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Goldman ‘Huddles,’ Swaps ‘Black Hole,’ Autoliv: Compliance

Goldman Sachs Group Inc. agreed to pay a $10 million fine and stop holding private meetings of stock analysts and traders known as “huddles” to settle an investigation by Massachusetts’s chief securities regulator.

The settlement ends a two-year probe by William Galvin, the secretary of the commonwealth, into New York-based Goldman Sachs’s “Asymmetric Service Initiative,” in which information on analysts’ trading ideas was disseminated earlier to favored clients. The company will “permanently discontinue” the practice, Galvin’s office said in a statement yesterday.

Goldman Sachs analysts, who publish stock recommendations for long-term investments, attended weekly meetings where they shared short-term trading ideas, the Wall Street Journal reported in 2009, citing internal company documents. Galvin’s office sent a subpoena to Goldman Sachs shortly after the article was published. The Securities and Exchange Commission and Financial Industry Regulatory Authority also began examining the practice.

Finra is close to concluding its investigation of Goldman Sachs’s trading huddles, a person familiar with the situation said yesterday. The person spoke on condition of anonymity because the details of the investigation aren’t public.

Michelle Ong, a spokeswoman for Finra, said she couldn’t comment. John Nester, a spokesman for the SEC, declined to comment.

“We are pleased to have resolved this matter with the Massachusetts securities division,” Stephen Cohen, a Goldman Sachs spokesman in New York, said in an interview.

While the settlement finds that Goldman Sachs “engaged in dishonorable or dishonest conduct,” it adds that nothing in the settlement “shall be construed as a finding or admission of fraud.”

Compliance Policy

Dodd-Frank Deadline May Create ‘Black Hole,’ Roberts Says

Swaps users may face a “black hole” when Dodd-Frank Act rules take effect next month because too much remains unresolved for markets to operate properly, the Senate Agriculture Committee’s top Republican said.

“We don’t even know what a swap is” under the financial overhaul, Senator Pat Roberts said in an interview yesterday at Bloomberg’s office in Washington. The Kansas Republican said the Commodity Futures Trading Commission needs to outline what provisions will apply when Dodd-Frank takes effect, and which will require rule-making that will delay implementation.

The CFTC and the Securities and Exchange Commission are writing new regulations required by the legislation enacted last July, after largely unregulated swaps helped fuel the 2008 credit crisis.

Roberts joined Republican Senators Saxby Chambliss of Georgia and Richard Lugar of Indiana in a letter to CFTC Chairman Gary Gensler on May 27 asking for a list of Dodd-Frank provisions that would become effective on July 16. They also asked the CFTC’s view of how swaps transitions would be governed while new regulations are put in place and how the commission would provide greater legal certainty for the transactions during the transition.

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AEP Says New Air Rules May Cost Up to $8 Billion, 600 Jobs

American Electric Power Co. said it would have to spend as much as $8 billion through the end of the decade to comply with proposed federal regulations aimed at curbing carbon-dioxide emissions from coal-fueled power plants.

The company estimated it would cut about 600 jobs and shutter five coal-fueled power plants in Virginia, West Virginia and Ohio if proposed federal rules are enacted, American Electric said in a statement yesterday.

“Unrealistic timelines” in the Environmental Protection Agency proposals would force the company to prematurely shut about 25 percent of its current coal-fueled generating capacity, or 6,000 megawatts, said Michael Morris, American Electric’s chairman and chief executive officer.

Business will face electricity price increases of “10 percent to more than 35 percent,” Morris said in the statement.

Coal-fueled generation accounts for about 65 percent of American Electric’s total generating capacity. The company has spent more than $7.2 billion since 1990 to reduce emissions from its coal power plants.

PCAOB to Weigh Inspection Program for Broker-Dealers’ Auditors

The Public Company Accounting Oversight Board will meet next week to consider establishing an interim inspection program for registered public accounting firms’ audits of brokers and dealers.

The measure, which would be part of the adoption of the nonprofit corporation’s expanded oversight responsibilities under the Dodd-Frank Act, will be weighed at a June 14 meeting in Washington, the PCAOB said yesterday in a statement.

