Dodd-Frank, JPMorgan, Sprint, Berkshire Hathaway: Compliance

The Dodd-Frank financial regulation law may require the federal government to spend almost $1 billion and hire or transfer more than 2,000 employees in the months ahead, according to the Government Accountability Office.

The 11 agencies implementing the law, including the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp., told the GAO they would need as much as $973 million to establish the new rules. The agencies, which provided the GAO with their Dodd-Frank-related costs for either the 2011 calendar year or for fiscal 2012, said that most of the expense would be recurring, according to a GAO slide presentation sent to U.S. House Republicans and obtained by Bloomberg News.

Taxpayers are likely to bear only part of the implementation costs. While three of the 11 agencies are at least partly funded by congressional appropriations, six are funded fully or partly by assessments on industry, one fully by federal budget offsets and one, the Consumer Financial Protection Bureau, by transfers from the Federal Reserve.

The consumer bureau, which has been targeted by Republicans for structural changes and funding cuts, may require $329 million in fiscal 2012 and more than 883 new employees, the GAO said.

Republicans requested the GAO report in advance of a Financial Services subcommittee hearing on Dodd-Frank this week. Republican lawmakers have proposed several changes to the law, which was enacted last year when Democrats held majorities in the House and Senate. Democrats still control the Senate and White House.

Compliance Action

Sprint Asks U.S. to Block AT&T’s ‘Anticompetitive’ Purchase

Sprint Nextel Corp., the third-largest U.S. wireless provider, claimed that AT&T Inc.’s planned $39 billion takeover of T-Mobile USA will damage industry competition and called on the government to block it.

Sprint said in a statement that the industry would be dominated by two carriers, the combined AT&T-T-Mobile and Verizon Wireless. “We think the anticompetitive nature of the transaction simply will not allow it to pass,” Charles McKee, a Sprint vice president of government affairs, said yesterday in an interview. “This is really an important transaction to stop.”

Sprint had also held talks with Bonn-based Deutsche Telekom to buy T-Mobile, people with knowledge of the matter said this month. McKee declined to say whether Sprint had held discussions with T-Mobile over a possible merger.

McKee said Overland Park, Kansas-based Sprint would voice its objections throughout the regulatory process, which AT&T said could take 12 months. Dan Hesse, Sprint’s chief executive officer, said last week that the carrier planned to file objections to the U.S. Congress when it begins its review.

AT&T said March 20 it agreed to buy T-Mobile from parent Deutsche Telekom AG, pending government approval. The deal would combine the second- and fourth-largest U.S. wireless providers. AT&T expects regulators will require it to divest wireless spectrum and subscribers to win approval for the acquisition, a person with knowledge of the situation said last week.

Mike Buckley, an AT&T spokesman, said the acquisition “will improve quality for consumers, provide a solution to impending spectrum exhaust” and bring so-called fourth-generation service to more Americans.

Reid Walker, a spokesman for T-Mobile in Bellevue, Washington, and Jeff Nelson, a Verizon Wireless spokesman, declined in e-mails to comment. Robert Kenny, a spokesman for the Federal Communications Commission, the phone-industry regulator, also declined to comment.

Berkshire Wrote Down U.S. Bancorp, Swiss Re After SEC Query

Warren Buffett’s Berkshire Hathaway Inc. wrote down the value of holdings in U.S. Bancorp, Sanofi-Aventis SA and Swiss Reinsurance Co. after a query from the Securities and Exchange Commission over valuations.

The adjustments to the equity stakes were made to Berkshire’s fourth-quarter results in its annual Form 10-K report, according to a Feb. 4 letter from Omaha, Nebraska-based Berkshire to the regulator. The letter was filed yesterday on the SEC’s website.

“As a result of our discussions, we recognize that the staff” of the SEC believes that impairments on the investments may be required according to generally accepted accounting principles, Berkshire Chief Financial Officer Marc Hamburg wrote.

