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Sheila Bair Leaving FDIC, Nasdaq, NYSE, Portugal: Compliance

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Federal Deposit Insurance Corp. Chairman Sheila Bair will leave her post July 8, a week after the official expiration of her term, the agency announced yesterday.

Bair, whose term officially ends June 30, plans to stay the extra days to finish work on the rule requiring systemically risky firms to outline how they can be unwound in the event of a collapse, a person briefed on the matter said.

The final rule on the so-called living wills is to be voted on during an FDIC board meeting in the first week of July, said the person, who spoke on condition of anonymity because the plan isn’t public.

The FDIC rule will require financial companies with at least $50 billion in assets to provide information on their debt, funding, capital and cash flows. The plan is designed to mitigate some of the risks that exacerbated the credit crisis after Lehman Brothers Holdings Inc. collapsed in 2008.

Companies failing to submit credible plans could be subject to more stringent capital, leverage or liquidity requirements as well as restrictions on their growth, activities or operations, agency officials have said.

Bair said at a Federal Reserve Bank of Chicago meeting May 5 that the Fed and FDIC must be willing to force systemically important financial firms to create “credible and actionable” living wills.

Bair, who is serving as the 19th chairman of the agency, has said she was not interested in renewing her term and intends to write a book and spend time with her family.

President Barack Obama faces several high-level regulatory vacancies this summer, including the chairman of the FDIC and the head of the new Consumer Financial Protection Bureau, which is scheduled to officially start work on July 21.

Compliance Action

Nasdaq Venture Market for Smaller Stocks Gets SEC Approval

Nasdaq OMX Group Inc. can launch a national market for “smaller and emerging” companies that fail to qualify for listing on other exchanges, according to the U.S. Securities and Exchange Commission.

The SEC said on May 6 it cleared Nasdaq OMX’s BX Venture Market for companies de-listed from other exchanges or that fail to meet standards on those venues. The listings are required to be segregated from higher-quality companies on Nasdaq Stock Market, the agency said.

BX Venture Market gives companies “the opportunity to list their securities on an exchange, in an environment that offers the potential of enhanced liquidity, transparency and oversight,” the SEC said. Its “second-tier” securities will face heightened evaluation and surveillance for fraud and manipulative trading activity by the exchange, the agency said.

Approval comes as the number of U.S. initial public offerings has fallen over the last two decades amid criticism that securities markets aren’t as welcoming to smaller companies because of changes to trading rules and financial regulations. From 2001 through last year there were 1,984 IPOs, compared with 6,066 in the previous decade, according to data compiled by Bloomberg. Eighty companies went public in 2009 and 59 in 2008.

Before that, the last time fewer than 100 companies went public in the U.S. was 1984.

“We need experimentation,” said James Angel, a finance professor at Georgetown University in Washington. “We’ve changed the market structure so it’s not as friendly to small-cap companies as it should be. We have to try a lot of different things to see what could work.”

Separately, Nasdaq and IntercontinentalExchange Inc. yesterday urged NYSE Euronext shareholders to demand that their board meet with the two companies before the July 7 vote on a merger with Deutsche Boerse AG.

NYSE Euronext and Frankfurt’s Deutsche Boerse agreed in February to a merger that would create the world’s largest exchange operator. The board rejected the Nasdaq OMX-ICE offer, worth $41.95 a share, saying the unsolicited deal would lead to too much debt and regulatory opposition.

The Nasdaq OMX-ICE proposal would break up NYSE Euronext, with Nasdaq OMX taking the stock and options trading and the listings businesses, while ICE would keep futures markets.

In the letter to shareholders, Nasdaq OMX and ICE cited their higher price per share, cost synergies and a $350 million reverse breakup fee. The companies said the regulatory execution risk that the NYSE Euronext board cited as a reason for their rejection is a “red herring.” Deutsche Boerse approvals will take months after the deal is complete, they wrote.

“NYSE Euronext management is attempting to divert attention from its own challenging regulatory approvals by rushing you through the stockholder approval process,” Nasdaq OMX and ICE wrote.

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U.S. Treasury Creates Committee to Advise on Insurance Issues

The U.S. Treasury Department said it will create a panel to advise regulators on insurance issues after the industry complained it wasn’t getting enough input on the Financial Stability Oversight Council.

The Federal Advisory Committee on Insurance will advise the Treasury Department and the director of the new Federal Insurance Office, the Treasury said in a statement yesterday.

Industry groups, including the Property Casualty Insurers Association of America, have said insurance companies need greater representation on the oversight council, a group of regulators created to prevent another financial crisis.

Portugal Probes Rating Companies Following Academics’ Complaint

Portugal’s Attorney General’s Office opened an investigation of credit-rating companies following a complaint by four professors who said the companies’ rating actions helped provoke the country’s financial crisis.

