Insider Trading, Mortgage Dialogue, Swiss Banks: Compliance

Raj Rajaratnam corrupted friends and employees of his hedge fund to “conquer” Wall Street, a prosecutor told jurors in his summation at the insider-trading trial of the Galleon Group LLC co-founder.

Assistant U.S. Attorney Reed Brodsky told jurors in Manhattan federal court yesterday that Rajaratnam was guilty of more than just insider trading: He was a corrupter of others.

Brodsky said Rajaratnam “corrupted his friends and employees” to “get secret information.” The goal was to get money and “conquer the stock market at the expense of the law,” the prosecutor said.

The prosecutor’s summation, which lasted more than 4 1/2 hours, came in the seventh week of a trial that might send Rajaratnam to prison for 20 years. Rajaratnam, 53, is accused of gaining $63.8 million from tips leaked by corporate insiders and hedge-fund traders about a dozen stocks, including Goldman Sachs Group Inc., Intel Corp., Clearwire Corp. and Akamai Technologies Inc.

“Getting information that others didn’t have was very valuable,” the prosecutor said. “It meant the defendant knew tomorrow’s news today, and it meant big money for the defendant’s fund and for himself.”

As he has throughout the trial, Rajaratnam sat quietly in a second row of defense lawyers, his hands folded, while Brodsky told jurors that government wiretaps of Rajaratnam’s conversations were “devastating evidence of the defendant committing crimes in real time.”

John Dowd, an attorney for the Sri Lankan-born money manager, spent the first hour of his summation urging an acquittal, accusing the government of “smearing” his client. He repeatedly said the U.S. case was “a fiction.”

“The government is trying to make Galleon into something it wasn’t,” Dowd said. “Rajaratnam worked hard for Galleon investors.”

Jurors saw that Rajaratnam was hard-working, that Galleon’s research operation was extensive and that Rajaratnam demanded transparency at meetings where analysts defended investment ideas, Dowd said. The lawyer assailed government witnesses for their “unreliable” testimony and said prosecutors gave several who pleaded guilty a “free pass” in return for their testimony.

The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

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S&P Can’t Be Sued in Frankfurt Over Lehman Ratings, Court Says

Standard & Poor’s Financial Services LLC, a unit of McGraw-Hill Cos., can’t be sued in Frankfurt over its ratings of Lehman Brothers Holdings Inc., a German court ruled.

A German pensioner seeking compensation for 30,000 euros ($43,500) he lost investing in Lehman certificates had his suit turned away yesterday, Frankfurt court spokesman Arne Hasse said in an interview, because the tribunal doesn’t have jurisdiction to decide the case. The suit claimed S&P’s A+ rating for the securities in May 2008 was misleading.

Rating companies have come under fire for their alleged failure to foresee the financial crisis and for granting top rankings to mortgage bonds that fell in value after home-loan defaults. Investors brought cases in Germany after a U.S. court ruled the ratings companies can’t be held liable because their ratings are protected speech.

A different chamber of the Frankfurt court last month sent another case against S&P to a Munich tribunal, saying that court may have jurisdiction because the firm owns a trademark registered with the German trademark office based in that city.

The judges in March rejected a similar suit against Moody’s Corp. saying the New York-based company couldn’t be sued in Frankfurt. That case is now on appeal.

The case is: LG Frankfurt, 2-13 O 111/10.

Compliance Policy

Swiss Lawmakers Asked to Back Plan to Curb Bank Risk-Taking

Switzerland’s government asked lawmakers to approve proposals to limit risk-taking by the country’s biggest banks, UBS AG and Credit Suisse Group AG.

The proposals, largely based on a report commissioned by the government, also take account of comments by Swiss parties, lobbying groups and cantons. Both houses of parliament will debate the bill, which could be passed as early as January.

“If we don’t act, the big banks will continue to engage in very risky activities because they can count on the state assisting them if they incur problems,” Finance Minister Eveline Widmer-Schlumpf told reporters yesterday in the Swiss capital Bern. The measures are “about making Switzerland as a financial center stronger and more secure,” she said.

