Mortgage Servicers Settle, Insider Trading, FDIC: Compliance

The 14 largest U.S. mortgage servicers must pay back homeowners for losses from foreclosures or loans that were mishandled in the wake of the housing collapse, according to consent decrees released yesterday.

The banks, including JPMorgan Chase & Co. and Wells Fargo & Co., agreed in the settlement to conduct a review of all loans that went into foreclosure in 2009 and 2010. They also agreed to improve their foreclosure, loan modification and refinancing procedures by hiring staff, upgrading document-tracking systems, assigning a single point of contact for each borrower and policing lawyers and vendors.

The companies also agreed to end the practice of dual-track foreclosures, in which servicers seize the homes of delinquent borrowers even while negotiating lower mortgage payments.

While the settlements didn’t include any fines, regulators say they will be imposed at a later date.

“There will be civil money penalties,” acting Comptroller of the Currency John Walsh told reporters in a conference call. “The issue is time and amount.”

The agreements could also help the U.S. Justice Department, which, along with several state attorneys general, is negotiating a global settlement with the largest mortgage servicers. According to Associate Attorney General Tom Perrelli who is leading the efforts, the parties met yesterday to discuss potential fines. Also at issue is whether servicers should be required to reduce the amount owed on some home loans.

“This has been a very broad interagency effort,” Perrilli told reporters. “The best possible resolution for consumers, for all government entities, is a fully coordinated resolution.” Yesterday’s consent decrees address only a “subset” of issues with mortgage servicers, Perrelli said.

Compliance Action

FrontPoint Partners’ Skowron Charged With Securities Fraud

FrontPoint Partners LLC portfolio manager Joseph “Chip” Skowron was charged with conspiracy and securities fraud as part of a U.S. crackdown on so-called expert networkers.

Skowron, 41, of Greenwich, Connecticut, surrendered yesterday to agents at the Federal Bureau of Investigation’s New York office, said James Margolin, an FBI spokesman. Information Skowron obtained from an insider about hepatitis C drug trials enabled his fund to avoid more than $30 million in losses, prosecutors said.

Skowron is linked to the case brought in November by U.S. Attorney Preet Bharara in Manhattan and the U.S. Securities and Exchange Commission against Dr. Yves Benhamou, an expert in hepatitis drugs and a former adviser for Human Genome Sciences Inc., prosecutors said.

Benhamou acted as a paid consultant to hedge funds while working as an adviser to HGSI and serving on its steering committee for Albuferon trials, the U.S. said.

The U.S. alleged that Benhamou shared inside information with an unidentified co-conspirator at a hedge fund. The U.S. yesterday identified Skowron and FrontPoint as the recipients of Benhamou’s tips, court papers said. Skowron provided benefits to Benhamou, including paying him more than $14,600 in cash as well as other gratuities such as hotel rooms and expenses, the U.S. said.

The SEC yesterday separately accused Skowron of insider trading. Six hedge funds previously named as defendants in the case agreed to settle and pay more than $33 million in disgorgement and interest, without admitting or denying wrongdoing, the SEC said.

Benhamou, of Neuilly-sur-Seine, France, pleaded guilty April 11 before U.S. District Judge George Daniels in New York, said Ellen Davis, a spokeswoman for Bharara’s office. He has agreed to cooperate with prosecutors, according to a plea agreement unsealed yesterday. He was originally arrested and charged by Bharara’s office with insider trading on Nov. 2.

Benhamou pleaded guilty to four counts, including conspiracy, securities fraud, conspiracy to obstruct justice and making false statements to the FBI during their investigation of the expert-networking scheme. Securities fraud carries a term of as long as 20 years in prison.

The case is U.S. v. Skowron, 11-MAG-997, U.S. District Court, Southern District of New York (Manhattan).

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FDIC Settles Dispute Over Executive Documents From Failed Banks

The Federal Deposit Insurance Corp. settled a lawsuit filed by a law firm representing former executives at four failed banks over bank files. The executives said they need access to the documents to defend against possible fraud claims.

A federal court in Atlanta on April 12 dismissed McKenna Long & Aldridge LLP’s lawsuit against the FDIC after both parties requested the case be closed. McKenna Long sued in November after the FDIC demanded the law firm return records it received from its clients before the banks collapsed.

“I think the FDIC understands it is reasonable for bank officers and directors to have some access to documents,” said David L. Balser of McKenna Long in Atlanta. He declined to say in an interview how the suit was resolved.

