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Debit Fees, Rating Ban, Morris Sentence: Compliance

Federal Reserve officials yesterday addressed a Fed proposal to cap debit-card “swipe” fees at 12 cents per transaction.

Fed Chairman Ben S. Bernanke told lawmakers that the central bank’s governors are uncertain that lenders with less than $10 billion in assets would be helped by an exemption from the rule.

“We are not certain how effective that exemption will be,” Bernanke said yesterday at a Senate Banking Committee hearing on implementation of the Dodd-Frank Act. “It is possible that because merchants will reject more expensive cards from smaller institutions, or because networks will not be willing to differentiate the interchange fee for issuers of different sizes, it is possible that the exemption will not be effective in the marketplace.”

Fed Governor Sarah Bloom Raskin, in testimony prepared for a separate hearing yesterday before the House Financial Services a Committee, said the rule “may result in significant market changes.” Citing the “novelty and unusual complexity” of the rulemaking, she said the central bank would “reserve judgment” on the final language until all the public comments were received.

Financial services lobbyists are counting on the Republican majority in the U.S. House to help them reopen the battle they lost to retailers over the proposed cap.

Large banks stand to lose more than $12 billion in revenue if the proposal as written by the Fed becomes final. Shares of Visa Inc. and MasterCard Inc., which set the fees and pass the money to card-issuing banks, tumbled more than 10 percent after the proposed rules were made public on Dec. 16, amid investor concern that the caps will damage their business model.

Retail groups representing 7-Eleven Inc. and Home Depot Inc are pushing for the Fed to keep the proposal the same when it finalizes the rule under an April 21 deadline. Financial-services groups speaking for firms including Visa and Citigroup Inc. are calling for a suspension of the rulemaking until a federal study can be conducted on its effects.

Some of Wall Street’s top executives have gone directly to Bernanke, urging him to withdraw the central bank’s proposal. The Federal Advisory Council, a group of 12 bankers who consult and advise the Fed, told Bernanke and his fellow governors in a Feb. 4 meeting that the proposal “misinterprets and misapplies” the Dodd-Frank provision, according to a summary posted on the Fed’s website.

For more, click here. To view the hearings, click here and click here.

OCC’s Walsh Says Credit-Rating Ban May Block Basel III

The Dodd-Frank Act ban on references to credit ratings in financial-industry rules should be amended to keep it from blocking adoption of international capital and liquidity standards, a top banking regulator told lawmakers.

“Precluding undue or exclusive reliance on credit ratings, rather than imposing an absolute bar to their use, would strike a more appropriate balance,” John Walsh, the acting Comptroller of the Currency, said in testimony prepared for a Senate hearing yesterday on the financial-regulation overhaul enacted last year.

Dodd-Frank requires regulators to replace references to credit ratings with an “appropriate” standard for measuring creditworthiness. Unless that provision is amended by Congress, the U.S. will have difficulty meeting the Basel III capital and liquidity framework adopted last year, Walsh said in comments prepared for the Senate Banking Committee.

Developing a new credit standard has been challenging for regulators, Federal Deposit Insurance Corp. Chairman Sheila Bair told lawmakers in her prepared remarks.

Credit-rating firms, including Moody’s Corp. and McGraw-Hill Cos.’ Standard & Poor’s unit, were targeted by lawmakers after they issued top rankings to mortgage-backed securities whose collapse helped spark the financial crisis.

Senators called Walsh and Bair to testify along with regulators including Federal Reserve Chairman Ben S. Bernanke at a hearing marking the half-year since passage of Dodd-Frank, the biggest financial rules overhaul since the 1930s. Agencies are drafting scores of measures to boost oversight of derivatives, executive pay and systemically important financial firms.

For more, click here.

Fed Tells U.S. Banks to Test Capital for Recession

The Federal Reserve ordered the 19 largest U.S. banks to test their capital levels against a scenario of renewed recession with unemployment rising above 11 percent, said two people with knowledge of the review.

The banks stress-tested the performance of their loans, securities, earnings, and capital against at least three possible economic outcomes as part of a broader capital-planning exercise. The banks, including some seeking to increase dividends cut during the financial crisis, submitted plans last month. The Fed will finish its review in March.

