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Bank of America, Consumer Bureau, Taxes, Audits: Compliance

New York Attorney General Eric Schneiderman is investigating the proposed $8.5 billion Bank of America Corp. settlement with Bank of New York Mellon Corp. over residential mortgage-securitization trusts.

The New York attorney general’s office sent letters to more than 20 companies including Goldman Sachs Group Inc. and BlackRock Inc. regarding their participation in the proposed deal. The investment managers were asked to identify clients affiliated with New York state government entities, public authorities or not-for-profit organizations that invested in the 530 residential mortgage-securitization trusts established from 2004 to 2008, according to copies of the letters obtained by Bloomberg News.

Dated July 7, the letters also request the total par amount and current market value of all securities issued by the trusts covered in the settlement agreement for each client that meets the criteria. The information was requested in connection with an ongoing investigation by the office “into certain matters related to securitization of residential mortgages,” according to the letters.

Lauren Passalacqua, a spokeswoman for Schneiderman, declined to comment on the probe. BlackRock spokeswoman Bobbie Collins declined to comment. Goldman Sachs spokesman Michael DuVally declined to immediately comment.

Compliance Action

Ex-Morgan Stanley Trader Settles SEC Claims Over Hiding Risk

A former Morgan Stanley trader agreed to pay $25,000 to settle U.S. Securities and Exchange Commission claims that she concealed proprietary trades that exceeded the firm’s risk limits.

Jennifer Kim and her supervisor, Larry Feinblum, used “fake” swap orders at least 32 times from October to December 2009 to hide their risk of losses, the SEC said in an order yesterday. New York-based Morgan Stanley ultimately lost about $24.5 million from the unauthorized trades, according to the agency.

Feinblum, who is no longer employed by Morgan Stanley, agreed to pay $150,000 to settle related claims May 31, according to a separate order. In resolving the matters, Kim and Feinblum didn’t admit or deny wrongdoing.

Kim and Feinblum entered into swap orders that they intended to cancel almost immediately, which had the effect of “tricking” the firms’ monitoring systems into recording reduced net risk positions, the SEC said. After being told by his supervisor not to increase his exposure to India-based Wipro Limited, Feinblum instead distorted his position with the fake swaps and continued to accumulate more risk, the SEC said.

The misconduct came to light in December 2009 after Feinblum told his supervisor he had lost $7 million in one day and that he and Kim had repeatedly exceeded risk limits and hidden the positions, according to the order.

SEC Commissioner Luis Aguilar said the terms of Kim’s settlement were “inadequate,” according to a written dissent posted on the agency’s website. The settlement “fails to address what is in my view the intentional nature of her conduct,” Aguilar said.

Phone calls to Daniel Chaudoin, Feinblum’s attorney at Wilmer Cutler Pickering Hale and Dorr LLP, and Christopher Caparelli, Kim’s lawyer at Torys LLP, weren’t immediately returned. Mary Claire Delaney, a spokeswoman for Morgan Stanley, declined to comment.

U.S. Consumer Bureau Outlines Bank Exams Starting July 21

The Consumer Financial Protection Bureau will begin supervision of the 111 largest U.S. banks for consumer protection problems on July 21, according to a statement issued by the Treasury Department.

“Starting on July 21, we will be a cop on the beat -- examining banks and protecting consumers,” Elizabeth Warren, the Obama administration adviser who is setting up the new agency, said in the statement yesterday.

Under the Dodd-Frank financial regulatory overhaul, supervision of banks on consumer issues transfers from other federal regulators to the bureau on July 21, a date set by Treasury Secretary Timothy F. Geithner.

The consumer bureau’s supervisory process will work to detect and remedy practices that violate federal law and could harm consumers, Treasury said.

“Examiners will look at the products and services the institution offers, with a focus on risk to consumers,” Treasury said. “The institution’s compliance with requirements during the entire life cycle of the product or service will be reviewed, including how a product is developed, marketed, sold and managed.”

The banking supervision program at the consumer bureau is headed by Steven Antonakes, a former commissioner of banking in Massachusetts. It will cover institutions that together hold more than 80 percent of the nation’s banking assets, Treasury said in the statement.

For more, click here.

Mexico Antitrust Agency Starts Second Probe of Telecom Market

Mexico’s antitrust agency is opening an investigation into “relative monopolistic practices” in the markets for cable television, fixed-line phone and internet service.

The Federal Competition Commission, known as the CFC, will review actions or agreements by companies that have the “objective or effect of inappropriately displacing other market participants.” Competitors may also have attempted to increase costs for rivals or reduce demand for their services, according to a statement published in Mexico’s official gazette yesterday.

