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Insider Trading, News Corp., Dodd-Frank: Compliance

July 12 (Bloomberg) -- Rajat Gupta, the former Goldman Sachs Group Inc. director, can proceed with a suit claiming the U.S. Securities and Exchange Commission violated his rights when it filed an administrative action accusing him of passing illegal stock tips.

The SEC initiated the administrative proceeding in Washington on March 1, claiming Gupta passed information to Galleon Group LLC co-founder Raj Rajaratnam about Goldman Sachs and Procter & Gamble Co., where Gupta was also on the board.

U.S. District Judge Jed Rakoff ruled yesterday that Gupta, who hasn’t been charged criminally, may argue that the agency intentionally singled him out for unfair treatment in retaliation for claiming his innocence. Rakoff said that all of the other suits filed in the Galleon case, against 21 people and seven companies, are in federal court.

“We have the unusual case where there is already a well-developed public record of Gupta being treated substantially disparately from 28 essentially identical defendants, with not even a hint from the SEC, even in their instant papers, as to why this should be so,” Rakoff wrote in yesterday’s opinion.

SEC spokesman John Nestor said the agency may appeal the ruling.

In the administrative proceeding the SEC claimed Gupta gave Rajaratnam information about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs. The agency also alleges Gupta told Rajaratnam about quarterly earnings of Goldman Sachs and Procter & Gamble. Gupta hasn’t been criminally charged. Rajaratnam was found guilty of 14 criminal counts of conspiracy and securities fraud on May 11. He is awaiting sentencing.

In his suit against the SEC, Gupta claims the agency is unfairly trying to gain an advantage by denying him legal protections he would have had if the suit had been filed in federal court.

In his ruling, Rakoff narrowed Gupta’s case to include only his claim that the SEC is trying to deny his constitutional right to equal protection of the laws. Rakoff said he intends to hold an evidentiary hearing in the case within four months.

The case is Gupta v. SEC, 11-CV-1900, U.S. District Court, Southern District of New York (Manhattan).

Compliance Action

News Corp.’s Bid for BSkyB Referred to U.K. Competition Body

News Corp.’s 7.8 billion-pound ($12.4 billion) bid for British Sky Broadcasting Group Plc faces a review by the top U.K. competition authority that will take at least six months as a probe into phone hacking widens.

The Competition Commission, now overseeing the regulatory process for Murdoch’s 700 pence a share bid, will report in six months, followed by “intensive discussions,” Culture Secretary Jeremy Hunt told lawmakers in London yesterday. Hunt sent the bid to the antitrust body after News Corp. withdrew earlier pledges aimed at avoiding a lengthy review, including the spinoff of BSkyB’s Sky News channel.

The U.K. government is seeking to avoid ruling on the deal in the wake of the public outcry after the escalating phone-hacking allegations involving members of the public, celebrities and sports figures.

U.K. Deputy Prime Minister Nick Clegg asked Murdoch to “reconsider” his bid following allegations that Murdoch’s News of the World tabloid hacked into voicemails of terror and murder victims such as murdered schoolgirl Milly Dowler and paid police for stories. News Corp. published the last issue of the 168-year-old newspaper yesterday.

In a statement, News Corp. said it “continues to believe that, taking into account the only relevant legal test, its proposed acquisition will not lead to there being insufficient plurality in news provision in the U.K.”

News Corp., which also publishes the Sun, the Times and the Sunday Times, also said yesterday that it will investigate whether its journalists broke the law to obtain the bank, medical and legal records of former Prime Minister Gordon Brown.

The Guardian reported that both the Sunday Times and the Sun obtained files using techniques known as “blagging,” where people impersonate someone over the phone in order to access private information. The Sun obtained details of the private medical files of Brown’s son Fraser, while someone working for the Sunday Times acquired Brown’s legal records and tried to gain access to bank statements, the Guardian said.

“We note the allegations made today concerning the reporting of matters relating to Gordon Brown,” News Corp.’s News International unit said in an e-mailed statement. “So that we can investigate these matters further, we ask that all information concerning these allegations is provided to us.”