“They’re essentially saying, ‘Before you start returning capital to shareholders, let’s make sure banks’ capital bases are strong enough to withstand a double-dip scenario,’” said Jonathan Hatcher, a credit strategist specializing in banks at New York-based Jefferies Group Inc. Regulators don’t want to see banks “come crawling back for help later,” he said.

Executives at banks such as JPMorgan Chase & Co. in New York and PNC Financial Services Group Inc. in Pittsburgh have asked regulators for permission to increase dividends. The Fed has told banks that it expects dividends and share buybacks to be “conservative” and allow for “significant accretion of capital,” according to a November notice. Some capital payout plans may be rejected as “inappropriate,” the notice said.

Federal Reserve spokeswoman Barbara Hagenbaugh declined to comment on the specifics of the Fed’s parameters.

For more, click here.

Compliance Action

Ex-Hevesi Adviser Gets Up to 4 Years in Pension Case

Former political consultant Henry “Hank” Morris, who pleaded guilty to a felony count of securities fraud in a probe of corruption at the New York state pension fund, was sent to prison for as long as four years.

Morris, once chief political adviser to former state Comptroller Alan Hevesi, was ordered yesterday to serve 1 1/3 to four years by New York state Supreme Court Justice Lewis Bart Stone in Manhattan. Morris admitted in November that the investment process at the pension fund was manipulated to benefit him, his associates and contributors to Hevesi’s campaign.

Morris, 57, was the first to be sentenced of about eight defendants who pleaded guilty in connection with a probe of “pay-to-play” at the New York pension fund under Hevesi, who resigned in 2006 after serving four years. In October, Hevesi admitted to approving pension fund investments in exchange for almost $1 million in gifts. He is scheduled for sentencing March 10. The probe was conducted by former New York Attorney General Andrew Cuomo, a Democrat who is now the state’s governor.

Yesterday’s sentencing “marks the beginning of the end of criminal proceedings arising out of a massive fraud against the New York State pension system” during Hevesi’s tenure, Stone said in a written decision, part of which he read from the bench. “Morris was Hevesi’s principal legal consultant, the substantial architect of his political career and a central figure in the illegal scheme.”

As part of his plea, Morris agreed to forfeit $19 million in fees Cuomo said he received through 23 state pension-fund investments for which he acted as an undisclosed placement agent, or middleman.

“My actions undermined the integrity of New York state’s government,” Morris told the judge yesterday before he was taken into custody. “For too long I was blind to that truth.”

The case is People v. Morris, 0025/2009, New York State Supreme Court, New York County (Manhattan).

For more, click here.

Stanford Sues U.S. Prosecutors, SEC and FBI Agents

R. Allen Stanford, the indicted financier, sued U.S. prosecutors and agents of the FBI and Securities and Exchange Commission, accusing them of “abusive law enforcement” and seeking $7.2 billion in damages.

Stanford, who has been held without bail since being indicted in 2009, filed the lawsuit on Feb. 16 at the U.S. courthouse in Houston. He is accused of leading a $7 billion securities fraud scheme and has pleaded not guilty.

“Mr. Stanford contends the named and unknown agents undertook illegal tactics to prosecute Mr. Stanford, starting with a civil prosecution by the SEC,” according to the complaint. The SEC sued him two years ago.

The Texas financier alleges the federal government has used more than $51 million of his own assets to pursue cases against him. “The agents have engaged in unfair, abusive law-enforcement methods and tactics,” he alleged.

Kevin Callahan, an SEC spokesman, declined in an e-mail yesterday to comment on Stanford’s lawsuit. Citing a court-imposed gag order in the criminal case, Laura Sweeney, a Justice Department spokeswoman, also declined to comment.

Shauna Dunlap, public information officer for the FBI’s Houston office, where the Stanford investigation is based, didn’t immediately return calls to her office and cell phone.

The case is R. Allen Stanford v. Stephen Korotosh, 11cv582, U.S. District Court, Southern District of Texas (Houston).

The criminal case is U.S. v. Stanford, 09cr342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank Ltd., 09cv298, U.S. District Court, Northern District of Texas (Dallas).

For more, click here.

BofA Unit’s Utah Foreclosures Violate Law, State Says

A Bank of America Corp. unit is conducting home foreclosures in Utah in violation of state law, the Utah attorney general’s office said in a federal appeals court case.

