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Debit Fees, Privacy Breaches, Insider Trading: Compliance

A Federal Reserve rule capping debit-card “swipe” fees set by Visa Inc. and MasterCard Inc. would be delayed at least six months under a plan being crafted in the U.S. Senate, said two people with direct knowledge of the talks.

Senators Jon Tester, a Montana Democrat, and Bob Corker, a Tennessee Republican, who earlier pushed for a two-year postponement, are among lawmakers said to be working on a compromise that would let regulators study the issue before determining whether to write new rules. The caps, mandated by the Dodd-Frank Act, are set to take effect July 21.

The Fed would get more months if the study shows the current proposal would hurt consumers or fail to exempt banks with less than $10 billion in assets, said the people, who declined to be identified because a deal hasn’t been reached. In December, the Fed proposed capping the swipe fees, or interchange, at 12 cents a transaction, replacing a formula that averages 1.14 percent of the purchase price.

“For several months, Senator Tester and Senator Corker have been working with colleagues on a bill to prevent consumers and rural banks from experiencing serious harm as a result of the interchange amendment,” Andrea Helling, Tester’s spokeswoman, said in an e-mail. “The conversations continue to progress, and we feel confident that in the next 24 hours we will have a bill that can become law.”

David Skidmore, a Fed spokesman, didn’t return phone and e-mail messages.

Compliance Policy

U.S. Regulators Extend Comment Deadline on Risk-Retention Rule

U.S. regulators extended the comment period for Dodd-Frank Act risk-retention rules that could make it more difficult or expensive for borrowers to get mortgages.

The Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp., Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development announced the extension in a statement yesterday. The comment period, which was to end June 10, was extended to Aug. 1.

Dodd-Frank, the regulatory overhaul enacted last year, requires lenders and bond issuers to keep a 5 percent stake in loans they bundle for sale to investors. Forcing the industry to share potential losses was meant to rein in risky lending and avoid mistakes that led to a flood of subprime mortgages, which helped trigger the 2008 financial collapse.

The law requires regulators to exempt home loans that are deemed safe, including those with fixed interest rates and long repayment terms.

Concealing a Data Breach Would Be a Crime Under Leahy Bill

U.S. Senator Patrick Leahy introduced legislation that seeks to enhance protections for consumers’ personal information, citing recent data breaches at Sony Corp. and Lockheed Martin Corp.

The bill would establish a national standard for companies to notify customers when their personal data has been exposed, according to a news release yesterday from Leahy, a Vermont Democrat who chairs the Senate Judiciary Committee. The measure also proposes criminal penalties for those who conceal data breaches that cause “economic damage” to consumers.

“The many recent and troubling data breaches in the private sector and in our government are clear evidence that developing a comprehensive national strategy to protect data privacy and security is one of the most challenging and important issues facing our country,” Leahy said in a statement.

The bill is co-sponsored by two other Democrats, Senators Charles Schumer of New York and Ben Cardin of Maryland. Leahy introduced similar cybersecurity measures in 2005, 2007 and 2009 that failed to advance in the Senate.

A recent flurry of security breaches at large companies has sharpened U.S. government scrutiny of how businesses safeguard consumer information and notify the public about cyber attacks.

Sony, targeted since April by hacker attacks that have compromised more than 100 million customer accounts, said yesterday it is investigating two new possible intrusions.

Compliance Action

Ex-SAC Capital Manager Testifies about Trades, Drugs at Trial

A former hedge-fund portfolio manager told a federal jury in New York yesterday that he was involved in at least 18 incidents of insider trading while working at Sonar Capital and later at SAC Capital Advisors LLP.

Noah Freeman, who pleaded guilty to securities fraud, is the first of three cooperating witnesses who the U.S. said will testify against Winifred Jiau, 43, a former Primary Global Research LLC consultant charged with conspiracy and securities fraud.

She is the first of the so-called expert networkers to go on trial as part of a U.S. crackdown on insider trading at hedge funds. She faces as long as 25 years in prison if convicted.

David Luttinger, a lawyer for Jiau, asked Freeman how many times he engaged in insider trading at Sonar Capital.

“Approximately a dozen where I’m totally confident the information was material and nonpublic,” Freeman said.

Luttinger also questioned Freeman about drug use. Freeman, a Harvard University graduate, testified that on a business trip he ingested a hallucinogenic mushroom that resulted in his wandering around the streets of San Francisco in his underwear.