The probe follows another CFC investigation into possible collusion in the same markets, announced June 1. Telefonos de Mexico SAB, the Mexico City-based company that controls 80 percent of the nation’s fixed-line market and is the largest Internet provider, filed a complaint with the CFC in March, saying commercial agreements between Grupo Televisa SA and Megacable Holdings Inc. hurt competition.

Televisa, also based in Mexico City and the world’s largest Spanish-language broadcaster, controls three cable operators that offer packages of TV, phone and Web service, and it shares a brand, Yoo, with Megacable, the nation’s largest cable carrier.

The companies, which have been taking customers from Telmex with their package of services, have denied their collaboration hurts competition. Telmex, controlled by billionaire Carlos Slim’s America Movil SAB, is banned from offering a video product by Mexico’s government, which says the company must first comply with rules governing phone-network connections.

Belvedere, CEO, Units Fined by French Market Regulator

France’s financial-markets regulator fined Belvedere SA Chief Executive Officer Jacques Rouvroy 100,000 euros ($140,000) by for manipulating the company’s share price.

Belvedere, its Sobieski and Polmos Lancut units, and Rouvroy’s Financiere du Vignoble were fined another 75,000 euros in total. The Autorite des Marches Financiers issued the decision on its website yesterday.

Rouvroy and Belvedere were found to have reported misleading information to the markets on a share buy-back plan as well as on how many of the company’s shares they controlled. Sobieski, a Polish vodka company, Rouvroy and Financiere du Vignoble were faulted for not declaring purchases of Belvedere shares. Polmos Lancut didn’t notify the markets that it had crossed stake thresholds in buying up Belvedere shares.

“These elements come together to show that while using the companies’ accounts” Rouvroy “ensured that Belvedere shares were fixed at an abnormal level compared to that which would have happened naturally in the market,” the AMF said.

Alain Ribeyre, a lawyer for Rouvroy and the companies, didn’t immediately respond to calls for comment on the decision. Rouvroy didn’t return a message left on his mobile phone.

Compliance Policy

Watchdog Proposes Dodd-Frank Standards for Broker-Dealer Audits

Accounting firms would have to consider how much risk their clients take when auditing brokerage firms under rules proposed by the industry’s new watchdog.

The proposal from the Public Company Accounting Oversight Board comes a month after the nonprofit corporation established an inspection program for auditors of broker-dealers under terms of the 2010 Dodd-Frank financial reform act.

“It would require auditors to use judgment to identify and focus on matters that are most important to the customer-protection objectives,” said PCAOB Chairman James R. Doty, in a statement.

The proposed standards are open for a two-month public comment period. A final version would be adopted only if the Securities and Exchange Commission, which oversees the PCAOB, approves its own rule proposed last month to beef up disclosure requirements for broker-dealers who hold clients’ funds.

“The broker-dealer community is very diverse, and the business models and risk profiles of the roughly 5,000 registered broker-dealer firms vary,” said Daniel Goelzer, a member of the audit board. “The proposals recognize that reality. They are explicitly risk-based and are intended to be scalable to firms of different types and sizes.”

The PCAOB yesterday also proposed standards for auditors reviewing supplemental information a company files with its financial statements.

Levin Says Better Offshore Tax Compliance Would Reduce Deficit

U.S. Senator Carl Levin said the congressional focus on reducing the federal budget deficit should enhance the chances for passage of legislation to crack down on offshore tax havens.

Improving offshore tax enforcement would allow the U.S. Treasury to recoup a significant chunk of an estimated $100 billion in revenue that Levin said is lost annually to “offshore trickery and tax shelter abuses.” He made the remarks yesterday at a press briefing unveiling the legislation.

Levin, a Michigan Democrat, heads the Senate Permanent Subcommittee on Investigations, which has examined offshore transactions for the past decade. He has introduced similar legislation in four previous congressional sessions.

The bill’s 18 provisions include several that would require improved reporting of offshore transactions by banks and corporations, and allow for more tax information-sharing among U.S. regulatory agencies.

The legislation would require that corporations registered with the Securities and Exchange Commission annually disclose country-by-country figures for employees, sales, financing, tax obligations and tax payments.

The bill would treat non-U.S. corporations that are publicly traded or have $50 million or more in assets and are managed and controlled primarily from the U.S. as U.S. corporations for income tax purposes.

For more, click here.

FCC Consider Rules to Guard Landline Users From Surprise Charges

The U.S. Federal Communications Commission is proposing new rules to protect landline telephone users from surprise charges on their monthly bills.

The rules proposed yesterday would require telephone companies, such as Verizon Communications Inc. and AT&T Inc., to separate third-party charges more clearly on their bills and to provide more disclosure about those charges.

The FCC said in an e-mail that the rules would help subscribers block unauthorized charges. The agency will take public comment on the rules, which require a vote by the full commission to take effect.

Last month, the FCC proposed a total of $11.7 million in fines against four telephone companies it said had charged thousands of consumers for services that they never wanted, ordered or used.