The FDIC has a pending complaint against Bryan Cave LLP, alleging the St. Louis-based law firm broke federal privacy laws and Kansas trade secret laws by acquiring bank files while representing executives at Hillcrest Bank in Overland Park, Kansas. A federal judge in Atlanta is considering whether to end the case without a trial.

The FDIC said the records sent to Bryan Cave’s Atlanta office included customer information, as well as financial statements, business plans, and “confidential information relating to the FDIC’s regulatory activities,” according to court papers.

FDIC spokesman David Barr declined to comment on the matter.

The cases are McKenna Long & Aldridge LLP v. FDIC, 10-cv-3779, U.S. District Court, Northern District of Georgia (Atlanta) and FDIC v. Bryan Cave LLP, 10-cv-03666, Northern District of Georgia (Atlanta).

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Compliance Policy

Insurers Fight AIG Stigma in Bid to Avoid Fed Risk Oversight

Insurance companies are fighting the legacy of American International Group Inc. as they seek to avoid being branded systemically risky and the extra supervision that comes with that designation.

Lobbyists representing Prudential Financial Inc., Northbrook, Illinois-based Allstate Corp. and Berkshire Hathaway Inc.’s Geico Corp. say the business model for insurers has little in common with the high-risk derivatives and securities-lending operations that might have destroyed AIG if it weren’t for a $182 billion taxpayer-funded bailout.

Their position may clash with the views of the Financial Stability Oversight Council, a group of regulators charged with preventing another financial crisis. The council’s staff suggested in a draft report in February that some insurers may warrant tougher oversight by the Federal Reserve because their failure could pose a threat to the financial system.

“AIG stood alone, quite unique, relative to other insurance companies,” John Nadel, an analyst with Atlanta-based securities firm Sterne, Agee & Leach Inc., said in an interview. “I don’t think there’s a regulatory body in Washington that truly understands the unique elements, the arcane and esoteric elements of the insurance industry.”

MetLife Inc. will automatically be subject to increased supervision because it is a bank holding company with more than $50 billion in assets. “Enhanced standards” will be applied to its risk-based capital, liquidity, leverage, wind-down plan and concentration limits, the New York-based company said in its annual report in February.

Representatives from the Property Casualty Insurers Association of America have met with officials from the Fed, Treasury, Federal Deposit Insurance Corp. and other agencies in an effort to convince regulators that insurers shouldn’t be treated like banks and pose no threat to financial stability, said David Sampson, the group’s chief executive officer.

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Companies Can Argue Systemic-Risk Designation, Treasury Says

Financial companies under consideration for Federal Reserve oversight will get a chance to convince a council of regulators they don’t warrant the extra supervision, a U.S. Treasury Department official said.

“A company under consideration will have the opportunity to submit written materials to the council on whether, in the company’s view, it meets the standard for designation” as systemically risky, Jeffrey Goldstein, undersecretary for domestic finance, said in testimony prepared for a congressional hearing today. The council’s decisions will ultimately be subject to review by a judge, he said.

The Financial Stability Oversight Council, a group of regulators charged with preventing a financial crisis, will evaluate information submitted by the company before voting on whether to subject it to heightened scrutiny, Goldstein said. His prepared testimony before a House Financial Services Committee panel was obtained by Bloomberg News.

U.S. bank-holding companies with more than $50 billion in assets -- including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. -- will automatically have increased supervision. Fed Chairman Ben S. Bernanke, a council member, said last month that regulators hope to start designating some non-bank financial companies by midyear.

Treasury Secretary Timothy F. Geithner is chairman of the council, which also includes the chairmen of the Securities and Exchange Commission, the Federal Deposit Insurance Corp. and the Commodity Futures Trading Commission.

Treasury Needs Better Review of TARP Legal Bills, Watchdog Says

The U.S. Treasury risks paying too much in legal fees related to bailouts because it isn’t adequately reviewing bills from law firms, a government watchdog said.

The Treasury office managing the Troubled Asset Relief Program needs to “improve controls over the review and payment of legal fee bills,” according to a report from the Office of the Special Inspector General for TARP. “Current contracts and fee-bill review practices create an unacceptable risk that Treasury, and therefore the American taxpayer, is overpaying for legal services.”

The special inspector general’s office, or SIGTARP, said it “found weaknesses” in the Treasury’s contract with law firm Venable LLP. The contract didn’t include sufficient detail on how Venable should prepare bills or how to describe tasks within each bill.

The Treasury “has already taken steps” to implement recommendations SIGTARP made to improve the review and payment of legal fees, Timothy Massad, acting assistant secretary for financial stability, said in a letter released with the report. The department “has implemented strong and effective processes in regard to all its contracts, including those for legal services,” he wrote.