ReconTrust Co., a subsidiary of Bank of America, the biggest U.S. lender by assets, can’t conduct trustee foreclosures in Utah because it isn’t a member of the state bar or a title insurance company, Utah Attorney General Mark Shurtleff wrote in papers filed Feb. 16 with the U.S. Court of Appeals in Denver.

“ReconTrust Co. N.A. is a non-depository national bank initiating approximately 4,000 home foreclosures in Utah each year in violation of Utah law,” the attorney general said.

The court filing was made in a homeowner’s lawsuit against ReconTrust and Bank of America. The homeowner, Peni Cox, said ReconTrust doesn’t have authority to conduct foreclosure sales in the state, according to a court filing.

Jumana Bauwens, a spokeswoman for Bank of America, didn’t immediately respond to an e-mail seeking comment.

The case is Cox v. ReconTrust Co., 10-04117, U.S. Court of Appeals for the 10th Circuit (Denver).

U.S. Said to Examine New Apple Service for Antitrust Violations

The U.S. Justice Department and the Federal Trade Commission are beginning to examine whether Apple Inc.’s new media subscription service violates antitrust laws, according to two people familiar with the matter.

The agencies haven’t decided whether to pursue a more formal investigation as the examination is at a preliminary stage, said the people, who requested anonymity because the matter is confidential. The Wall Street Journal reported today on the preliminary probes.

Justice Department spokeswoman Gina Talamona declined to comment, as did an FTC spokeswoman. Steve Dowling, a spokesman for Apple, didn’t respond immediately to an after-hours e-mail or phone call for comment. Jill Tan, a Hong Kong-based Apple spokeswoman, didn’t immediately return two calls to her office and mobile phone seeking comment.

Apple on Feb. 15 said it was starting a subscription service for publishers to sell newspapers and magazines on the iPad and other devices through the company’s online App Store. Cupertino, California-based Apple will take a 30 percent cut of any subscription purchased through the App Store. Publishers that participate will have to offer their lowest subscription rates within Apple’s store.

The following day, Google Inc. unveiled a rival service in which the company would keep 10 percent of fees charged by publishers.

The FTC has been reviewing separate allegations that Apple is engaging in anti-competitive tactics to restrict rivals in the mobile-advertising market. The Justice Department is looking into Apple’s business practices regarding its iTunes digital music service.

Barclays Deregisters U.S. Unit After Capital Requirement Change

Barclays Plc, the U.K.’s third-largest bank, deregistered Barclays Group U.S. as a bank-holding company, partly to sidestep capital requirements mandated by the Dodd-Frank Act.

“The purpose of the restructuring was to better align the businesses with the appropriate capital regimes,” the London-based lender said in an e-mailed statement today.

The U.S. Dodd-Frank Act of 2010 will require the U.S. holding companies of overseas banks, such as Barclays, to comply with the same capital rules as domestic lenders. They were previously exempt as long as their foreign parents were regulated by a U.S.-recognized entity.

Without the move, Barclays would have needed to add $12 billion to the U.S. bank-holding unit, according to the Wall Street Journal, which reported the move earlier today.

Before the change, Barclays Capital was held within Barclays Group U.S. Inc., which was subject to federal capital requirements. It will now be subject to Securities and Exchange Commission regulation instead.

A Barclays spokesman in London declined to comment beyond the statement. The bank disclosed the restructuring when it reported earnings this week.


Judge Gives U.S. 30 Days to Act on Gulf Drill Permits

U.S. offshore energy regulators have 30 days to act on five Gulf of Mexico drilling permits that have been unreasonably delayed by the Obama Administration’s offshore drill bans, a New Orleans judge ruled.

“The government is under a duty to act by either granting or denying a permit application within a reasonable time,” U.S. District Judge Martin Feldman ruled yesterday in New Orleans. “Not acting at all is not a lawful option.”

Feldman ordered offshore energy regulators to act within 30 days on five permit applications filed by companies that have drilling contracts with Ensco Offshore Co., the Louisiana drilling company leading the legal challenge to the government’s offshore drilling bans.

He said these permits have been delayed anywhere from four to nine months by drilling suspensions imposed by regulators in the wake of the worst offshore oil spill in U.S. history. Before the spill, permits were typically processed within two weeks.

