Georgia Subpoenas, Dodd-Frank, Greek Rescue: Compliance

Georgia requested information from UBS AG, Morgan Stanley and Ameriprise Financial Inc. in its probe over whether the firms broke the state’s securities laws in sales of structured notes called reverse convertibles.

The Secretary of State’s office sent subpoenas requesting data from each of the firms on how many reverse convertibles they sold in Georgia and the names of the investors, according to a person familiar with the matter, who spoke on condition of anonymity because the investigation is ongoing.

Reverse convertibles are short-term bonds generally sold to individuals that convert into stock if a company’s share price plummets. Georgia began examining the securities in May after lawyers received complaints from investors who asked if the state had any open investigations, Vincent Russo, general counsel and acting assistant securities commissioner for the Secretary of State’s office, said in a telephone interview last month.

“We received a generic subpoena seeking a list of Georgia-based clients who invested in certain types of products, some of which we do not offer,” Benjamin Pratt, a spokesman for Minneapolis-based Ameriprise, said in an e-mail. “The subpoena does not name products or advisers.”

Matt Carrothers, a spokesman for the Georgia Secretary of State’s office, said he couldn’t immediately comment. Allison Chin-Leong, a spokeswoman for Zurich-based UBS, and Mary Claire Delaney, of Morgan Stanley in New York, declined to comment.

Sales of structured notes such as reverse convertibles are soaring as investors frustrated by record-low interest rates on savings seek higher returns through investments that carry more risk. The “complex” securities can be difficult for investors and brokers to evaluate, according to the Financial Industry Regulatory Authority.

Special Section: Dodd-Frank Anniversary

Frank Says Cutting Funds to Regulators ‘Worst of All Worlds’

U.S. Representative Barney Frank said Republican efforts to cut funding to agencies implementing new Wall Street rules under the Dodd-Frank Act are creating the “worst of all worlds” for regulators.

“This nickel and diming the Securities and Exchange Commission and Commodity Futures Trading Commission does grave harm,” said Frank, co-sponsor of the financial-regulation law that bears his name, during testimony at a Senate Banking Committee hearing in Washington yesterday.

Frank, of Massachusetts, the senior Democrat on the House Financial Services Committee, was the first witness at a hearing marking the one-year anniversary of the law signed by President Barack Obama. Regulators including Federal Reserve Chairman Ben S. Bernanke, SEC Chairman Mary Schapiro and CFTC Chairman Gary Gensler were expected to testify at the hearing conducted by Senate Banking Committee Chairman Tim Johnson.

House Republicans, who took majority control of the chamber after Dodd-Frank was passed, have pushed to cut the funding of the SEC and CFTC, which are required to write hundreds of rules to implement the law.

For the video of Frank’s testimony, click here.

Bernanke testified at the Senate Banking Committee’s hearing yesterday. His remarks included such topics as the impact of the financial crisis on U.S. economy, the purpose of Dodd-Frank, and the financial regulations that have been implemented under the law.

For the video of Bernanke’s testimony, click here.

Wells Fargo’s Vitner Says Dodd-Frank Hasn’t Made System Safer

Mark Vitner, senior economist at Wells Fargo Securities LLC, talked about the impact of the Dodd-Frank Act on the financial markets and the strengths and weaknesses of the legislation.

Vitner, who spoke with Mark Crumpton on Bloomberg Television’s “Bottom Line,” also discussed the outlook for the debt ceiling debate.

For the video, click here.

Talbott Sees Narrower Margins for Banks Under Dodd-Frank

Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, talked about the accomplishments of the Dodd-Frank Act in the year since it became law and its impact on financial services companies.

Talbott spoke with Lisa Murphy on Bloomberg Television’s “Fast Forward.”

For the video, click here.

Harvard’s Scott Says Dodd-Frank Act ‘Handcuffed’ Fed

Hal Scott, a professor at Harvard Law School, said in a Bloomberg Radio interview that the Dodd-Frank Act “has handcuffed the Federal Reserve’s ability to respond to a future crisis.”

Scott talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Dodd-Frank Swipe Caps Slow Growth, End Rewards: One Year Later

Less than a month after the Federal Reserve approved Dodd-Frank Act rules capping debit-card swipe fees, the limits on so-called interchange are looking like a compromise that displeases almost everyone.

Big banks such as JPMorgan Chase & Co. are looking for ways to make up for $8 billion in lost revenue, payment networks including Visa Inc. are forecasting slower growth and smaller retailers are questioning whether the change will boost their bottom lines. Meanwhile, there is little specific discussion among big retailers of any benefits for consumers.