GAO’s Revolving-Door Study of SEC Cites Ethics-Advice Record

U.S. Securities and Exchange Commission employees who leave the regulator for work with private companies often find positions with firms most heavily involved with the agency, the Government Accountability Office said.

More than a third of 224 recently departed SEC employees who returned before the SEC with business from 2005 to 2010, represented 16 financial, legal or consulting firms often in contact with the SEC, the GAO said in a report released yesterday. Of 2,127 employees who left from 2006 to 2010, 37 percent took jobs as attorneys, economists, examiners or accountants, occupations that are “relevant” to SEC examination and investigative work, the GAO said.

SEC Inspector General H. David Kotz has issued four reports since 2009 on revolving-door problems at the agency. The GAO report didn’t highlight systemic issues with former SEC employees joining regulated firms. The report’s primary criticism was that the SEC hasn’t kept track of ethics advice the agency gives employees.

“SEC has not consistently documented ethics-related advice,” the GAO reported. Recording such advice could show “that its officials are providing appropriate advice to current and former employees, and that the agency is taking steps to minimize the potential for post-employment violations or conflicts of interest,” the report said.

In response, the SEC “has begun drafting standards concerning the documentation of ethics advice,” SEC Chairman Mary Schapiro told the government research office in a letter.

In a revolving-door proposal filed with the SEC July 11, the Financial Industry Regulatory Authority said it will ban former officers from making client appearances or testifying as experts in Finra cases within one year of leaving the regulator.


Madoff Judge Approves Trustee’s First Payments to Customers

A bankruptcy judge approved the first payments to customers of Bernard Madoff out of funds collected by the trustee, more than 2 1/2 years after the Ponzi scheme collapsed, according to a court filing yesterday.

Trustee Irving Picard said in May he would initially pay $272 million to customers with approved claims, out of a $2.6 billion fund set up for Madoff investors.

Safeway, Ralph’s Profit Sharing Found to Need More Scrutiny

Safeway Inc., Supervalu Inc.’s Albertson’s and Kroger Co.’s Ralph’s supermarket chains may have violated antitrust law with their 2003 accord to share profits during a strike, a federal appeals court ruled.

An eleven-judge panel of the U.S. Court of Appeals in San Francisco yesterday said the agreement “is not exempt” from antitrust scrutiny. A three-judge panel last year overturned a lower-court ruling that the agreement, reached during a conflict with the companies’ unions, didn’t violate antitrust law.

“More than a ‘quick look’ is required to ascertain its impact on competition,” according to yesterday’s ruling.

The supermarket companies had argued that the agreement, which called for sharing profits if any of the three were singled out for a strike, wasn’t anticompetitive because it lowered prices for consumers by reducing labor costs.

California sued the three grocers in 2004, saying the so-called mutual strike assistance agreement violated federal antitrust laws and led to higher prices. A 141-day strike and lockout at the companies’ Southern California stores was the longest in the industry’s history and was mainly over proposals requiring workers to share health-care costs and establish a two-tier pay system.

Teena Massingill, a spokeswoman for Pleasanton, California-based Safeway, owner of the Vons brand, didn’t immediately return a call for comment.

Meghan Glynn, a spokeswoman for Cincinnati-based Kroger, didn’t immediately return a call seeking comment.

Jeff Swanson, a spokesman for Eden Prairie, Minnesota-based Supervalu, wasn’t immediately available to comment.

The case is State of California v. Safeway, 08-55708, U.S. Court of Appeals for the Ninth Circuit (San Francisco).

Toyota Wins Dismissal of Most Investor Recall-Suit Claims

Toyota Motor Corp. won dismissal of some claims in a stockholder lawsuit related to alleged sudden, unintended-acceleration problems that caused a 20 percent drop in the carmaker’s shares in January and February of last year.

The suit raised claims under Japanese securities law, over which the U.S. court didn’t have original jurisdiction, U.S. District Judge Dale Fischer in Los Angeles ruled in an 11-page memorandum dated July 7. Those claims involve investors who purchased their stock on foreign exchanges, Fischer said.

Respect for foreign law “would be completely subverted if foreign claims were allowed to be piggybacked into virtually every American securities fraud case,” the judge wrote.

The investors, led by the Maryland State Retirement and Pension System, said in their complaint that internal documents show the Toyota City, Japan-based company, Asia’s largest carmaker, deliberately hid the acceleration problems and knew about the alleged defects as early as 2000.

“We are pleased that the court has granted Toyota’s motion to dismiss most of the claims in the federal securities case,” Celeste Migliore, a Toyota spokeswoman, said in an e-mail. The company believes it’s important that the judge rejected the shareholders “attempted end-run around” a Supreme Court decision to pursue claims under Japanese law, she said.

