highly rated, safe securities,” according to the complaint. “Defendants knew the pool was a toxic mix of loans given to borrowers that could not afford the properties and thus were highly likely to default.”

Jennifer Zuccarelli, a spokeswoman at New York-based JPMorgan, declined to comment on the lawsuit.

Officials at New York-based JPMorgan didn’t immediately return a call for comment.

The case is Allstate Bank v. JPMorgan Chase Bank, 650398/2011, New York state Supreme Court (Manhattan).

Rajaratnam May Be Guilty of Conspiracy Without Trade

Galleon Group LLC co-founder Raj Rajaratnam can be convicted of joining in an insider trading conspiracy even if he didn’t trade in particular stocks, a prosecutor said at a pretrial hearing in Manhattan.

Assistant U.S. Attorney Reed Brodsky told U.S. District Judge Richard Holwell yesterday that prosecutors can prove Rajaratnam “violated the conspiracy law” merely by taking a single act to further an illegal scheme. He needn’t have made an actual trade, he said.

The argument came as Holwell denied requests from Rajaratnam’s lawyers to exclude certain testimony that prosecutors plan to offer at the March 8 trial. Prosecutors may present proof of illegal trades in 35 stocks and portions of 173 wiretap recordings that may be vague or don’t explicitly refer to an insider-trading scheme, the judge said.

“It’s the agreement that’s the nub” in an insider trading conspiracy, and not the actual illegal trades, Holwell said.

Rajaratnam faces five counts of conspiracy and nine counts of insider trading. To prove insider trading, prosecutors will have to show actual trades. He denies wrongdoing.

The case is U.S. v. Rajaratnam, 09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

Judge Orders Hearing Into U.S. Wiretaps of Trader Drimal

A federal prosecutor will take the witness stand when a judge weighs whether the government properly recorded telephone conversations between former Galleon Group LLC trader Craig Drimal and his wife.

Drimal is among five men who face a May trial for trading with inside information. U.S. District Judge Richard Sullivan yesterday ordered a hearing on March 9 into whether the prosecutors who secretly taped Drimal’s phone conversations “demonstrated a high regard” for Drimal’s privacy by not listening into conversations between him and his wife.

“Very personal calls were captured,” Drimal’s lawyer, Jane Anne Murray, said yesterday in an interview.

The judge previously rejected other arguments from Drimal to exclude from evidence wiretapped phone conversations that he had with traders. Murray said she wants Sullivan to exclude from the trial all wiretaps if he finds prosecutors violated Drimal’s privacy rights by recording calls with his wife.

“The court expects to hear testimony from the agents who monitored” more than a dozen taped phone calls, Sullivan said in a one-page order. “The court also expects to hear testimony from the assistant U.S. attorney who supervised the agents.”

Drimal and the other defendants, all of whom deny any wrongdoing, face charges in an insider-trading case involving Galleon Group co-founder Raj Rajaratnam. Also charged are traders Zvi Goffer, Emanuel Goffer and Michael Kimelman and lawyer Jason Goldfarb.

Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined to comment.

The case is U.S. v. Goffer, 10-cr-00056, U.S. District Court, Southern District of New York (Manhattan).

Milan Assumed UBS, JPMorgan Did Swaps for Free, Witness Says

The City of Milan assumed banks that sold it derivatives, and later restructured the contracts, did so for free, a former city finance official testified at a trial where four firms face fraud charges.

Angela Casiraghi, a witness for the prosecution, told a court in Milan yesterday that she believed a commission of 0.01 percent paid to the banks for a 1.7 billion-euro ($2.3 billion) bond sale in 2005 covered both the securities sale and the swaps that adjusted payments on the borrowings.

Deutsche Bank AG, Depfa Bank Plc, JPMorgan Chase & Co. and UBS AG are accused of misleading Milan into thinking they could save the city about 55 million euros by selling the bonds and related derivatives and earning 101 million euros in hidden fees. The banks deny the charges.

Officials for Deutsche Bank, JPMorgan and UBS declined to comment on yesterday’s testimony. Officials for Depfa didn’t immediately respond to an e-mail.

Casiraghi said the city considered the swaps part of the bond sale. She said the city assumed that the banks restructured the derivatives in subsequent years for free.

Asked whether city officials had discussed why the firms might be working for nothing, Casiraghi said she thought the banks were acting in their capacity as advisers to the municipality.