Berkshire, which held $61.5 billion of equities as of Dec. 31, was asked by the SEC in January for more information about stockholdings that traded below the prices paid by the company. The firm recorded equity impairments of $938 million in the fourth quarter. Berkshire told the SEC that it wasn’t writing down its holdings of Kraft Foods Inc. and Wells Fargo & Co. because it expects the stocks recover.

Unrealized losses of more than 12 months on equity investments narrowed to $531 million on Dec. 31 from $2.7 billion a year earlier, Berkshire said in its annual report. The Wells Fargo stake accounted for $384 million of that unrealized loss, Berkshire said.

In the Courts

Hewlett-Packard Investor Can’t Get Hurd Report, Judge Rules

A Hewlett-Packard Co. investor isn’t entitled to a law firm’s confidential report about sexual-harassment allegations that led to Mark Hurd’s ouster last year as chief executive officer, a judge ruled.

Delaware Chancery Court Judge Donald Parsons on March 25 denied Hewlett-Packard Co. shareholder Ernesto Espinoza’s request for the report, which was prepared for the HP board by lawyers at Covington & Burling LLP, court records show.

Espinoza sued HP Nov. 18 seeking company books and records as a part of his investigation into possible wrongdoing by directors. The board granted Hurd a severance package worth as much as $40 million “rather than terminate him for cause” with no payment, according to court filings.

Shareholders have sued Palo Alto, California-based Hewlett-Packard in Delaware and California claiming that the computer-maker’s officials should be held liable for wasting company assets on Hurd’s severance.

Mylene Mangalindan, a Hewlett-Packard spokeswoman, declined to comment on the ruling. Felipe Arroyo, one of Espinoza’s lawyers, didn’t immediately return calls for comment.

The Delaware case is Espinoza v. Hewlett-Packard Co., CA6000, Delaware Chancery Court (Wilmington). The California case is Levine v. Andreessen, 10-3608, U.S. District Court, Northern District of California (San Jose).

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JPMorgan Chase Sues Florida Foreclosure Law Firm Over Files

JPMorgan Chase & Co. sued the Florida law firm of Ben-Ezra & Katz to force it to return files of foreclosure cases in which the firm represented the bank.

JPMorgan said in a complaint filed March 25 in Miami that the files include thousands of original promissory notes, mortgages and other documents that “evidence and secure” loans worth more than $400 million. The New York-based bank seeks a court order forcing Ben-Ezra to return the files and unspecified damages.

The Florida attorney general’s office is investigating law firms in the state that handle residential foreclosure cases on behalf of lenders. The probes focus on whether the firms were “fabricating and/or presenting false and misleading documents in foreclosure cases,” according to the attorney general’s website.

On March 25, the attorney general said she had reached a $2 million settlement with one of the firms, the Law Offices of Marshall C. Watson. Ben-Ezra, based in Fort Lauderdale, is one of four law firms still under investigation, the office said.

JPMorgan terminated Ben-Ezra on March 8, according to the complaint. The law firm refuses to return the files because it claims it is owned $5 million, according to the complaint.

Mark Sell, a spokesman for Ben-Ezra, had no immediate comment on the suit.

In a separate suit, the law firm of David J. Stern sued Chase Home Finance, claiming the firm was owed $398,979.95. Stern’s firm is also under investigation by the Florida attorney general’s office.

The case is JPMorgan Chase Bank v. Ben-Ezra & Katz, 11-60655, U.S. District Court, Southern District of Florida (Miami.)

Syncora Wins Partial Judgment Against JPMorgan’s EMC in Suit Syncora Guarantee Inc. won part of its case against JPMorgan Chase & Co.’s EMC Mortgage Corp. over the securitization of 9,871 home equity line of credit loans.

U.S. District Judge Paul A. Crotty in New York ruled March 25 that Syncora, a New York-based insurer, notified EMC of 1,300 mortgages with defects and asked EMC to cure them. EMC agreed to cure only 20 of the mortgages.