The judge allowed the case to proceed on seven of the 33 misrepresentations Toyota is alleged to have made to investors about the sudden-acceleration problems.

“We respect the judge’s decision, but we plan to move forward and collect significant damages,” David Paulson, a spokesman for Maryland Attorney General Douglas F. Gansler, who represents the retirement system, said in a telephone interview.

The case is In re Toyota Motor Corp. Securities Litigation, 10-00922, U.S. District Court, Central District of California (Los Angeles)

MBIA Gains on Speculation of BofA Accord on Debt Protection

MBIA Inc. shares surged after the bond insurer agreed with Bank of America Corp. to dismiss a lawsuit over protection sold against mortgage-debt defaults. The agreement prompted speculation that the two firms are near a wider settlement of claims tied to soured subprime home loans.

The suit is one of several involving Bank of America, the firm that bought Countrywide Financial Corp. in 2008 and Merrill Lynch & Co. in 2009, and MBIA, which guaranteed Wall Street’s toxic mortgage debt. The companies agreed voluntarily to dismiss the case and pay their own legal fees, according to a filing July 11 in New York state court.

“This is likely a precursor to a wider, comprehensive settlement which resolves all outstanding litigation against Bank of America and MBIA,” said Manal Mehta, a partner at Branch Hill Capital, a San Francisco-based hedge fund that invests in Armonk, New York-based MBIA. “Any meaningful settlement would have dramatic positive implications for the credit quality of MBIA.”

MBIA sued the bank to unwind or recover payouts on $5.7 billion of credit-default swaps and related insurance sold against collateralized debt obligations. The firm, the largest bond insurer during the 2008 financial crisis, claimed that efforts by Merrill Lynch to market the swaps contracts were part of a scheme to offload deteriorating loans from 2006 and 2007.

Kevin Brown, an MBIA spokesman, and Bill Halldin of Bank of America declined to comment.

Bank of America had $6.2 billion set aside as of the first quarter for claims from insurers and bond buyers that soured mortgages were created with false or missing information. There were $13.6 billion in outstanding claims at the time, $5.3 billion of which came from bond insurers, the bank said.

MBIA has booked $2.7 billion in estimated recoveries on its balance sheet for mortgage-bond repurchase claims as of the first quarter, the firm said in a May filing. The insurer said it believes it is entitled to collect the full $4.6 billion of losses it has incurred on the debt. Through September, MBIA had paid out $2.5 billion on mortgage securities sponsored by Countrywide, Chief Executive Officer Jay Brown said in February.

The case is MBIA Insurance Corp. v. Merrill Lynch, Pierce, Fenner & Smith, 09601324, New York State Supreme Court, New York County (Manhattan).

For more, click here.

Tetragon Financial Shareholder Sues Directors Over Fees

A Tetragon Financial Group Ltd. shareholder sued a group of company officers and directors, the firm’s investment manager and Polygon Investment Partners LLP, an investment firm, claiming “an ongoing abusive scheme” by the directors to profit at Tetragon’s expense.

“Instead of faithfully serving the company’s investors, defendants have engaged and continue to engage in the looting of TFG,” investor Daniel Silverstein said in his complaint, filed July 11 in Manhattan federal court. “The investment manager, with the active complicity of the TFG board, has expropriated almost $205 million in unjust fees.”

Silverstein’s case is a shareholder derivative suit, which is a claim filed on behalf of the company to enforce legal rights the company’s officers and directors have allegedly failed to assert.

In the suit, Silverstein claims Tetragon’s directors allowed the company to manipulate its net asset values to maximize performance fees paid to its investment adviser, which is owned by Polygon, a London-based hedge-fund firm run by Reade Griffith and Paddy Dear, both of whom are among the defendants in the Silverstein case.

Carissa Ramirez, an outside spokeswoman for Tetragon Financial Group, had no immediate comment. Tetragon is based in Guernsey in the Channel Islands.

The case is Silverstein v. Knief, 11-CV-4776, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Comings and Goings

Labaton Sucharow Hires Former SEC Attorney Jordan Thomas

Labaton Sucharow LLP hired former U.S. Securities and Exchange Commission attorney Jordan A. Thomas to start the New York-based law firm’s whistle-blower representation practice.

Thomas was assistant director and assistant chief litigation counsel in the SEC’s Division of Enforcement for the past eight years and helped to develop the agency’s whistle-blower program, Labaton said yesterday in a statement. Thomas will head Labaton’s practice focused exclusively on representing individuals who report fraud to the SEC.

The SEC’s whistle-blower program, part of the agency’s rulemaking under the Dodd-Frank Act, will let corporate tipsters collect as much as 30 percent of penalties when they report financial wrongdoing. The program expands a bounty system that was previously limited to insider-trading cases.

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