Dodd-Frank, the regulatory overhaul enacted a year ago yesterday, required the Fed to ensure fees charged for debit-card purchases were “reasonable and proportional” to the cost of processing transactions. The 21-cent cap approved by the central bank on June 29 reflected a pullback from a 12-cent limit it proposed in December, which roiled shares of Visa and MasterCard Inc. and prompted banks to seek to delay or overturn the rules.

The largest debit-card issuers, which stand to lose billions of dollars in annual revenue under the Fed caps, have already begun to eliminate rewards programs and free checking and new fees may be next in the effort to help make up the difference, according to analysts and executives.

While financial firms face the loss of half their debit-fee revenue, the question of who wins remains a toss-up, according to retailers. The debit-card market is massive -- more than 38 billion transactions took place in 2009 -- and its participants include grocery and electronics stores, gas stations and large retailers like Wal-Mart Stores Inc. and Target Corp., all of whom lobbied for limits on the power of banks and payment networks to impose fees.

For more, click here.

Compliance Policy

Euro-Area Leaders May Accept Greek Default, Ease Bailout Terms

Euro-area leaders may accept a temporary Greek default and ease the terms on bailouts to cash-strapped nations as they intensify efforts to resolve the 21-month sovereign debt crisis, officials said.

European leaders fanned out to persuade investors that last night’s array of crisis-fighting measures can help stop the debt turmoil that’s defied them for more than a year.

German Chancellor Angela Merkel hailed “significant” progress after government chiefs widened the scope of their bailout fund to allow it to buy the bonds of debt-laden nations, support banks and offer credit lines. The agreement included new aid for Greece that embraced bondholders, prompting Fitch Ratings to say it will put a default rating on Greek debt.

The risk is that the package will follow the pattern of previous agreements and eventually disappoint markets. Leaders declined to increase the 440 billion euro ($634 billion) fund, prompting economists from Citigroup Inc. to Goldman Sachs Group Inc. to question whether it’s big enough to insulate Spain and Italy from contagion. The onus also remains on Greece and other cash-strapped nations to keep delivering austerity measures.

With Greece being charged about 35 percent to borrow for two years, heads of government meeting in Brussels may cut the interest rates on loans to it, Portugal and Ireland to about 3.5 percent and double the repayment period to at least 15 years. Europe’s main rescue fund may get the power to buy bonds from investors, help countries recapitalize banks and offer precautionary lines of credit to repel speculative attacks.

Policy makers are meeting for the second time in a month in a bid to calm Greece’s financial distress and inoculate Spain and Italy from it.

For more on Europe’s debt crisis, see EXT4.

Compliance Action

Consumer Bureau Notifies Banks Supervisory Role Begins

The Consumer Financial Protection Bureau alerted U.S. banks with more than $10 billion in assets that it plans to focus on compliance with federal consumer laws and regulations in its new supervisory role over the firms.

The bureau, created by the Dodd-Frank regulatory overhaul enacted a year ago, notified bank chief executive officers of its new role in letters dated yesterday as it began official operations in Washington.

“We expect that institutions will offer consumer financial products and services in accordance with federal consumer financial laws, and will maintain effective systems and controls to manage their compliance responsibilities,” the bureau wrote in the letters, according to copies e-mailed to reporters.

Dodd-Frank took away supervisory powers on consumer issues from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. and gave it to the bureau.

Steven Antonakes, the bureau’s assistant director for large bank supervision, said on June 15 that it will periodically supervise 111 banks, thrifts and credit unions, which control about 80 percent of U.S. banking assets. Most banks with assets above $100 billion will face continuous supervision by on-site examiners.

Under the law, the bureau doesn’t assume other powers until it has a director confirmed by the U.S. Senate.

MetLife Seeks to Sell Business to Avoid Banking Regulation

MetLife Inc., the biggest U.S. life insurer, is exploring the sale of its deposit-gathering business to avoid tighter regulation that comes with bank status.

“We do not believe it is appropriate for the overwhelming majority of our business to be governed by regulations written for banking institutions,” Chief Executive Officer Steven Kandarian said yesterday in a statement.

MetLife is seeking to avoid stronger federal oversight imposed on banks after government bailouts in 2008 prompted Congress to increase regulation through the Dodd-Frank Act. New York-based MetLife, which opted against accepting U.S. Treasury Department capital, said it got about 2 percent of operating earnings from its banking unit in the first quarter.

MetLife said the business that may be sold includes savings accounts, certificates of deposits and money-market accounts. The insurer plans to continue lending through its residential mortgage business. MetLife Bank began in 2001 and expanded through acquisition in 2008. The unit had total assets of $15.6 billion, including $9.3 billion in deposits, as of March 31.