Swiss rule makers want UBS and Credit Suisse, which each have assets more than twice the size of the Alpine economy, to hoard capital to cut the risk of an Icelandic-style collapse. Swiss central bank President Philipp Hildebrand last month said he remains confident the proposals will be turned into law.

The country’s biggest banks must build additional capital by the end of 2018, meet more stringent liquidity requirements and improve their risk diversification, the government said in an e-mailed statement.

The government has recommended changes to banking laws that would require UBS and smaller rival Credit Suisse to hold capital equal to at least 19 percent of assets, weighted according to risk, by 2019. While the Basel Committee on Banking Supervision has proposed a 10.5 percent requirement for lenders worldwide, that figure doesn’t yet include a surcharge for systemically important banks, which has been incorporated into the Swiss number.

Capital requirements for the largest Swiss banks should first be set at 13 percent until it’s clear what regulators elsewhere demand of their lenders, UBS said last month in a written response to the proposed law. “If Switzerland goes a lot further than other countries that would damage the competitiveness of the financial center,” the Zurich-based bank said in an e-mailed statement yesterday.

Swiss political parties have also criticized the government’s proposals. The proposals, however, follow a government-commissioned report by a panel that included members of the Swiss National Bank, academics and representatives from banks and insurers.

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Obama May Make Contractors Disclose Political Giving

The Obama administration has drafted an executive order that would require government contractors to disclose some of their political donations, White House press secretary Jay Carney said. Carney declined to confirm any specifics about the proposal, saying it “could change over time.”

President Barack Obama “is committed to improving our federal contracting system,” Carney told reporters traveling with the president on Air Force One to California. “His goal is transparency and accountability.”

Politico reported April 19 that the administration is circulating an executive order that would require companies seeking government contracts to disclose contributions they make to groups that air political advertisements. Some of those contributions can now be kept secret, Politico said.

The draft order follows last year’s Supreme Court decision that struck down a federal law banning companies and unions from using money from their general treasuries to support or oppose political candidates. After the ruling, Obama urged Congress to pass legislation requiring additional disclosures to limit the impact of anonymous political spending.

Senate Republican Leader Mitch McConnell yesterday said Obama’s executive order was “outrageous.”

“No White House should be able to review your political party affiliation before deciding if you’re worthy of a government contract,” the Kentucky senator said in a statement.

Craig Holman, a campaign finance lobbyist for Public Citizen in Washington who advocates greater campaign spending disclosures, said the executive order shows a more “active role” being taken by the White House after the high court’s action.

Hedge Funds Resist Dodd-Frank Rules on Disclosure, Registration

Hedge funds and private-equity firms are asking the U.S. Securities and Exchange Commission to back off from demanding a level of disclosure they don’t currently give their own investors.

The regulator is on the verge of asking for wide, routine disclosure of assets and leverage from the funds, as required by last year’s Dodd-Frank Act. Two pending rules -- which could be finalized before July 21 -- would require many funds for the first time to register with the SEC and provide information about their inner workings.

“The burden for advisers will be extraordinary and unprecedented in the private investment funds industry,” said Joanne Medero, a managing director at BlackRock Inc., in a letter to the SEC last week. She said it will “divert advisers’ attention from their primary duty of managing client assets without a sufficiently clear benefit to justify such burdens.”

The Dodd-Frank overhaul gave the SEC new authority over the funds, whose complex investments had previously avoided most government scrutiny. Besides the registration requirement, large fund managers such as Paulson and Co. will also have to provide quarterly disclosures designed to help regulators identify potential systemic risks from the funds.

Hedge fund officials say their trades don’t threaten the financial system and don’t deserve the level of scrutiny suggested in the SEC’s initial proposals for the rules. The systemic-risk disclosures laid out by the regulator call for quarterly filings that include the value of assets the funds say aren’t calculated with any frequency and can be difficult to determine.

“We don’t even provide quarterly reports to our own investors, typically,” said Doug Lowenstein, president of the Washington-based Private Equity Growth Capital Council. “You’re talking about assets that are illiquid, long-term assets.” He called conducting such valuations an “extremely burdensome process” requiring multiple accounting firms.

Senator Carl Levin, the Michigan Democrat who led a two-year congressional investigation into the financial crisis, wrote in a January letter that hedge funds have become so entrenched in the financial markets “that their actions can significantly impact market prices, damage other market participants, and even endanger the U.S. financial system.”