Separately, Amalgamated Bank of New York said in an amended lawsuit filed in Delaware that allegations of phone hacking at News of the World show a “culture run amuck” and indicate the board “provides no effective review or oversight.” Amalgamated, as a trustee for funds through which it holds almost 1 million News Corp. shares, sued the directors on behalf of the company in Delaware Chancery Court in Wilmington in March. The bank accused Chief Executive Officer Rupert Murdoch of nepotism in the purchase of Shine Group Ltd., his daughter’s U.K.-based television production company.

“These revelations should not have taken years to uncover and stop,” according to an amended complaint filed July 8 and made public yesterday.

Teri Everett, a News Corp. spokeswoman in New York, didn’t immediately return a message seeking comment.

The case is Amalgamated Bank v. Murdoch, CA6285, Delaware Chancery Court (Wilmington).

AT&T, Sprint Face 9 State Subpoenas in Reviews of T-Mobile Bid

AT&T Inc.’s proposed $39 billion purchase of T-Mobile USA Inc. prompted subpoenas of AT&T and Sprint Nextel Corp. by nine states in connection with antitrust reviews.

Sprint’s subpoenas came from Arizona, Florida, Hawaii, Illinois, Minnesota, New York, Pennsylvania, Texas and Washington, and the U.S. Justice Department, the company said in a June 28 letter posted on the Federal Communications Commission’s website. AT&T got requests for data from the same states, Michael Balmoris, a company spokesman, said.

“Pennsylvania and a number of states are looking at the transaction,” James Donahue, Pennsylvania’s chief deputy attorney general, said in an interview. “We’re taking in all the information and have reached no conclusion.”

The disclosure of the states’ subpoenas reveals a growing scrutiny of AT&T’s bid to combine the second- and fourth-largest wireless carriers to create a new market leader, ahead of No. 1 Verizon Wireless. The states are seeking data for customer habits, including when consumers switch carriers, which would help their regulators evaluate the level of competition in their respective markets.

AT&T disclosed on June 21 the Justice Department had broadened its demands for information on the proposed deal.

“Not unexpectedly, some state attorneys general offices have sought information about our merger, and we have responded in an appropriate and timely manner,” Balmoris said in an e-mail.

David Kerwin, a Washington state assistant attorney general, said in an interview that the acquisition is “a large matter that potentially affects a number of people.”

Minnesota Attorney General Lori Swanson “is concerned about the merger,” said Ben Wogsland, a spokesman for her office. “It’s hard to see how four companies going down to three, basically less competition, would benefit consumers,” he said.

Florida issued a civil investigation demand to Sprint, said Jennifer Davis, a spokeswoman for the state’s attorney general.

Gina Talamona, a spokeswoman for the Justice Department’s antitrust division, said “the investigation is ongoing.”

Janney Montgomery to Pay $850,000 to Settle SEC Claims

Janney Montgomery Scott LLC settled claims by the Securities and Exchange Commission over the failure to enforce procedures related to its Equity Capital Markets unit, creating the risk of insider trading, the agency said.

Janney Montgomery agreed to pay a penalty of $850,000 as part of the settlement, and didn’t admit or deny the SEC’s findings, according to an e-mailed statement yesterday.

FCC Says Comcast Violated Rules to Detriment of Tennis Channel

Comcast Corp. violated Federal Communications Commission rules by limiting distribution of the Tennis Channel on its cable systems, the agency’s enforcement bureau said in a court filing.

Comcast should be required to include Tennis Channel on a broadly distributed tier within 30 days on terms similar to its own Golf Channel and Versus sports networks, the FCC Enforcement Bureau said in a recommendation to Chief Administrative Law Judge Richard L. Sippel in Washington.

The recommendation was reported earlier by Multichannel News.

Compliance Policy

Obama Urges Independent Agencies to Shed Burdensome Rules

President Barack Obama urged independent agencies to consider proposals that would cut paperwork and eliminate outdated rules, broadening his effort to remove or overhaul unnecessary regulations.

Obama’s order is aimed at bodies such as the Securities and Exchange Commission and the National Labor Relations Board, excluded from the effort among federal departments he started in January to drop rules that stifle economic expansion without helping consumers.

“I hope you see this as an opportunity to something big and lasting -- to change the ways of Washington,” Obama said yesterday in a statement to the agencies. “We are taking immediate steps to eliminate millions of hours in annual paperwork burdens for large and small businesses and save more than $1 billion in annual regulatory costs.”