The transaction in dispute began with the purchase of the home equity lines of credit or HELOCs, which in turn served as collateral for the issuance of $666 million in publicly offered securities, Syncora said in court papers.

Syncora claimed in the 2009 suit that EMC sold the loan pool to the entity that issued the notes and contracted with Syncora to provide financial-guaranty insurance protecting investors.

The insurer alleged that after it hired consultants to investigate poor loan performance, “it learned that more than 85 percent of a randomly selected pool of loans contained defects that breached the loan-level warranties,” Crotty wrote.

Syncora notified EMC of these claimed breaches, Crotty wrote. EMC agreed to repurchase certain loans and disputed others “because Syncora misinterpreted the representations relied upon or because the loans were not defective,” the judge wrote.

Crotty separately rejected a bid by Syncora to add JPMorgan Chase & Co.’s Bear Stearns & Co. to the lawsuit. The insurer said it had uncovered new evidence to support claims of fraud and interference. The request wasn’t filed in a timely fashion, the judge said.

“Syncora gave no indication of its intention to file an amended complaint, add a new party or assert additional claims until September 2010, approximately fourteen months after the amendment deadline had passed,” Crotty said. He added later, “Syncora has failed to demonstrate the good cause necessary to permit this late amendment.”

Michael Corbally, a spokesman for Syncora, didn’t immediately reply to a voice-mail message left at his office seeking comment. Jennifer Zuccarelli, a JPMorgan spokeswoman, didn’t respond to a message.

The case is Syncora Guarantee Inc. v. EMC Mortgage Corp., 1:09-cv-03106, U.S. District court, Southern District of New York (Manhattan).

Ex-Goldman Programmer Aleynikov Denied Bail During Appeal

Former Goldman Sachs Group Inc. computer programmer Sergey Aleynikov must remain in jail while appealing a 97-month prison term for stealing the firm’s computer code, a federal judge ruled.

U.S. District Judge Denise Cote, after sentencing Aleynikov March 18, rejected a request by his lawyer, Kevin Marino, to free the defendant during an appeal. Aleynikov was convicted by a Manhattan jury in December of violating the Economic Espionage Act and the Interstate Transportation of Stolen Property Act.

“The facts that caused Aleynikov’s remand prior to his sentencing have not changed,” Cote said in a ruling yesterday. “His sentence of roughly eight years’ imprisonment substantially increases his incentive to flee and he has not shown by clear and convincing evidence that he is not likely to do so.”

Cote said that in papers filed seeking Aleynikov’s release, Marino repeated prior arguments that she previously rejected. She also said the defense “largely conceded” that the amount of loss to Goldman Sachs as a result of Aleynikov’s actions was properly calculated at more than $7 million.

The judge said her sentence was on the lowest end of the guideline range for such a crime and that Marino had failed to show that the term would be reduced on appeal.

Marino argued, as he had during the trial, that Aleynikov only took open-source code he had written at Goldman Sachs and that nothing he took was proprietary, Cote said.

The case is U.S. v. Aleynikov, 1:10-cr-00096, U.S. District Court, Southern District of New York (Manhattan).

Ex-Enron Broadband Executive Sentenced for Insider Trading

Former Enron Broadband Services executive Rex Shelby was sentenced yesterday on an insider trading charge linked to the investment fraud that destroyed the world’s largest energy trader 10 years ago.

Shelby, 59, pleaded guilty to one count of insider trading and was sentenced to three months in a federal halfway house and three months of house arrest. Shelby will also forfeit about $2.6 million in profits from the illicit trade.

Shelby’s lawyer Ed Tomko told a judge that Shelby has also agreed to forfeit another $1 million to resolve related Securities and Exchange Commission charges. He faced a maximum of 10 years and a fine of $1 million on the one count before reaching his plea deal. He’ll be in probation for two years, including the six months of combined confinement.

“I take full responsibility for my actions and all the decisions I made at Enron,” Shelby told the judge yesterday. “No one forced me to do those things.”