“To this day I cannot come to terms” with the fact that there may have been fraudulent activity, said Casiraghi.

Compliance Action

Mortgage Servicers May Face Sanctions, New Rules, Regulator Says

U.S. banking regulators investigating flawed foreclosures are “finalizing” remedial requirements and sanctions against mortgage servicers, Acting Comptroller of the Currency John Walsh said.

Banking regulators, the Department of Justice, and state attorneys general began reviewing foreclosures last fall at the 14 largest federally regulated loan servicers, including Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and the GMAC unit of Ally Financial Inc., after evidence surfaced that bank employees and contractors were seizing homes without proper review or complete documentation.

In testimony prepared for a hearing of the Senate Banking Committee today, Walsh said regulators uncovered “critical deficiencies and shortcomings” that “resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse effect on the functioning of the mortgage markets and the U.S. economy as a whole.”

Federal Housing Administration Commissioner David Stevens told a congressional panel yesterday that government agencies could come to agreement on enforcement actions and financial penalties within about a month.

Most regulators found problems during their examinations that would merit sanctions, but they have not yet decided whether a unified settlement will take place, Stevens said during a hearing of the House Financial Services Committee.

“We can work with the other regulators to come up with a set of solutions, assuming the general outcomes and findings are the same, or we can go individually,” Stevens said during the hearing.

The attorneys general have said they plan to address the loan-modification process in settlements with major servicers. They may push to bar foreclosures when borrowers are already seeking modification and to create a fund to compensate victims of wrongful foreclosures.

It would be “really premature” to discuss the content or timing of a possible settlement, Stevens said in an interview after the hearing.

“We would love to come to a mutual outcome that respects the need to get the market stabilized as well as respects all the regulators involved and the institutions that are going to need to settle,” he said.

Stevens said regulators were still trying to reach consensus on the size of financial penalties. “This comes down to, what are the actual violations we can identify?” he said. “We haven’t aggregated them all together. What are the potential costs that each agency could assess?”

Federal regulators also are considering changing the rules governing foreclosures.

Changes being studied include a new fee structure for servicers, independent reviews of rejected requests to ease loan terms and a fund to compensate victims of improper foreclosures, according to Sheila Bair, chairman of the Federal Deposit Insurance Corp. and federal and state regulators.

FSA Won’t Release Bank Pay Data Without Permission

The U.K. Financial Services Authority will ask bankers for permission before handing over data on their pay to lawmakers, the regulator’s chief executive, Hector Sants, said yesterday.

The FSA will “seek consent of all the firms” before passing information on the size of senior bankers’ bonuses to the U.K. Parliament’s Treasury Committee, Sants said in a letter to Andrew Tyrie, the group’s chairman.

Tyrie asked the FSA to disclose more information on executive remuneration at banks last month. Lloyds Banking Group Plc, Barclays Plc, HSBC Holdings Plc and Royal Bank of Scotland Group Plc will disclose the pay of their five most senior employees below board level as part of a deal with the government, U.K. Chancellor of the Exchequer George Osborne said last week.

“Assuming the firms are prepared to release the data and given the reporting timetables of the firms, we would hope to be able to write to you with the aggregated data by the end of April,” Sants said in the letter to Tyrie.

Tyrie also asked for information on the number of people in big firms whose pay is “equal to or more than, the remuneration of the least well-paid executive board member” in his Jan. 31 letter.

The FSA doesn’t have this information and firms will have to decide whether to provide it, Sants said. The FSA can’t “compel firms to supply information where it is not required for our regulatory function.”

European Union regulators approved laws to curb banker bonuses in December, including limits on immediate cash payouts and requiring part of the award to be deferred or held in shares for a minimum of three years.

KBR to Pay $11.3 Million to U.K. to End Bribery Probe

KBR Inc. agreed to pay 7.03 million pounds ($11.3 million) to U.K. prosecutors to end a four-year probe into bribes paid to Nigerian officials to win a liquefied natural gas project through a company unit based in England.

M.W. Kellogg Ltd., the U.K. subsidiary of KBR, self-reported the illegal payments to the Serious Fraud Office and cooperated with the investigation, the Houston-based company said in a statement yesterday.

KBR and its former parent Halliburton Co. paid $579 million in February of 2009 to resolve U.S. criminal and regulatory probes over claims bribes were paid to obtain contracts to build the Bonny Island liquefied natural gas facility in Nigeria.