U.K. Regulator Defends Liquidity Rules Against Bank Criticism

The U.K. Financial Services Authority defended rules requiring lenders to hold increased liquidity buffers after banks complained that the rules were tougher than international standards.

The FSA disagrees with claims that banks must “hold more liquidity than is likely to be required under the implementation of” global rules proposed by the Basel Committee on Banking Supervision, “and to date have not seen any evidence from firms to suggest otherwise,” Liam Parker, an FSA spokesman, said in an e-mailed statement today.

The rules proposed by the FSA requiring banks to have enough high-quality assets to survive a temporary liquidity crisis could “cause disruption in the payment systems as banks delay payments in an attempt to reduce liquidity usage,” according to a paper published by Bank of England officials last week.

The liquidity rules may require U.K. banks to buy as much as 110 billion pounds ($161 billion) of government bonds.

Compliance Action

Autoliv Raided as EU Probes Automotive-Parts Price Fixing

Autoliv Inc., the world’s biggest producer of seatbelts and air bags, was raided by European Union authorities as part of an antitrust investigation into car-parts suppliers.

The commission, the 27-nation EU’s competition authority, said on its website yesterday that raids at producers of car safety systems began on June 7. Stockholm-based Autoliv said it’s cooperating with investigators.

The relationship between suppliers and automakers has tightened as development times shorten and car companies insist components be delivered shortly before assembly to reduce inventory costs. Component manufacturers are critical to the automotive industry, accounting for about 75 percent of the value of an average car, up from 65 percent 10 to 15 years ago, according to the Center of Automotive Management at the University of Applied Sciences in Bergisch-Gladbach, Germany.

Autoliv said two of its facilities in Germany were visited by EU officials. The commission didn’t say which companies it inspected.

Cartels are “the top priority” for antitrust regulators, the EU’s competition commissioner Joaquin Almunia said in April. The commission said last year it is investigating companies that make automotive electrical distribution systems as part of a joint probe with the U.S. into possible price fixing. The commission said there is no deadline to complete its investigations.

JPMorgan Warehouses Won’t Get LME Investigation, U.K. OFT Says

JPMorgan Chase & Co.’s stockpile of copper and ownership of warehouses for goods traded on the London Metal Exchange won’t be probed for market violations, Britain’s antitrust regulator said, citing a lack of evidence and jurisdiction.

The U.K. parliamentary committee that sought the review didn’t give proof that certain “large dealers” on the exchange were undermining the market by owning warehouses, the U.K. Office of Fair Trading said in a May 27 letter posted on the Science and Technology Committee’s website.

The exchange last year handled $11.6 trillion in contracts, offering trading in metals from copper to cobalt to steel. In May, the committee said it was concerned about allegations made by other traders at hearings reviewing the country’s “strategically important metals.”

Other allegations that New York-based JPMorgan “could distort commodity markets” by owning 50 percent of the stock of copper as part of a creation of an exchange-traded fund fall under the jurisdiction of Britain’s Financial Services Authority, the OFT said.

JPMorgan spokesman Joe Evangelisti didn’t immediately return a call for comment.

LME spokeswoman Miriam Heywood said yesterday in an e-mail that is it “unjustified” to suggest that ownership of a warehousing company implies anticompetitive behavior.

More than 400 warehouses in about 35 countries handle metal traded on the exchange, and JPMorgan’s Henry Bath unit has warehouses in 14 locations, the OFT said.

SEC Cautions Investors on Buying Reverse-Merger Stocks

The U.S. Securities and Exchange Commission cautioned investors about buying stakes in companies that gain listings on U.S. exchanges through so-called reverse mergers, saying they may be prone to “fraud and other abuses.”

Many of the companies, often overseas operations that access U.S. markets by acquiring publicly traded firms with few or no operations, “either fail or struggle to remain viable” and may use small audit firms that don’t verify financial statements, the SEC said yesterday in an investor bulletin.

Lori Schock, head of the SEC’s investor education office, said in a statement that investors “should be especially careful” when considering investing in the stock of reverse merger companies.

Yesterday’s warning comes more than a year after the SEC formed a task force to examine China-based reverse-merger companies and their auditors. The SEC and exchanges have halted trading in more than a dozen such firms in recent months, citing missing financial information, according to the release. Several such companies have seen their share prices plummet amid allegations that their financial statements were inaccurate.