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Compliance Action

Banks Await Payment Terms in Foreclosure Deal as AGs Split

State attorneys general negotiating the settlement of a nationwide foreclosure investigation have yet to approach banks with a proposed dollar amount that would fund principal reductions for borrowers, a state official said.

The states have agreed on some terms while failing so far to reach an accord on monetary payments by lenders, a person familiar with the talks said last week. Eight Republican attorneys general have publicly challenged the concept of principal reductions as part of a 50-state settlement.

Last month, state officials and federal agencies, including the Justice Department, submitted settlement terms to five mortgage servicers, including Bank of America Corp. and JPMorgan Chase & Co. They called for a “substantial portion” of an unspecified monetary amount to go toward a loan modification program.

Virginia Attorney General Kenneth Cuccinelli and six other Republican attorneys general assailed the proposal as overreaching, with four calling principal reduction a “moral hazard.”

“You’re declaring in advance who the winners and losers are,” Georgia Attorney General Sam Olens said in an interview April 19. “I’m a little concerned that this process disengages the normal market forces.”

Oklahoma Attorney General Scott Pruitt is seeking an alternative settlement with banks that respects “the appropriate role of attorneys general,” his office said in a statement yesterday. The settlement could be a model for other states, Pruitt said.

The six-month probe by the states was triggered by claims of faulty foreclosure practices following the housing collapse, which state officials said may violate their laws. Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, a Democrat who leads the investigation, said in an interview that the states haven’t presented a dollar figure to the banks, declining further comment.

Another person familiar with the talks said state negotiators are discussing what form a financial component may take, and that there will be no settlement without a monetary payment. The person, who declined to be identified because the talks are private, said it may take four months to reach a deal.

Bank of America, JPMorgan, Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. are the five companies involved in the talks with the 50 states.

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Justice Department Seeks Data in Nasdaq-NYSE Antitrust Study

The U.S. Justice Department is asking market participants how a takeover of the New York Stock Exchange would affect competition in equity listings, according to a person with direct knowledge of the matter who declined to be named because the conversations are private.

NYSE Euronext agreed to a $9.5 billion merger with Deutsche Boerse AG in February. It’s trying to fend off an unsolicited $11.3 billion bid by Nasdaq OMX Group Inc. and IntercontinentalExchange Inc.

NYSE Euronext rejected the Nasdaq OMX-ICE bid on April 10, saying it wouldn’t create enough long-term value for shareholders even though it was worth approximately 15 percent more than Deutsche Boerse’s February agreement to combine with the company

Antitrust review is emerging as a key test in the battle for the 219-year-old market. Giving Nasdaq control would create a monopoly in listings, a prospect that may create undue risk the takeover will be blocked, according to NYSE CEO Duncan Niederauer.

“A Department of Justice review can be quite significant to a deal given that antitrust regulators have the legal authority to sue to block transactions they deem anticompetitive,” said Gregory Neppl, a Washington-based attorney at Foley & Lardner LLP. “That can force parties to modify the transaction in a material way, abandon it or litigate with the government over the antitrust legality of the transaction.”

Nasdaq OMX may consider selling the NYSE Amex business to allay competition concerns, a person familiar with the matter said April 15. NYSE Amex, home to more than 500 stocks, is one of four main listing venues in the U.S., including the Big Board, which offers all except three companies in the 30-member Dow Jones Industrial Average, the Nasdaq Stock Market, and NYSE Arca, which provides exchange-traded funds.

Scott Cutler, executive vice president and co-head of U.S. listings at NYSE Euronext, said separating the Amex listings business from a combined NYSE-Nasdaq company wouldn’t improve competition in the listings business or give U.S. issuers more choice about where to offer their shares.

“If the concern is antitrust, this does little to resolve that,” he said in an interview on April 17. Most companies that have initial public offerings in the U.S. list on Nasdaq or NYSE, “so you’re not improving issuer choice by not having Amex owned by either of them,” he said.