Jonathan Gasthalter, a spokesman for SAC Capital, said in an e-mailed statement, “Freeman’s testimony confirms what we said initially: his outrageous actions required active circumvention of our compliance policies and systems.”

The case is U.S. v. Jiau, 11-cr-00161, U.S. District Court, Southern District of New York (Manhattan).

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Ex-Credit Suisse Broker Tzolov Ends Up With Four-Year Sentence

Julian Tzolov, a former Credit Suisse Group AG broker who fled prosecution before pleading guilty to securities fraud, was sentenced to four years in prison after initially getting a five-year term earlier in the day.

Tzolov, 38, was sentenced yesterday by U.S. District Judge Jack B. Weinstein in Brooklyn, New York. He was accused of fraudulently selling securities that cost corporate clients more than $1.1 billion.

The judge cut the original five-year term after recalculating the penalty for bail jumping, according to Benjamin Brafman, a lawyer for Tzolov, and Robert Nardoza, a spokesman for the U.S. Attorney’s Office.

Tzolov, a native of Bulgaria, returned to New York from Spain in July 2009 after fleeing for three months. Tzolov pleaded guilty when he returned to the U.S. and has been in custody since. He testified as a prosecution witness against Eric Butler, his former partner.

The jury found Butler guilty in August 2009. Weinstein sentenced Butler, 39, in January 2010 to five years in prison. Butler is free on bail while he appeals his conviction.

Weinstein sentenced Tzolov to 2 1/2 years for securities fraud, two conspiracy counts and seven wire-fraud counts. He added another 1 1/2 years, to run consecutively, for bail jumping. He granted probation for a count of immigration fraud.

In pleading guilty, Tzolov said he and Butler intentionally misled clients about securities purchased on their behalf, falsely claiming they were backed by federally guaranteed student loans. The men told clients the investments, actually backed by riskier corporate debt and subprime mortgages, were a safe alternative to bank deposits or money-market funds, said prosecutors in the office of U.S. Attorney Loretta Lynch in Brooklyn.

The cases are U.S. v. Tzolov, 08-cr-370, 09-cr-475 and 10-cr-83, U.S. District Court, Eastern District of New York (Brooklyn).

Ex-Primary Global Networker Chu Pleads Guilty in Insider Case

Former Primary Global Research LLC consultant Don Ching Trang Chu pleaded guilty and admitted helping employees of public companies pass confidential information to the expert networking firm’s hedge fund clients.

Chu, 57, pleaded guilty to conspiracy to commit securities fraud and conspiracy to commit wire fraud in a hearing yesterday before U.S. District Judge Jed Rakoff in New York.

Chu worked as the Taiwan liaison for Mountain View, California-based Primary Global before he was arrested in November. He told Rakoff that inside information was shared with former SAC Capital Advisors LP portfolio manager Noah Freeman and Sam Barai, founder of Barai Capital Management LP.

Barai and Freeman both have pleaded guilty.

Chu was accused in connection with one of three alleged overlapping insider-trading rings that included Galleon Group LLC co-founder Raj Rajaratnam. Prosecutors said Chu facilitated a conversation in July 2009 between Richard Choo-Beng Lee, a former partner at San Jose, California-based Spherix Capital LLC, a Primary Global client, and an unidentified employee of a publicly traded technology company.

Lee pleaded guilty and is cooperating with the government along with his partner, Ali Far.

Chu signed an agreement with prosecutors yesterday that requires him to cooperate with their investigation, according to the judge.

The government and Chu’s lawyer, James DeVita, agreed that federal guidelines call for Chu to get as much as six months in prison. Rakoff, who may disregard the guidelines, told Chu he faces as long as 25 years in prison when he’s sentenced Sept. 7.

The case is U.S. v. Chu, 1:11-cr-00032, U.S. District Court, Southern District of New York (Manhattan).


JPMorgan Sued by Syncora Over Bear Stearns Mortgages Deal

J.P. Morgan Securities LLC, formerly Bear, Stearns & Co., was accused in a lawsuit by Syncora Guarantee Inc. of making false and misleading statements about loans pooled into a 2007 mortgage-backed securities transaction.

The transaction, known as GreenPoint Mortgage Funding Trust 2007-HE1 and insured by Syncora, resulted in more than $168.6 million in unreimbursed insurance claims after about two years, according to the complaint, filed June 6 in New York state Supreme Court in Manhattan.