In a reverse merger, a closely held firm buys a so-called shell company and becomes able to sell shares without the scrutiny that would surround an initial public offering.

Goldman, U.S. Banks Probed by SEC on Libya Deals, WSJ Reports

Goldman Sachs Group Inc. is among financial firms being examined by U.S. regulators to determine if transactions with Libya’s sovereign fund may have violated bribery laws, the Wall Street Journal reported, citing people it didn’t identify.

U.S. Securities and Exchange Commission officials are reviewing documents including those related to a $50 million fee Goldman Sachs agreed to pay the Libyan fund to help recoup losses, the newspaper said yesterday. The payment, which was to be passed on by the Libyan Investment Authority to a firm run by a local official’s son-in-law, was never made, it said.

HSBC Holdings Plc and Goldman Sachs are among banks that held funds for the Muammar Qaddafi-controlled Libyan sovereign wealth fund, London-based advocacy group Global Witness said last month. Talks between Goldman Sachs and the wealth fund stalled before violent protests broke out in Libya in February, the newspaper said, citing people it didn’t identify.

Goldman Sachs said it was confident it hadn’t violated any rules or regulations, according to the Journal, citing spokesman Lucas van Praag. An SEC spokesman declined to comment, the newspaper said. The agency’s interest doesn’t mean that a formal investigation will be started, the Journal said.

Connie Ling, a Hong Kong-based spokeswoman for Goldman Sachs, and Vinh Tran, a Hong Kong-based spokeswoman for HSBC, didn’t immediately return a call or e-mail seeking comment.


Ex-UBS Adviser Pleads Guilty to Fraud, Agrees to Prison

Steven Kobayashi, a former UBS AG financial adviser in California, pleaded guilty to wire fraud and agreed to serve more than five years in prison for improperly transferring client funds to his bank accounts, U.S. Attorney Melinda Haag said in a statement yesterday.

Kobayashi, 39, of Livermore, California, was charged in March with taking money from his clients’ UBS accounts and putting it into his accounts, sometimes gaining customer authorization to withdraw their money by telling them it would be used to purchase investments, prosecutors said.

Between 2006 and 2009, Kobayashi transferred more than $5.4 million in client funds to his bank accounts, prosecutors said. In March, he settled a lawsuit brought by U.S. Securities and Exchange Commission alleging misappropriation of $3.3 million. He didn’t admit or deny wrongdoing.

Kobayashi pleaded guilty yesterday in federal court in northern California to one count each of money laundering and wire fraud. In a plea agreement with prosecutors, he agreed to serve 65 months in prison and pay $5.4 million in restitution, Haag said.

Kobayashi’s attorney, Joyce Leavitt, didn’t immediately return a voice-mail message.

The criminal case is U.S. v Kobayashi, 11-106 and the SEC case is U.S. v Kobayashi, 11-981, in U.S. District Court, Northern District of California (Oakland).

UBS Madoff Claims Must Wait for Luxembourg Court Ruling

UBS AG lost its bid to dismiss outright claims by LuxAlpha Sicav-American Selection Fund’s French investors, who must wait on related Luxembourg court cases before their claims can be addressed, a Paris court said.

A commercial court in Paris said in an opinion June 9 that while their case is admissible, it will wait to issue a final ruling until the Luxembourg-based LuxAlpha liquidators’ claims are resolved by judges there.

The suit is one of many over UBS’s role as custodian for LuxAlpha, which invested 95 percent of its assets with Bernard Madoff and is being liquidated. Irving H. Picard, the trustee liquidating Madoff’s firm, sued the bank for $2.6 billion last year, claiming UBS aided the fraud partly by setting up feeder funds like LuxAlpha.

Dominique Gerster, a UBS spokesman, said the Zurich-based bank welcomes the court’s “overall conclusions.”

UBS lawyer Denis Chemla told the Paris court at a March hearing that LuxAlpha was created at the request of wealthy clients who wanted a fund that allowed them to continue investing with Madoff and that UBS didn’t issue any false information.