The Obama administration said in May that more than 30 agencies are seeking to repeal or modify regulations to reduce reporting requirements and trim compliance costs. The effort eliminated rules for vapor-recovery systems at gas stations and changed labeling requirements for hazardous materials. Yesterday’s order applies to agencies where he has limited power to dismiss the body’s chief.

The White House effort to eliminate unnecessary regulations has so far failed to slow the process, Republicans such as Representative Cliff Stearns of Florida, chairman of the subcommittee, have said.

“New regulations affecting many sectors of industry and aspects of American life are being promulgated under the same flawed system that produced the regulations identified” by the White House, Stearns said June 3 at a hearing of the House Energy and Commerce Committee panel on oversight and investigations.

FSA Looks Into Risk-Management Governance at Clearinghouses

Clearinghouses are likely to see greater scrutiny of their risk-management governance and organizational structure as the U.K. financial regulator seeks to cut the risks they pose to the financial system.

The U.K. Financial Services Authority is looking into the model central counterparties use to calculate the funds traders must give them as a buffer, the regulator said yesterday on its website.

The FSA, which previously said it will adopt “a more intrusive approach” is reviewing credit risk management practices at central counterparties as their use grows. Scrutiny of clearinghouses has mounted even as European and U.S. regulators promote greater transparency in the over-the-counter derivatives market.

“The clearing market is undergoing a period of substantial change,” the FSA wrote in its guidance paper. “Both market participants and regulators have indicated a desire to increase the scale and scope of financial instruments cleared through central counterparties. Further, increased industry competition and consolidation continues to play a fundamental role in defining the shape of the clearing industry.”

By acting as the central counterparty to every buy and sell order they process, a clearinghouse reduces the risk that could result if a trading firm defaults on its obligation in a transaction. Clearinghouses are funded by their members, who must meet capital requirements and pass operational and technology tests.

Stress Tests May Worsen Debt Crisis, German Banking Groups Say

European stress tests risk worsening the sovereign-debt crisis and making lenders the target of speculators because the level of detail being published is too high, according to Germany’s banking associations.

“Given the tense situation which already exists in money and capital markets, we believe publishing the results with the present level of detail would exacerbate the sovereign-debt crisis,” the ZKA Central Credit Committee said in a letter obtained by Bloomberg News. “To avoid further capital market turmoil, which would fly totally in the face of what the stress test was actually intended to achieve, we believe the level of detail needs to be significantly reduced.”

European regulators are seeking to assuage investor concern that banks in the region are inadequately capitalized with a second round of stress tests to be published on July 15. The London-based European Banking Authority toughened this year’s review by tightening its definition of bank capital and forcing firms to disclose more about their holdings of government bonds after criticism last year by analysts that the tests were too lenient.

The 91 banks being tested will be expected to maintain a core Tier 1 capital ratio, a key measure of financial strength, of at least 5 percent in the tests’ baseline and adverse scenarios, the EBA has said. All 13 German lenders being assessed expect to pass, based on the data they submitted, people with knowledge of the process who declined to be identified said last week.

The German banking groups said they are concerned about elements including the detailed breakdown of sovereign-debt holdings by country and maturity, which they say will reveal company business and trading strategy. They’re also worried about giving out specifics on portfolio and hedge structures, which may “open the door to arbitrage,” as well as a breakdown of banks’ loan books.

“The possibility cannot be excluded that publication of the stress test results in their present form will spark not only market volatility, but also targeted speculation against individual banks,” the letter said. The banking associations proposed a simplified version of publication excluding some of the details.

The criticism echoes that made on June 6 by Jochen Sanio, the head of Germany’s top financial regulator, where he lashed out at the European Union’s stress tests, saying the standards adopted by the agency carrying them out lack “legitimacy.”


SIPC Opposes Attempt by Mets Owners to Dismiss Madoff Suit

The Securities Investor Protection Corp. opposed a request by the owners of the New York Mets baseball team to dismiss a $1 billion suit by the trustee liquidating Bernard Madoff’s firm.

The trustee, Irving Picard, is suing Fred Wilpon and Saul Katz and their firm, Sterling Equities, seeking the return of $700 million in principal and $300 million in profit from Madoff’s Ponzi scheme. Picard claims the team’s owners had a duty to investigate “red flags” warning of possible fraud.