Christine Varney, head of the Justice Department’s Antitrust Division, said in an April 14 interview in Washington that her unit is reviewing the NYSE Euronext-Deutsche Boerse deal. Regulators focused on competition in Europe are also looking at that deal since it creates a monopoly in fixed-income derivatives trading by combining NYSE Euronext’s Liffe business and Deutsche Boerse’s Eurex futures operation.

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FSA Asks Prudential to Investigate Its Failed Bid for AIA

The Financial Services Authority has told Prudential Plc, the U.K.’s biggest insurer, to hire a law firm to investigate its failed $35.5 billion bid for AIA Group Ltd., two people briefed on the matter said.

The FSA requested the probe to review advice given to Prudential during its attempt to buy American International Group Inc.’s Asian unit last year, said the people, who declined to be named because the talks are private. Credit Suisse AG, JPMorgan Chase & Co. and HSBC Holdings Plc advised London-based Prudential on its bid. Clifford Chance LLP is conducting the review, the people said.

The bid foundered in June after Prudential investors forced the insurer to cut its offer, which AIG rejected. The probe is a Skilled Person report under Section 166 of the Financial Services Act, one of the people said. It can lead to recommended changes in procedure or in some cases enforcement action. Last year, 140 reports were ordered, up from 88 the previous year, according to the FSA’s business plan for 2011.

Spokesmen at Prudential, Credit Suisse, JPMorgan, HSBC, the FSA and Clifford Chance declined to comment on the probe, which was reported earlier today by the Financial Times.

Investors including Schroders Plc called for Prudential’s Chief Executive Officer Tidjane Thiam and Chairman Harvey McGrath to resign after the AIA talks broke down, costing the firm 284 million pounds ($470 million) in fees. Both men have stayed in their positions.

Prudential has risen by almost a third in London trading since the talks ended, as profit at its own Asian division increased. The company raised its dividend 20 percent in March.

Comings and Goings

SEC Names Leiman-Carbia Head of Broker-Dealer Examinations Unit

The U.S. Securities and Exchange Commission named Julius Leiman-Carbia as an associate director to lead the agency’s national broker-dealer examination program, according to a statement on its website.

Leiman-Carbia will oversee a staff of about 300 lawyers, accountants and examiners responsible for the inspections of U.S.-based broker-dealers in the unit, part of the SEC’s Office of Compliance Inspections and Examinations, according to the statement. He succeeds Mary Ann Gadziala, who retired in September, the SEC said.

“Julius is a great addition to the leadership team of the National Exam Program and brings a wealth of technical expertise and broker-dealer industry experience to this role,” OCIE Director Carlo di Florio said in the statement.

Leiman-Carbia, who previously worked at the SEC from 1989 to 1994 as a counsel in what was then the Division of Market Regulation, has served for the past two years as vice president for integrated supply and trading compliance for North America for BP Plc, according to the statement. He has also held legal and compliance leadership positions at Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., the SEC said.

Obama Said to Choose Gallagher as Casey’s Replacement at SEC

President Barack Obama may nominate Daniel M. Gallagher, a former Securities and Exchange Commission official, as one of the watchdog’s five commissioners, said two people familiar with the appointment.

Gallagher, a former SEC deputy director who left the agency last year, would replace Kathleen L. Casey after her five-year term expires in June, said the people, who declined to be identified because the White House hasn’t announced the selection.

Gallagher, 38, oversaw the agency’s response to the 2008 bankruptcy of Lehman Brothers Holdings Inc. and worked on the Credit Rating Agency Reform Act. SEC Chairman Mary Schapiro named Gallagher and James Brigagliano co-acting directors of the agency’s trading and markets division after Erik Sirri stepped down in April 2009.

When Gallagher left the SEC in January 2010 to become a law partner in the Washington office of Wilmer Cutler Pickering Hale & Dorr LLP, Schapiro said he had “served this agency well during a very difficult time in the markets.”

Before joining the SEC, Gallagher was general counsel and senior vice president of Fiserv Securities Inc., a unit of Brookfield, Wisconsin-based Fiserv Inc.

Obama “will nominate someone to fill that role as quickly as possible, but we won’t speculate or comment on possible candidates before the president makes his decision,” said Amy Brundage, a White House spokeswoman.

John Nester, an SEC spokesman, declined to comment. A call to Gallagher yesterday wasn’t immediately returned.

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