The investigation of Moody’s Investors Service, Standard & Poor’s Corp. and Fitch Ratings is in an initial phase, the Attorney General’s Office said yesterday in an e-mailed statement.

The complaint was filed by current and retired professors including Jose Reis, an economist at Coimbra University, and Jose Manuel Pureza, a Coimbra University professor who is also a member of parliament with the Left Bloc party.

Ferrostaal Internal Probe Finds 8.8 Million Euros in Bribes Paid

A Ferrostaal AG internal investigation found 8.8 million euros ($12.7 million) in bribes were paid to win business, less than what government prosecutors investigating corruption at the company have claimed.

The company probe also found another 81 million euros for which no clear purpose could be established, Maria Lahaye-Geusen, a company spokeswoman, said in an interview yesterday. There wasn’t enough evidence to indicate that money was also used to bribe potential customers to win orders, she said.

The findings contrast with charges Munich prosecutors brought last month against a management-board member and a former manager at the Essen, Germany-based company, claiming they paid more than 62 million euros in bribes from 2000 through 2007 to win submarine orders from Greece and Portugal. The prosecutors have asked a court to make Ferrostaal a party in the case, which would allow the seizure of profits from the sales.

Handelsblatt reported Ferrostaal’s findings early in the day yesterday. Lahaye-Geusen declined to comment on the portion of the report that said the company paid 77 million to lawyers and auditors for the internal probe.


Rajaratnam Jury Asks to Hear More Wiretapped Conversations

Jurors in the insider-trading trial of Galleon Group LLC co-founder Raj Rajaratnam, began their third week of deliberations yesterday, listening to a dozen wiretapped conversations.

Jurors asked to hear recordings of phone conversations between Rajaratnam and Rajiv Goel, a former Intel Corp. executive, as well as one between Rajaratnam and his brother, Rengan Rajaratnam. The conversations primarily concerned an investment by Intel in a wireless network company to be formed by Clearwire Corp. and Sprint Nextel Corp. and the planned acquisition of PeopleSupport Inc. by Essar Group, an Indian company.

Rajaratnam, 53, is on trial as part of the largest crackdown on hedge-fund insider trading in U.S. history. Prosecutors said he gained $63.8 million from tips leaked by corporate insiders and hedge-fund traders about stocks including Goldman Sachs Group Inc., Intel and Clearwire.

Rajaratnam defended himself at trial claiming his trades were the result of Galleon research, not illegal tips.

During the trial, Goel testified that he passed inside information about Intel’s planned investment in the Clearwire venture to Rajaratnam, who made about $579,000 in profit from the information, according to prosecutors. Goel, a former friend of Rajaratnam, pleaded guilty and testified as a prosecution witness.

Goel also testified that Rajaratnam made trades in Goel’s investment account based on inside information about the PeopleSuppport acquisition.

On May 4, U.S. District Judge Richard Holwell replaced Juror 2, saying she was forced to withdraw from the panel for medical reasons that weren’t disclosed publicly. Holwell told the panel to restart deliberations with the new juror.

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

Ex-Langbar CEO Should Have Known of Fraud, U.K Prosecutor Says

Geoffrey Pearson, the former chief executive officer of a Bermuda-based investment company at the center of a fraud scandal, made false statements to induce investors to buy worthless shares, a prosecutor told a London jury yesterday.

Pearson, 63, has pleaded not guilty to 13 counts of making misleading statements to the financial markets between June and October 2005 while he was CEO of Langbar International Ltd.

The company was set up in Bermuda in June 2003 and began trading on London’s Alternative Investment Market later that year. Shortly after starting business, Langbar said it had won South American contracts which it sold for a profit of around $350 million. Those contracts were a fiction, as was the money, Prosecutor Jonathan Caplan told the jury yesterday.

Pearson was appointed CEO of the company, formerly known as Crown Corp., in June 2005. By October of that year, trading in the company’s shares was suspended. Lawyers for Pearson will present his defense later in the trial of the case brought by the Serious Fraud Office, the U.K. agency responsible for prosecuting white-collar crime.

While Pearson isn’t accused of setting up the fraud, he should have found out about it and stopped authorizing statements to the market, Caplan said.

U.K. Charges Former Torex Retail Chairman Over 2007 Collapse

The former chairman of Torex Retail Plc was charged in connection with the collapse of the company, the U.K.’s Serious Fraud Office said.

Christopher Edward Moore was charged with conspiracy to defraud and false accounting, the agency, which prosecutes white-collar crime, said in a statement. The U.K. prosecutor last week also charged three former directors of the company in connection with the collapse.

Torex Retail’s shares were suspended from trading in London in January 2007 after the SFO started its investigation. The probe was followed by overhauls of the company’s management and it went into administration later that year. Its assets were bought by New York-based private equity group Cerberus Capital Management for 204.4 million pounds ($293 million).