MetLife and Prudential Financial Inc., the second-biggest life insurer, are pushing federal regulators to refrain from applying bank capital standards to insurance companies. Newark, New Jersey-based Prudential isn’t a bank holding company and, like rivals, including MetLife, has insurance operations regulated by individual U.S. states.

Fed’s Dudley Got Waiver to Keep AIG Holdings After Bailout

The Federal Reserve Bank of New York’s William C. Dudley got a waiver in 2008 to keep personal financial holdings of American International Group Inc. after the company received a Fed rescue, Senator Bernard Sanders, a Vermont Independent, said yesterday in a statement.

Dudley, who was the New York Fed’s markets-group chief at the time and is now the bank’s president, is the senior New York Fed official identified in a Government Accountability Office report yesterday as receiving the waiver. Jack Gutt, a New York Fed spokesman, declined to comment.

The GAO criticized the Fed’s standards for managing conflicts of interest, saying the Dudley example “highlights the potential for appearance concerns” even if the stake is a small percentage of the person’s total holdings. New York Fed employees who requested permission to retain holdings in companies receiving assistance were “generally allowed” to keep the investments, the GAO said.

The Fed on Sept. 16, 2008, authorized a loan to AIG to avert its collapse. The bailout later expanded to include aid from the U.S. Treasury and the Fed.

For more, click here.


Keydata Founder Says FSA Probe Relied on Confidential E-Mails

Lawyers for Keydata Investment Services Ltd. founder Stewart Ford are seeking to prevent U.K. regulators from using in an investigation seized e-mails that were sent by the insolvent company’s law firm.

The e-mails contained confidential legal advice and shouldn’t have been available to the Financial Services Authority, the lawyers told a London court yesterday.

Hodge Malek, one of Ford’s lawyers, said the FSA “was neither fair nor transparent in the way it got the e-mails.”

Keydata was forced into administration by the FSA in 2009 and the U.K. regulator is investigating potentially misleading marketing and tax irregularities at the company, which managed as much as 2.8 billion pounds ($4.6 billion) before it failed.

The FSA obtained the e-mails in 2009 from Keydata’s administrators at PricewaterhouseCoopers LLP and Ford’s lawyers said they contained material covered by “legal and professional privilege.”

The founder and former chief executive officer of Keydata was granted a judicial review in May to question the way the FSA carried out its investigation.

Part of yesterday’s judicial review was held in private after Judge Ian Burnett ruled the contents of the e-mails shouldn’t be publicized until he ruled on whether it was fair for the FSA to use them.

K1 Hedge Fund Founder Kiener Convicted of Ponzi-Scheme Fraud

K1 Group founder Helmut Kiener was convicted of defrauding investors with a 345-million euro ($497 million) Ponzi scheme and sentenced to 10 years and eight months in prison.

Kiener, 52, was found guilty of fraud, forgery and tax evasion by a court in Wuerzburg, Germany. Kiener in April confessed to using new investors’ money to make up for losses in the wake of the financial crisis and to having manipulated some account statements.

Barclays Plc and BNP Paribas SA lost a combined 223 million euros and private investors lost about 122 million euros, prosecutors said. Dieter Frerichs, the former managing director of two K1 funds in the British Virgin Islands, killed himself last year to avoid being arrested on the Spanish island of Mallorca.

Achim Groepper, Kiener’s lawyer, said he was satisfied with the sentence because it was less than the 12 years and nine months sought by prosecutors. He won’t appeal the verdict.

K1 Invest Ltd. and K1 Global Ltd. were the two main funds Kiener operated and which took the losses that prompted the trial.

For more, click here.

Minkow Gets Five Years in Prison for Stock-Fraud Conspiracy

Barry Minkow, a convicted confidence man who started a fraud-detection firm, was sentenced to five years in prison for his role in a stock-manipulation scheme.

Minkow, 45, was also ordered yesterday in Miami federal court to pay $583 million in restitution. U.S. District Judge Patricia Seitz gave Minkow, who pleaded guilty in March to conspiracy to commit securities fraud, 60 days to surrender so he can get his sons settled in school.

Prosecutors said Minkow made false and misleading statements about Miami homebuilder Lennar Corp.’s financial condition to drive down the company’s share price. The U.S. said Minkow also abused his relationship with federal law enforcement agents to get non-public information about Lennar and traded on that information.

The case is U.S. v. Barry Minkow, 11-cr-20209, U.S. District Court, Southern District of Florida (Miami).

For more, click here.

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