U.S. District Judge Vanessa Gilmore sentenced Shelby to half the number of months confinement that he’d agreed to in a plea deal. “Mr. Shelby’s actions ultimately did not cause the downfall of Enron,” she said. “Only a few individuals at the pinnacle of Enron knew of the fraud.”

Gilmore said she moderated the sentence to fit Shelby’s role and the punishments given to others in the Enron fraud scheme. She said the fact Shelby has for the last eight years devoted himself exclusively to working on his defense, in “self-imposed home confinement’’”, was also a consideration in her decision.

Shelby and six other EBS executives were indicted in 2003 on charges they helped the parent company’s senior management, including Enron’s former Chairman Kenneth Lay and Chief Executive Officer Jeffrey Skilling, deceive analysts and investors about the unit’s capabilities and financial performance.

The executives were accused of misrepresenting EBS at a January 2000 analysts’ conference, where they portrayed it as one of Enron’s “core” units, worth about $50 billion. In reality, the division struggled to launch products and never earned a profit.

Shelby had long maintained he sold the shares to diversify his portfolio and not based on any inside knowledge of an alleged conspiracy to inflate Enron’s stock price. To avoid a trial on broader conspiracy and fraud charges, which had been set to begin this past January, Shelby pleaded guilty to one count of insider trading in November.

The case is U.S. v. Shelby, H-03-093, U.S. District Court, Southern District of Texas (Houston).

Fake Hedge Fund Operators Sentenced to 87 Months in Prison

Two men who in December admitted to defrauding investors of more than $7 million though bogus hedge funds were each sentenced to 87 months in prison, Manhattan U.S. Attorney Preet Bharara said.

Igor Levin, 41, of Brooklyn, New York, and Yevgeny Shvartsshteyn, 40, of Belle Harbor, New York, each pleaded guilty last year to one count of conspiracy to commit mail and wire fraud. The two said they operated A.R. Capital, a general partner of A.R. Capital Global Fund LP, which they told investors was a hedge fund that invested primarily in equity of international real estate companies, and in oil, gas and other commodities, according to a statement from Bharara’s office.

The U.S. said that in reality, there were no such investments. The defendants instead wired more than $7 million of investor funds to bank accounts in the Ukraine. Levin and Shvartsshteyn received the proceeds from these illegally obtained investments, prosecutors said.

“My client wanted to get this sentence behind him,” Joseph Mure, a lawyer for Shvartsshteyn, said yesterday in a telephone interview. Andrew Frisch, a lawyer for Levin, declined to comment.

U.S. District Judge Sidney Stein in New York imposed the sentences upon the two men on March 25, Bharara’s office said.

The case is U.S. v. Levin, 10-CR-00031, U.S. District Court, Southern District of New York (Manhattan).

Deutsche Bank, Standard & Poor’s Must Face Anschutz Claims

Deutsche Bank Securities Inc. and Standard & Poor’s must face claims in a lawsuit brought by the Anschutz Corp. seeking damages over its purchase of auction-rate securities, a judge ruled.

U.S. District Judge Susan Illston in San Francisco has refused to throw out Anschutz’s claims of market manipulation and fraud against Deutsche Bank and negligent misrepresentation against S&P, according to a March 27 ruling.

Banks running periodic auctions abandoned the $330 billion market for the securities in 2008 amid the fallout from the subprime market slump. Investors were stuck with the products. Denver-based Anschutz in 2007 bought $40 million of the securities underwritten and rated by the defendants, the ruling said.

“The case is without merit and we will defend ourselves vigorously,” Edward Sweeney, a spokesman for S&P, said in a statement.

In a separate lawsuit over auction rate securities, a federal judge in San Francisco yesterday conditionally granted Deutsche Bank Securities’ request to dismiss claims by Louisiana Pacific Corp. while giving the building products company an opportunity to revise its lawsuit.