Moore’s lawyer, Peter Burrell at Herbert Smith LLP, declined to comment.

Comings and Goings

Former SEC Counsel Rejoins Law Firm; Madoff Scrutiny Continues

David Becker, the former U.S. Securities and Exchange Commission general counsel who has been sued over inherited profits from a Bernard Madoff account, has rejoined the law firm where he worked before taking the SEC post.

Becker, 63, returned to Cleary Gottlieb Steen & Hamilton LLP to focus on securities enforcement, corporate governance, internal investigations and financial regulation, the firm said yesterday in a statement. Becker, who will be based in Washington, left the SEC in February after two years in the position.

Irving H. Picard, the bankruptcy court trustee unwinding Madoff’s business, sued Becker a week after he announced his plans to leave the agency. The suit demands that Becker and his brothers return $1.5 million in what Picard called fictitious profits from liquidating their mother’s account three years before the Ponzi scheme unraveled.

Becker, who returned to the SEC two months after Madoff was arrested in December 2008, has said the SEC’s ethics office cleared his involvement with the case and has said his departure was unrelated to the Picard lawsuit.

Congressional lawmakers and SEC Inspector General H. David Kotz have begun investigations into why Becker was permitted to work on Madoff matters at the SEC even though he had personal ties to the case.

Madoff pleaded guilty in 2009 to charges related to his decades-long Ponzi scheme and is serving a 150-year sentence in federal prison.

Speeches, Interviews and Reports

Bank Bail-in Bonds May Avert ‘Systemic Trauma,’ IIF Says

Bank bail-in bonds could help avoid the “systemic trauma” caused by the disorderly failure of large financial firms, the Institute of International Finance lobby group said.

Rules for bail-in securities would force bond investors in failing banks to take losses so governments aren’t forced to tap taxpayer funds for bailouts. National regulators should agree to consistent rules on how to resolve failing banks, the IIF wrote in a report published yesterday. The group represents more than 400 financial firms from Citigroup Inc. to Credit Suisse Group AG.

“The general objectives of bail-in arrangements should be to create conditions where any financial firm may be restructured in an orderly failure in the event it is no longer able to meet its obligations,” Credit Suisse Chairman Urs Rohner said at a press conference in London yesterday.

Bail-in legislation would create a form of Chapter 11 process for banks that would allow firms to gain time in a restructuring by swapping debt for equity, said Gerry Cross, the IIF’s deputy director of regulation. Bail-in laws would allow regulators to make banks convert bond liabilities into equity, which they don’t have to repay to investors, he said.

“Bail-in can forestall precipitous loss of value and systemic shock by recapitalizing the firm and allowing it to be restructured,” the IIF said in its report. “The objective of any resolution tools should not be the survival of a failing firm per se, but rather allowing firms to fail in an orderly way without any cost to taxpayers.”

Bail-in legislation needs to be coordinated internationally because impairing the rights of bond investors raises different legal questions across jurisdictions, the IIF wrote in the report. National regulators should agree to consistent rules on how to resolve failing banks, the lobby group said.

The U.K.’s Independent Commission on Banking recommended in April that the country’s biggest banks implement plans for an orderly bankruptcy and erect fire breaks around their consumer units in what it termed “moderate” proposals.

SNB’s Hildebrand Says World Financial System Needs Improvements

Regulators’ efforts to make the global financial system more resilient against future crises require “improvements” rather than “revolutionary changes,” according to Swiss central bank President Philipp Hildebrand.

“The current system, despite many imperfections, also has good features,” Hildebrand said at a conference in Zurich today. It “can be strengthened while preserving its core features. If progress is slow, it is because even small changes typically require difficult political decisions.”

Governments and regulators around the world are seeking to ensure that banks won’t turn to taxpayers for support during future financial crises. Lenders from UBS AG to Commerzbank AG had strengthened their balance sheets with government support, and the Group of 20 nations has said that banks considered too-big-to-fail should face stiffer capital requirements.

“A thorough reassessment and reform of the system have become a priority among policy makers,” Hildebrand said.

Germany-Based U.S. Companies Advocate Euro-Debt Restructuring

A third of U.S. companies with operations in Germany favor a restructuring of over-indebted euro countries’ debt, a poll by the American Chamber of Commerce in Germany and the Boston Consulting Group showed.

Eighteen percent of companies rejected such a measure, according to the survey of 107 U.S. businesses polled at the start of the year.

European debt woes are one of three big challenges faced by Germany-based U.S. businesses, which have emerged from the economic and financial crisis faster than they expected and are seeking to expand sales, marketing, research and production operations in Europe’s biggest economy, according to the poll.

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