Murdoch’s Sun Can’t Identify Ex-RBS CEO Goodwin’s Mistress

Rupert Murdoch’s Sun newspaper can’t identify a woman who had an affair with former Royal Bank of Scotland Group Chief Executive Officer Fred Goodwin, a judge ruled in a case involving privacy and corporate governance.

Justice Michael Tugendhat at the High Court in London today refused to allow the paper to name the woman, but modified a court order to allow more details about her job description to be published.

RBS posted the largest loss in U.K. corporate history in 2008 and required a 45 billion-pound ($74 billion) bailout following its acquisition of ABN Amro Holding NV. Goodwin was cleared of responsibility in December. The RBS rescue may explain why the paper considers articles about Goodwin to be of interest to readers, Tugendhat said in the ruling. He noted that “what is of interest to the public is not the same as what it is in the public interest to publish.”

The Sun’s lawyer, Richard Spearman, said at a June 1 hearing that an anonymity order was stifling public debate about corporate governance at the bank before its 2008 bailout. Hugh Tomlinson, the lawyer representing the woman, said at the same hearing that there was no need to change the order because there isn’t any evidence the affair contributed to the collapse of RBS.

Tomlinson said he planned to challenge the judgment at the Court of Appeal. Tugendhat said the Sun shouldn’t publish the woman’s job description for 14 days to allow time for the appeal to be filed.

The case is one of dozens involving so-called super injunctions or privacy injunctions that ban newspapers from printing stories about people’s sex lives.

German Top Court Schedules Hearing in Euro Bailout Suits

Germany’s top constitutional court scheduled a hearing on lawsuits against the nation’s participation in the euro-area rescue fund and the aid package for Greece.

The Federal Constitutional Court in Karlsruhe will hear oral arguments in three cases over the issue on July 5, the court said in an e-mailed statement today. The cases were brought by a group of academics and lawmaker Peter Gauweiler.

The German high court has drawn criticism for not acting swiftly on the suits, which were filed in the first half of 2010. The judges declined to issue emergency orders blocking the aid package for Greece in May 2010 and the euro-area rescue fund in June 2010 and didn’t schedule a hearing on the main legal questions in the cases until yesterday.

The court is expected to consider whether the case can be dismissed for procedural reasons as well as substantive questions. The court normally takes a few months after a hearing before it issues a ruling.

The cases are BVerfG, 2 BvR 987/10, 2 BvR 1099/10 and 2 BvR 1485/10.


Bair Says U.S. Must Avoid Amnesia in Response to Crisis

Federal Deposit Insurance Corp. Chairman Sheila Bair strongly defended higher capital buffers for the biggest banks and said U.S. regulators must guard against pressure to be less vigilant in financial-industry oversight as the nation recovers from the 2008 credit crisis.

“I see a lot of amnesia setting in now,” Bair said yesterday during a question-and-answer session at the Council on Foreign Relations in New York, where she discussed her tenure at the FDIC and the government’s response to the worst financial crisis since the Great Depression.

Bair was asked to respond after JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, head of the most profitable U.S. bank, pressed Federal Reserve Chairman Ben S. Bernanke in a public forum on June 7 on whether regulators have risked slowing growth by going too far in reining in the U.S. banking system.

Regulators must look at the relationships among different rules and may have to phase in regulations on derivatives, Bair said in an acknowledgement of some agreement with Dimon. In other areas, such as a 3 percent equity capital buffer for systemically important firms, the new rules will help protect the financial system while allowing large banks to earn a reasonable return, she said.

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Comings and Goings

Germany Risks Losing Manager Post at EU Stress-Test Agency

Germany’s financial supervisor risks losing its seat on the managing committee of the European Banking Authority, days after Bafin’s chairman criticized the “legitimacy” of the agency overseeing stress tests on lenders.

Bank watchdogs from across the European Union are scheduled to vote as soon as this month on a replacement for Bafin’s Sabine Lautenschlaeger, who must step down from her role at the EBA because she agreed to join the Bundesbank. The EBA’s six-person managing committee helps decide the agency’s annual work plan and includes supervisors from the Czech Republic, Finland, France, Hungary and Sweden.

Bafin spokesman Ben Fischer said that Lautenschlaeger “now loses her seat” and it won’t automatically go to a new German candidate.

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