Syncora, based in New York, won part of a federal court lawsuit against Bear Stearns affiliate EMC Mortgage Corp. on March 1 in an earlier case involving the transaction. Bear Stearns and EMC are now part of JPMorgan Chase & Co.

“Each day the evidence continues to mount of the egregious, widespread fraud perpetrated by Bear Stearns in connection with its mortgage securitization business and the catastrophic consequences for the participants in the securitizations,” Syncora said in its new state-court complaint.

Bear Stearns was the underwriter of the transaction while EMC was the sponsor. U.S. District Judge Paul A. Crotty in New York ruled March 25 that Syncora notified EMC of 1,300 mortgages with defects and asked EMC to cure them. EMC agreed to cure only 20 of the mortgages, according to that ruling.

Crotty separately rejected a bid by Syncora to add JPMorgan’s Bear Stearns unit to the federal lawsuit because that request wasn’t filed in a timely fashion, the judge said.

Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment yesterday.

The case is Syncora Guarantee Inc. v. J.P. Morgan Securities LLC, 651566/2011, New York state Supreme Court (Manhattan).

Barclays Must Pay Lehman Brokerage $2 Billion in Margin Assets

Barclays Plc, which bought Lehman Brothers Holdings Inc.’s North American business, must return $2 billion in margin assets to the trustee liquidating the remains of Lehman’s brokerage and pay about $270 million in interest, a bankruptcy judge ruled.

U.S. Bankruptcy Judge James Peck in New York yesterday said Barclays must pay the trustee 5 percent interest on the assets from September 2008 until he signs his final order on the case. Barclays will appeal, the bank said in an e-mailed statement.

The amount Barclays must return will be offset by $1.1 billion in assets that the two parties previously agreed should go to the U.K. bank, which bought Lehman’s businesses in the 2008 credit crisis. That cuts its cost to about $1.2 billion, including interest. However, Barclays lost its bid for $1.9 billion in margin to offset liabilities it took on with some of the brokerage’s trading positions.

Peck’s “ruling brings finality to this issue by confirming that the $4 billion in Lehman cash and other margin assets belongs to the Trustee,” William Maguire, a lawyer for brokerage trustee James Giddens, said in an e-mail. The judge said he would publish his ruling later.

The main case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Kingate Funds to Be Sued for $975 Million by Madoff Trustee

Kingate Global Fund Ltd., Kingate Euro Fund Ltd. and other defendants will be sued for $975 million by the trustee liquidating Bernard Madoff’s investment firm, according to a court filing.

Trustee Irving Picard yesterday got permission from Judge Burton Lifland to file a new complaint against the two so-called feeder funds who invested with the con man, according to a law clerk for Lifland. Picard originally sued the funds in 2009, claiming $255 million that he said they withdrew before Madoff’s arrest in December 2008. The funds are being liquidated in the British Virgin Islands.

Picard’s proposed complaint names Federico Ceretti and Carlo Grosso, “Italian nationals operating from England” who funneled about $1.7 billion of investors’ money to Madoff’s Ponzi scheme from 1994 through the Kingate funds, which they set up and ran, he said. Ceretti, Grosso and the funds should have known of Madoff’s fraud and must return $975 million they redeemed, Picard said in the proposed, 129-page suit.

“These avoidable transfers to the Kingate funds are customer property that must be returned to the estate,” he said.

William Tacon of Zolfo Cooper, a liquidator for the funds, declined to comment on Picard’s pending suit. The document, attached to a request to Lifland for permission to file it, also names investment firm FIM Advisers LLP, run by Ceretti and Grosso, along with trusts and HSBC Bank Bermuda Ltd.

Antony Zacaroli, a lawyer for FIM, didn’t immediately return a call seeking comment.

The case is Picard v. Ceretti, 09-cv-1161, U.S. bankruptcy Court, Southern District of New York (Manhattan).

Gupta Sued by Goldman Shareholder for ‘Short-Swing’ Profits

Ex-Goldman Sachs Group Inc. director Rajat Gupta was sued by a shareholder to recover “short-swing” profit on trades allegedly based on inside tips from Gupta that were made by Galleon Group LLC co-founder Raj Rajaratnam.

Investor James Mercer, in a complaint filed June 6 in federal court in Manhattan, seeks to recover profit Galleon made from trading Goldman shares within a six-month period based on information from Gupta.

“Mr. Gupta was beneficial owner of these securities because he had a pecuniary interest in the profits generated by this trading activity,” Mercer, a resident of Kirkland, Washington, said in the complaint. “Mr. Rajaratnam undoubtedly paid Mr. Gupta for the Goldman Sachs inside information on which these trades were made.”