SIPC yesterday asked U.S. District Judge Jed Rakoff in Manhattan to let the suit go forward, arguing that Picard has the legal authority to pursue the claim.

Rakoff agreed this month to review the case, which Picard filed last year in bankruptcy court. He said judges have struggled with the duty of inquiry into fraud for more than half a century and the duty may not have applied to the Mets owners.

The case is Picard v. Katz, 11-cv-03605, U.S. District Court, Southern District of New York (Manhattan).

Deutsche Bank, MortgageIT Ask Court to Throw Out U.S. Suit

Deutsche Bank AG, Germany’s biggest bank, and its MortgageIT unit asked a U.S. judge to dismiss a $1 billion federal government lawsuit claiming they lied to qualify thousands of risky mortgages for a government insurance program.

The U.S. claims Deutsche Bank and MortgageIT falsely certified that they properly assessed the default risk of borrowers, qualifying loans for insurance by the Housing and Urban Development Department’s Federal Housing Administration, according to a complaint filed May 3 in Manhattan federal court.

“The complaint is long on unsupported and conclusory rhetoric but short on facts and legal underpinnings,” Deutsche Bank argued in a court filing yesterday.

The U.S. sued under the False Claims Act, which permits it to seek triple damages and penalties of more than $1 billion.

The government claims Deutsche Bank and MortgageIT masked problem loans through “egregious” violations of HUD rules for analyzing the income and creditworthiness of borrowers. MortgageIT endorsed more than 39,000 loans for FHA insurance after 1999, making them “highly marketable for resale,” the U.S. claimed. Of those, 12,500 defaulted.

The case is U.S. v. Deutsche Bank AG, 11-cv-2976, U.S. District Court, Southern District of New York (Manhattan).


Dodd-Frank Act Standing Up After First Year, Rep. Frank Says

The U.S. law reshaping the financial system has stood up well to the challenges and criticisms it’s faced in its first year of existence, Representative Barney Frank said.

“I believe that the year’s study, examination, criticism, advocacy, et cetera, leaves this legislation holding up very well,” Frank, a Massachusetts Democrat and co-author of the financial overhaul law, said yesterday in remarks at the National Press Club in Washington. “There have been very few calls for any substantial amendment on the part of the financial services community.”

With the Dodd-Frank Act nearing its one-year anniversary, debate continues inside federal agencies and on Capitol Hill over its final shape. The law, which was enacted on July 21, 2010, requires regulators to craft and implement hundreds of new rules that will govern much of the U.S. financial system, including the derivatives market and consumer finance.

Frank, the senior Democrat on the House Financial Services Committee, said the law provides regulators a set of principles while giving them the flexibility they need to write the rules.

House Republicans, who took power in the House after the November elections, have pushed multiple bills to reshape or repeal provisions in the law. Financial Services Committee Chairman Spencer Bachus, an Alabama Republican, is leading Republicans who almost unanimously opposed the law last year.

The lawmakers have introduced a slate of bills to change or repeal provisions in the law -- including restricting the powers of the Consumer Financial Protection Bureau -- that Republicans say extend regulation too far.

Frank said Republicans were “bluffing” in their efforts to reshape or repeal parts of the law.

“My Republican colleagues, unlike climate change and health care, don’t want to take this one head-on because it is still too popular,” Frank said. “Coming to the defense of unrestricted derivative trading is not a popular cause.”

Frank defended a provision in the law requiring mortgage risk retention, which would force lenders to keep a 5 percent stake in loans they bundle for investors. Regulators have proposed that the only loans exempt from the requirement would be those for which borrowers made downpayments of 20 percent.

More than 40 groups, including the American Bankers Association and the Consumer Federation of America, have joined with Republican and Democratic lawmakers to urge regulators to loosen the rule.

“I am troubled because there is an assault now on risk retention,” said Frank, adding that even though he believes the 20 percent requirement is “too high” the overall provision is one of the most important in Dodd-Frank.

Frank said that in the wake of the subprime mortgage crisis, new rules that make changes to the current market are necessary.

“It’s disruptive because we had to disrupt a rotten system,” Frank said. “We had to disrupt a system that collapsed.”

To contact the reporter on this story: Ellen Rosen in New York at

To contact the editor responsible for this report: Michael Hytha at

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