“We are aware of the ruling and are reviewing it,” Wyn Hornbuckle, a Justice Department spokesman, said in an e-mail yesterday. “We have no further comment at this time.”

Sean O’Neill, Ensco’s spokesman, didn’t immediately return a call seeking comment.

President Barack Obama temporarily halted all drilling in waters deeper than 500 feet in May, following the explosion and sinking of the Deepwater Horizon drilling rig off the Louisiana coast. After offshore companies and regional business and political leaders sued in June, Feldman threw out the ban as overly broad and punitive to the Gulf Coast economy.

Interior Secretary Kenneth Salazar promptly announced he would find a new way to block offshore drilling and, in July, imposed an almost identical ban. When that ban was also challenged in court, Salazar withdrew it before Feldman could rule on its validity.

The case is Ensco Offshore Co. v. Salazar, 2:10-cv-01941, U.S. District Court, Eastern District of Louisiana (New Orleans).

More Than 100 Charged in Largest U.S. Medicare Fraud Roundup

Federal agents charged more than 100 suspects in nine cities with Medicare fraud -- the most ever in one day -- in the latest U.S. effort to crack down on schemes to bilk the health-care program for the elderly and disabled, according to the Justice Department.

At least 112 suspects, including doctors, nurses and company owners, were charged yesterday in various cases, and searches and arrests are continuing, said Alisa Finelli, a department spokeswoman. The cases involve more than $225 million in alleged false billings.

“We are pleased to announce the largest federal health-care fraud takedown in our nation’s history,” Attorney General Eric Holder said at a news conference in Washington yesterday.

Strike forces, used by the Justice Department and Health and Human Services Department to crack down on Medicare fraud since 2007, have charged more than 990 people who falsely billed Medicare for more than $2.3 billion, the Justice Department said in a statement yesterday.

The strike forces, which operate in seven cities, are expanding to include Dallas and Chicago, Holder said.

Suspects were charged with various health-care fraud crimes, including conspiracy to defraud Medicare and money laundering. Suspects allegedly participated in schemes involving home health care, physical and occupational therapy and durable medical equipment, according to the Justice Department.

U.S. Ends Antitrust Probe of Siemens Transmission

The U.S. Justice Department ended an antitrust probe into Siemens AG, Europe’s biggest engineering company, concerning flexible alternating-current transmission systems, according to a company spokesman.

The Justice Department reviewed allegation similar to ones that were investigated by the European Union, Alexander Becker, a spokesman for the Munich-based company, said in an interview yesterday. Becker didn’t specify the reason why the U.S. case was closed. The EU’s regulators dropped their investigation in September.

Siemens and ABB Ltd., the world’s biggest power-grid supplier, were being investigated by the European Commission, the EU’s executive, over the issue last year. The commission and national officials conducted raids in January 2010 over allegations some companies may have fixed prices.

Comings and Goings

SEC Names New Deputy Director in Corporation Finance

Lona Nallengara, a partner in the New York office of Shearman & Sterling LLP, will become the new deputy director for legal and regulatory policy in the U.S. Securities and Exchange Commission’s Division of Corporation Finance, the SEC said yesterday. Nallengara, 39, has worked in mergers and acquisitions as well as capital markets since arriving at Shearman in August 1998. Nallengara, who will relocate to Washington, will be “starting soon” in the new job, he said by telephone.

Warren Hires Former Pay Rent Chief for Consumer Bureau

Elizabeth Warren, the White House adviser charged with setting up the U.S. Consumer Financial Protection Bureau, hired Corey Stone to head a unit that will write rules for credit-information firms.

Stone, 54, is the former chief executive officer of Pay Rent, Build Credit Inc., a company designed to allow consumers to build credit histories by documenting rent and bill payments, rather than by incurring debt.

“I’m excited about being here,” Stone said in a telephone interview confirming the appointment.

The consumer-bureau unit will help write rules to regulate credit-reporting companies such as Equifax Inc., Experian Plc and TransUnion LLC, and debt-collection firms such as Portfolio Recovery Associates Inc., Encore Capital Group Inc., Asta Funding Inc. and Asset Acceptance Capital Corp., according to the agency’s draft organizational chart.

Jennifer Howard, a spokeswoman for Warren, declined to comment.

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