U.S. District Judge Jeffrey White gave Nashville, Tennessee-based Louisiana Pacific until April 29 to amend its case or face dismissal of most of the lawsuit, which seeks to recover damages from its $300 million purchase of auction-rate securities, according to a court filing.

Elizabeth Frolich, an attorney for Frankfurt-based Deutsche Bank, had no immediate comment.

The first case is Anschutz v. Merrill Lynch, 09-3780, U.S. District Court, Northern District of California (San Francisco). The second case is Louisiana Pacific v Money Market 1 Institutional Investment Dealer, 09-3529, U.S. District Court, San Francisco.

BofA Board Sued by Holders Over Mortgage Recording Paperwork

Bank of America Corp.’s board and some officers were sued by shareholders claiming they were hurt by false and misleading statements that hid defects in mortgage recording and foreclosure paperwork.

Bank of America “did not properly record many of its mortgages when originated or acquired, which severely complicated the foreclosure process when it became necessary,” according to the complaint filed yesterday in New York state Supreme Court in Manhattan. The suit also claims that the bank also concealed that it didn’t have adequate personnel to process the large numbers of foreclosed loans in its portfolio.

The bank’s stock traded at inflated prices, reaching a high of $19.48 on April 15, 2010, and fell almost 42 percent after the problems were disclosed, according to the complaint.

The directors and officers also hid the bank’s involvement in “dollar rolling,” omitting billions of dollars in debt from its balance sheet, according to the complaint. Bank of America later admitted it wrongly classified the transactions as sales when they were secured borrowing, according to the complaint.

In October, after news of improprieties at Bank of America and other large banks, the Charlotte, North Carolina-based lender temporarily halted foreclosures and admitted to possible irregularities.

Lawrence Grayson, a spokesman for Bank of America, had no immediate comment.

The case is Thomas O’Hare v. Brian T. Moynihan, 103729/2011, New York state Supreme Court (Manhattan).

Compliance Policy

U.S. Regulators Weigh Rules Clarifying Risk in Securitization

U.S. regulators, including the Federal Reserve, said they’re considering proposed rules this week under a law requiring companies to retain part of the risk when they securitize and sell loans.

“All of the agencies participating in this joint rulemaking process are expected to consider the rule this week and a detailed announcement will be made when this process is complete,” the regulators said yesterday in a statement in Washington, citing section 941 of last year’s Dodd-Frank Act overhauling financial regulation.

The agencies include the Fed, Department of Housing and Urban Development, Federal Deposit Insurance Corp., Federal Housing Finance Agency, Office of the Comptroller of the Currency and Securities and Exchange Commission.

Private Equity May Lose as U.S. Reconsiders Tax Break for Debt

As lawmakers working on a rewrite of the U.S. tax code examine the treatment of debt financing, the private-equity industry could face a challenge to its business model.

An overhaul of the U.S. tax code, which is in the early stages of discussion, could lessen the preference for debt that fuels both private-equity deals and financing strategies in other industries. That incentive is caused by the contrast between deductible interest payments and non-deductible dividends.

Changes to the value of the interest deduction would affect all companies that use debt. Private-equity firms such as Blackstone Group LP and KKR & Co. would experience the effects most directly because they borrow to finance corporate takeovers as part of an industry that manages $2.5 trillion in assets, according to research firm Preqin Ltd.

While private-equity firms might benefit from the lower corporate rate that lawmakers propose in a new tax system, they would have to shift their business model, said Steven Kaplan, a professor of entrepreneurship and finance at the University of Chicago Booth School of Business.

“If you can’t fully deduct your interest, then you want less of it,” he said.

The two top tax writers in Congress, Senator Max Baucus and Representative Dave Camp, have asked congressional analysts for a study of the preference toward debt financing.

They are holding hearings on the tax code and say they want to overhaul the system. Neither Baucus, a Montana Democrat who heads the Senate Finance Committee, nor Camp, a Michigan Republican who is chairman of the House Ways and Means panel, has released a detailed proposal.