Halliburton will reimburse KBR for 55 percent of the U.K. fine under an indemnity agreement. The penalty is equivalent to the profits generated for M.W. Kellogg by the Bonny Island project contracts, KBR said. KBR said last month the acquisition Roberts & Schaefer and M.W. Kellogg would add total 17 cents a share to its 2011 earnings.

“This settlement was expected and closes out an unfortunate part of KBR’s past,” William Utt, the company’s chief executive officer, said in the statement. “We have since moved forward, conducting our business with transparency, accountability and discipline.”

Prosecutors in the U.S. said KBR paid more than $180 million in bribes to unnamed Nigerian officials to win engineering, procurement and construction contracts. The Bonny Island project pipes natural gas from wellheads to processing plants, converts it into purified LNG, and loads it onto tankers for export.

Jack Stanley, KBR’s former chairman, pleaded guilty in 2008 in the U.S. to conspiring to violate the Foreign Corrupt Practices Act by helping to arrange the payment of the bribes.

“The SFO will continue to encourage companies to engage with us over issues of bribery and corruption in the expectation of being treated fairly,” Richard Alderman, the agency’s director, said in a statement. “In cases such as this a prosecution is not appropriate.”

Separately yesterday, a British lawyer wanted by U.S. prosecutors over allegations he helped to pay bribes in Nigeria for KBR will be extradited, after he dropped a legal challenge, his lawyer, Brad Simon, said in an interview. The U.K. Court of Appeal had ruled last month that Jeffrey Tesler should be sent to Houston to face criminal charges.

Another U.K. citizen accused of paying bribes on behalf of KBR, Wojciech Chodan, was extradited in December to Houston. He pleaded guilty that month to violating the FCPA.

Billionaire Ambani Questioned by Investigators in Phone Probe

India’s federal investigators questioned Anil Ambani, the billionaire chairman of Reliance Communications Ltd., for about two hours yesterday amid a widening probe into the award of mobile-phone licenses in 2008.

Ambani “met Central Bureau of Investigation officials to clarify ongoing issues, relating to telecom matters for the years 2001 to 2010,” an e-mailed statement from his group spokesman Gaurav Wahi said. “No summons of any kind have been issued by CBI” to Ambani.

The move by federal officials follows the arrests this month of former telecommunications minister Andimuthu Raja, his personal secretary and an ex-bureaucrat after the nation’s chief auditor said the sale of permits at below-market prices may have potentially cost the exchequer $31 billion. The questioning may further undermine investor confidence in Ambani, 51, who presides over the two worst performing stocks of the past year.

“Reliance Communications sends a lot of letters to shareholders to say everything is fine, but my feeling is that everything is not alright,” said Vienna-based Juergen Maier, who manages a 250 million euro ($337 million) India equity fund at Raiffeisen Capital Management. “It’s not the first time it’s been questioned and this confirms the image investors have.”

Ambani is the second executive to be quizzed by the CBI in as many days after Sanjay Chandra, managing director of Unitech Ltd., India’s second-biggest developer, said Feb. 15 his company is fully cooperating with the investigation.

The bureau has argued in court that Raja conspired to benefit companies including Swan Telecom Ltd., now known as Etisalat DB Telecom India Ltd., and Unitech by violating guidelines in the license sale. India’s chief auditor said in November second-generation airwaves were sold for an “unbelievably low” $2.7 billion when they may have been worth at least 10 times more.

For more, click here.

Ex-KB Home Executive Gets Probation in Backdating Case

Gary A. Ray, KB Home’s former head of human resources who had pleaded guilty in an investigation of stock-option backdating at the homebuilder, was sentenced to three years’ probation.

Ray, who cooperated with the government in its prosecution of Bruce Karatz, KB Home’s former chief executive officer, also got four months’ home detention, a $10,000 fine, and was ordered to do 600 hours community service, Assistant U.S. Attorney Paul Stern said yesterday in a telephone interview.

Ray pleaded guilty two years ago to conspiring with Karatz in 2006 to “impede and obstruct” a probe into backdating that was being conducted by the Securities and Exchange Commission. Karatz last year was sentenced to five years’ probation, including eight months’ home detention, and a $1 million fine after a jury trial.

“He’s pleased to have this behind him,” Ray’s lawyer, Mark Beck, said in a telephone interview. “He’s prepared to go back to work and go on with his life.”

The case is U.S. v. Gary Ray, CR08-1443, U.S. District Court, Central District of California (Los Angeles).

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