“Venable fully cooperated with SIGTARP’s review,” the law firm said in an e-mailed statement yesterday. “We have not had the opportunity to read the full report. However, we are confident that Treasury received fair value for the services that we provided.”

The special inspector general’s office said it analyzed contracts with five law firms that had received $27 million in legal fees from the Treasury as of the end of last year.

Higher Energy Taxes, New CO2 Levy Sought by EU Regulators

European Union regulators proposed to raise EU taxes on fuels including diesel and to introduce an emissions levy on industries that are spared carbon-dioxide caps, setting up a potential clash with national governments.

The draft law by the European Commission, the 27-nation EU’s regulatory arm, aims to spur energy savings and the development of low-emission technologies as part of the fight against climate change by taxing all fuels in the same way. The legislation needs the backing of all EU national governments, any one of which has veto power.

Current European law sets minimum tax rates for mineral oils, coal, natural gas and electricity to prevent distortions of competition between EU countries rather than to promote environmental goals. Separate EU legislation caps CO2 from power plants and factories by requiring them to have a permit for each metric ton they emit and forcing those that discharge more than their quotas to buy extra allowances.

“Our common goal is a more resource-efficient, greener and more competitive economy,” EU Taxation Commissioner Algirdas Semeta said yesterday in Brussels. The proposed emissions tax would apply to households and such industries as road transport and agriculture, which would also remain subject to the existing fuel levies.

The commission under President Jose Barroso is using the battle against global warming to venture into the politically sensitive area of taxation as the EU tries to contain a debt crisis that over the past year has forced Greece, Ireland and Portugal to request emergency aid.

Countries including the U.K. have traditionally opposed EU powers over taxation, saying this is a matter for national authorities and defending low rates. Opposition may also come from cash-strapped euro nations whose economic outlook has been clouded by the European Central Bank’s decision last week to raise interest rates for the first time in almost three years.

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Visa Loses EU Court Appeal Over Fine for Barring Morgan Stanley

Visa Inc., the world’s biggest electronic-payments network, and Visa Europe Ltd. lost an appeal of a 10.2 million-euro ($14.8 million) European Union fine for blocking competition.

The EU General Court, the 27-nation region’s second-highest tribunal, today upheld the fine for blocking Morgan Stanley from offering card services, rejecting all arguments by Visa.

The European Commission, the EU’s antitrust regulator, fined Visa in October 2007 for barring Morgan Stanley from its system because the securities firm owned the competing Discover card in the U.S.

While Visa had settled the dispute with Morgan Stanley in 2006, the commission continued its probe. It said the fine was justified because Visa blocked Morgan Stanley for two years after getting a formal EU charge sheet in 2004.

Visa Europe split from Visa Inc. before the U.S. card company’s initial public offering in early 2008. Visa Europe said it was “disappointed” with the decision and the finding that competition law had been infringed.

“The dispute with Morgan Stanley which led to the case was settled nearly five years ago -- in 2006 -- and the complaint was withdrawn at the time, although the commission continued with the case, which has ultimately led to today’s outcome,” the company said in an e-mailed statement.

The case is T-461/07, Visa Europe and Visa International Service v. European Commission.

New Lawsuits

American Sues Travelport, Orbitz as Ticket Dispute Expands

American Airlines sued Travelport Ltd. to stop what it called anticompetitive behavior and retaliation against the carrier for a push to use its own technology to distribute fares and schedules to travel agents.

The legal action expands a dispute between AMR Corp.’s American and global distribution systems that compile fare and schedule data from various airlines and distribute them to travel agents. American wants to bypass those companies, including units of Travelport and Sabre Holdings Corp., and substitute its proprietary technology.

“Travelport, Orbitz and other industry participants have undertaken attacks against American that have been swift and punitive,” said the lawsuit, which was filed April 12 in federal court in Fort Worth, Texas.

The lawsuit against Travelport and its Orbitz Worldwide Inc. affiliate seeks triple the airline’s actual damages as well as punitive damages to be determined at trial. More than $2.7 billion in sales were booked through Travelport’s global distribution systems in the past year, the lawsuit said. American had $16.8 billion in passenger revenue in 2010.

American said on April 4 it reached a tentative agreement with Expedia Inc. that would allow the online travel agency and its Hotwire unit immediately to resume selling the airline’s tickets, resolving a dispute that started in December. American remains in talks with Sabre after the two earlier agreed to freeze a lawsuit over the matter.

American’s Direct Connect system would limit consumer choices and ability to compare fares among carriers, Chicago-based Orbitz said in a statement, which called the claims “baseless.”