“The bias toward debt financing in this country led -- maybe slightly, but led nonetheless -- to the economic collapse,” Baucus said March 15.

Officials from Blackstone and KKR declined to comment. Private-equity firms pool investors’ money to buy companies, financing the purchase mostly with debt, with the intention of later selling the companies at a profit.

The magnitude of changes to the private-equity industry would depend on the shape of the broader tax legislation, said Doug Lowenstein, president of the Private Equity Growth Capital Council, the industry’s trade association in Washington.

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Large Banks Gain Over Smaller Rivals Under New Overdraft Rules

The Federal Deposit Insurance Corporation is set to begin enforcing rules this summer aimed at reducing overdraft fees, a move that may cut into retail banking revenue at companies such as BB&T Corp., Synovus Financial Corp. and Ameriana Bancorp.

The new rules may increase pressure on other U.S. banking regulators, including the new Consumer Financial Protection Bureau, to impose industrywide overdraft rules, said Jeremy Rosenblum, vice chairman of the consumer financial services group at the law firm Ballard Spahr in Philadelphia.

“If you don’t comply by July 1, you are really asking for problems in the examination process,” Rosenblum said. “The guidelines are going to really cut into overdraft revenues.”

Banks and credit unions were set to earn about $38 billion from overdraft fees in 2011, according to a Sept. 15 estimate by Lake Bluff, Illinois-based Moebs Services. About 10 percent of the revenue was expected to come from customers with 10 or more overdrafts per year.

Additional rules imposed by the consumer bureau would hit nationally chartered institutions such as JPMorgan Chase & Co. and Wells Fargo & Co.

The FDIC rules come atop industrywide regulation approved by the Federal Reserve last year requiring banks to obtain customers’ permission to enroll them in overdraft programs. Since the FDIC rules do not apply to nationally chartered banks, FDIC-regulated banks argue the guidance will skew competition. For more, click here.


Levitt, Former Head of the SEC, Calls for Merger of SEC And CFTC

Former U.S. Securities and Exchange Commission Chairman Arthur Levitt says because of “overlap,” the Securities and Exchange Commission and Commodities Futures Trading Commission “should merge immediately.”

Levitt talks with Bloomberg’s Tom Keene and Barry Ritholtz, chief executive officer at Fusion IQ, on Bloomberg Radio’s “Bloomberg Surveillance.”

To hear the interview, click here.

Chilton Says ‘Race to the Bottom’ at Risk in Global Swaps Rules

U.S. and European financial regulators would risk a “race to the bottom” if they proposed different rules governing the $583 trillion global swaps market, said Bart Chilton, commissioner at the U.S. Commodity Futures Trading Commission.

“We shouldn’t open the door for regulatory arbitrage or trading migration to the least or most poorly regulated trading environments,” Chilton said in a speech prepared for delivery yesterday in London at a Goldman Sachs Global Commodity Conference.

Regulators are drafting rules for the derivatives market after largely unregulated transactions helped fuel the 2008 credit crisis. The CFTC and Securities and Exchange Commission are leading U.S. efforts required under the Dodd Frank Act, signed into law by President Barack Obama last July. The law seeks to reduce risk and boost transparency by having most swaps guaranteed by clearinghouses and traded on exchanges or other platforms.

The EU’s focus only on derivatives traded away from exchanges may lead to gaps in regulation in the region compared with the U.S., Gary Gensler, chairman of the CFTC, said in Brussels on March 22. U.S. lawmakers have tasked regulators with determining whether other nations should be recognized as having rules that are “comprehensive and comparable” with those in the U.S., Gensler said.

Differences in trading regulations may lead banks and other market participants to shift where they conduct business, according to a Feb. 18 report from a technical committee of the International Organization of Securities Commissions.

Derivatives, including swaps, are financial contracts tied to a stock, bond, currency or event, such as a company default. The global swaps market was $583 trillion as of last June, according to the Basel-based Bank for International Settlements.

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