Mercer is seeking a judgment requiring Gupta to pay the short-swing profits from Galleon’s trading, from June to October of 2008. Mercer didn’t specify the amount he’s seeking in the suit.

“This lawsuit is completely without merit, and we will vigorously defend against it,” Gary Naftalis, a lawyer for Gupta, said in a statement.

In March, the U.S. Securities and Exchange Commission filed an administrative proceeding accusing Gupta of passing tips to Rajaratnam. Naftalis called those allegations totally baseless at the time.

Ed Canaday, a spokesman for Goldman Sachs, declined to comment yesterday.

The case is Mercer v. Gupta, 11-cv-03828, U.S. District Court, Southern District of New York (Manhattan).

British Airways, LAN to Pay $155.5 Million in Cartel Suits

British Airways and Chilean carrier Lan Airlines SA agreed to pay a total of $155.5 million to cargo customers to settle a U.S. lawsuit over their involvement in a global price-fixing cartel that increased fuel surcharges.

The deals, which must be approved by a New York judge, will resolve claims by companies that used the airlines’ freight services from 2000 through 2006, the law firm Hausfeld LLP said yesterday in a statement. British Airways will pay $89.5 million, while Santiago-based Lan will pay $66 million.

“We will continue our efforts to pursue recoveries for the huge number of victims of this cartel both in the U.S. and around the world,” Michael Hausfeld, a lawyer for the freight shippers, said in the statement.

European Union regulators in November fined British Airways and 10 other carriers a total of 779.4 million euros ($1.15 billion) for coordinating fuel and security surcharges. London-based British Airways, whose share of the fine was 104 million euros, pleaded guilty in the U.S., Australia and Canada and was later fined by a South Korean regulator.

“We are pleased that we have reached a settlement over these claims made by cargo customers in the U.S.,” British Airways spokesman Euan Fordyce said in a phone interview.

Lan’s payment will be made by June 14 and won’t affect the company’s results, the carrier said in a statement on the website of Chile’s securities regulator.

The class-action lawsuit in New York has generated settlements totaling about $434 million, including $87 million from Air France-KLM Group last year and $85 million from Deutsche Lufthansa AG in 2006, Hausfeld said. AMR Corp.’s American Airlines last year agreed to pay $5 million and provide witnesses and evidence to help the customers.

British Airways in November won a U.K. Court of Appeal ruling blocking hundreds of air-cargo customers from forming a group in a U.S.-style class action lawsuit over the cartel.

The case is In re Air Cargo Shipping Services Antitrust Litigation, 06-MD-1775 (JG) (VVP), U.S. District Court, Eastern District of New York (Brooklyn).


Groupon Chairman Remarks May Require New Company Filing

Remarks by Groupon Inc. Chairman Eric Lefkofsky, who said the money-losing daily-coupon provider will be “wildly profitable,” may force the company to make new filings before it sells shares to the public.

Lefkofsky, Groupon’s co-founder and biggest shareholder, made the comments June 3, a day after Chicago-based Groupon announced plans to raise $750 million in an initial public offering.

The U.S. Securities and Exchange Commission limits what companies planning IPOs can say about their prospects before listing shares. Groupon may need to file new documents that disclose Lefkofsky’s comments and either discount or ratify them, said Noah Hagey, a managing partner at BraunHagey LLP.

“Where you have somebody with insider knowledge and status making predictions about how the company is going to perform, which conflicts or potentially conflicts with what’s in the registration statement, I think that draws attention,” Hagey said in an interview on Bloomberg Television.

While Groupon’s sales surged 14-fold to $644.7 million last quarter, the company has racked up operating losses of $540.2 million since its founding in 2008.

John Nester, a spokesman for the SEC in Washington, declined to comment, as did Julie Mossler, a spokeswoman for Groupon.

To reconcile Lefkofsky’s comments with SEC rules, the company could file regulatory documents that say Groupon may be “profitable” over the next decade or two, without saying exactly when, said Marc Morgenstern, managing partner of Blue Mesa Partners, a San Francisco-based investment firm.

In 2005, the SEC adopted new rules to update securities-offering requirements after Google Inc.’s $1.67 billion IPO a year earlier. Playboy published an interview with Google’s founders before the offering, raising concern about selective disclosure. Under the revised rules, executives may speak to the media, as in Google’s Playboy interview, provided they file a copy of the remarks with the SEC.

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