Travelport, which sued American Airlines in November to block the carrier from terminating Orbitz’s ability to sell tickets on the airline’s flights, said it would vigorously defend the suit.

The case is American Airlines Inc. v. Travelport Ltd., Travelport LP and Orbitz Worldwide LLC, 4-11-cv-00244-Y, Northern District of Texas (Fort Worth).


CFTC Needs New Division for Dodd-Frank Rules, O’Malia Says

The Commodity Futures Trading Commission needs a new division to analyze and collect data under mandates from the Dodd-Frank financial overhaul passed last year, Commissioner Scott O’Malia said.

“I have a plan to reorganize the commission to make it ready to adapt to the Dodd-Frank responsibilities,” O’Malia said at a Futures Industry Association conference in New York. The Division of Market Data Collection and Analysis would include developing algorithms “to keep pace” with computer-based trading in futures markets, he said.

The CFTC and the Securities and Exchange Commission are writing rules for the $583 trillion over-the-counter derivatives market after it contributed to the financial crisis. The new regulations mandate that most interest-rate, credit-default and other swaps be processed by a clearinghouse and traded on exchanges or similar systems. Data on every swap traded, whether cleared or not, must be reported to the CFTC.

The commission is too reliant on exchanges it regulates such as Chicago-based CME Group Inc. for data showing market activity, O’Malia said.

“This is unacceptable. We have to develop our own analytical capabilities,” he said. “Data is a very dry topic, but it is the foundation” of what the CFTC does to police derivatives markets, he said.

The four other commissioners have received his re-organization idea “pretty well,” O’Malia said. The expansion wouldn’t mean the hiring of hundreds of new employees and would try to unify different parts of the commission such as enforcement and market surveillance, he said.

“This has to happen nearly immediately,” he said.

The commission may create a swaps division as well, though O’Malia said he had some concerns about that.

“Futures clearing and swaps clearing should be together” and not separated in different parts of the commission, he said.

EU Laws Shouldn’t Force High-Frequency Trade Slowdown, FSA Says

An overhaul of regulations by European Union lawmakers shouldn’t force high-frequency traders to slow down, the U.K.’s Financial Services Authority said.

The FSA “does not believe that the case has been made to require orders to rest on the book for a minimum period of time,” David Lawton, the FSA’s director for market infrastructure, said in a speech in London yesterday, referring to how long an offer to buy or sell must be maintained before it can be retracted.

The European Commission, the EU’s executive arm, is reviewing the Markets in Financial Instruments Directive, or Mifid, following the worst financial crisis since the Great Depression. The commission will present final proposals to regulate securities trading as soon as July for discussion by the European Parliament and the 27 member states.

“The existing evidence is inconclusive about the wider impact of high-frequency trading on market efficiency,” Lawton said.

High-frequency trading is used in strategies from electronic market making to statistical arbitrage and proprietary algorithms where how fast a trade is executed may be critical to profitability.

The commission in December sought views on plans to regulate high-frequency traders. The proposals may include limits on the number of orders traders can place, as well as requiring them to tell regulators how their computer algorithms work.

“There is a clear need to understand better the impact of trends in automated trading as the basis for forming any policy,” Lawton said.

Dodd-Frank Swaps Rules Help the ‘Real Economy,’ Gensler Says

Regulation of the $583 trillion over-the-counter derivatives market will “bring tangible benefits to the real economy,” Gary Gensler, chairman of the Commodity Futures Trading Commission, said yesterday in New York.

“It is essential that we have comprehensive oversight of these markets to protect and benefit both end-users of derivatives and the broader American public,” Gensler said at a conference sponsored by the Levy Economics Institute of Bard College.

The Dodd-Frank Act, approved last July, directs the CFTC and the Securities and Exchange Commission to write rules governing the derivatives market. The law was meant to reduce risk and increase transparency after unregulated swaps trading exacerbated the 2008 financial crisis.

The agency is tasked with setting margin requirements to secure trades against default, impose restrictions on the number of contracts a single firm can hold in commodities such as wheat and oil, and increase transparency by ordering that most standardized trades be guaranteed by clearinghouses and traded on exchanges or swap-execution facilities.

“Derivatives markets and effective oversight of those markets matters to corporations, farmers, homeowners and small businesses,” Gensler said. “The recent increases in commodity prices highlight the need for effective oversight that promotes fair and orderly derivatives markets.”

Gensler has said the commission will finish some rules after the mid-July deadlines required under Dodd-Frank.

Derivatives, including swaps, are financial contracts tied to commodities, stocks, bonds, interest rates or events, such as the default of a company.

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