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AIG-BofA, Fifth Third, Truck Emissions, Sirius: Compliance

Aug. 9 (Bloomberg) -- American International Group Inc., the bailed-out insurer, sued Bank of America Corp. over $10 billion in losses on mortgage-bond investments.

AIG bought more than $28 billion in residential mortgage-backed securities from Bank of America and the businesses it took over -- Countrywide Financial Corp. and Merrill Lynch & Co. -- which were marred by a “massive fraud” according to the insurer’s complaint filed in New York state court yesterday.

Bank of America and the other defendants created mortgage securities backed by shoddy loans and sold the investments based on inflated credit ratings that masked their true risk, AIG said in the complaint. Offering materials “grossly understated” the risks of loans tied to the securities the insurer purchased, the company said.

Mark Herr, a spokesman for New York-based AIG, said in a statement. “This is not the first lawsuit that AIG has filed against counterparties that have sought to profit at our expense, and we anticipate that it will not be the last.”

AIG took U.S. government bailouts starting in 2008 to avert a collapse after losses tied to subprime home loans and insuring mortgage bonds. Bank of America, which repaid its government aid in 2009, has lost more than 38 percent this year in New York trading through last week as Chief Executive Officer Brian T. Moynihan reached settlements with loan buyers and insurers who claim the bank’s Countrywide unit created defective mortgages.

Bank of America rejected the insurer’s “assertions and allegations,” said Larry DiRita, a spokesman for the Charlotte, North Carolina-based lender, the biggest in the U.S. by assets.

“AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets,” said DiRita. “It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors.”

In addition to the lawsuit against Bank of America, AIG yesterday also sought to intervene in a separate case in which the bank hopes to resolve claims from investors in 530 mortgage-securitization trusts. The deal, which requires court approval, calls for Bank of America to pay $8.5 billion to resolve claims.

AIG, which owns securities involved in the settlement, wants more information to determine whether the agreement is fair, it said in a court filing. The settlement, negotiated with a group of 22 institutional investors, pays a “fraction” of the losses estimated by that group, AIG said.

“Both the substance of the agreement and the procedure by which it was made raise numerous questions as to the reasonableness of the agreement,” AIG said.

New York Attorney General Eric Schneiderman last week called the deal unfair to investors and asked a New York state judge to reject it.

The case is American International Group Inc. v. Bank of America Corp., 652199-2011, New York State Supreme Court (Manhattan).

Compliance Action

Fifth Third May Face SEC Civil Claim Over Redemption of Hybrids

U.S. regulators have told Fifth Third Bancorp. that it may face enforcement claims over how it handled the redemption of securities that plunged in value in the two days before the company’s public disclosure.

The firm, Ohio’s largest lender, got a so-called Wells notice Aug. 1 from Securities and Exchange Commission lawyers, who said they plan to recommend the agency bring civil claims for violating regulations including fair-disclosure rules, Fifth Third said in a regulatory filing Aug. 5. The warning gives the bank a chance to dissuade the watchdog from proceeding.

“The Bancorp intends to respond and explain why it believes that an enforcement action is unwarranted,” the Cincinnati-based firm wrote in the filing.

The firm offered on May 25 to compensate investors who bought the hybrid securities in the days before the announcement, saying in a statement that it regrets “any inadvertent harm that may have occurred as a result of the notification process.”

Fund Manager Efrosman Is Extradited From Poland, U.S. Says

Aleksander Efrosman, accused of cheating investors out of millions of dollars that he used for his own benefit, including gambling more than $3 million, was extradited from Poland, the U.S. said.

Efrosman, 49, who controlled foreign-currency hedge funds Century Maxim Fund Inc. and AJR Capital Inc., was indicted in 2006. Efrosman defrauded more than 100 investors by telling them he would invest their money in the stock market and foreign currency exchange market, according to prosecutors. He falsely said that he had a history of profitable trading and that he would use a “stop-loss” mechanism to ensure that no trade would lose more than 3 percent, according to the government.

He had fled the U.S. with millions of dollars in 2005, traveling to Mexico, Panama and then Poland, using the alias “Mikhail Grosman” and a fraudulent Russian passport, according to a statement yesterday by U.S. Attorney Loretta Lynch in Brooklyn.

Efrosman, a U.S. citizen, was living in Krakow and was extradited to the U.S. on Aug. 5, according to the statement. He faces mail-fraud, wire-fraud and money-laundering charges, and a maximum penalty of 20 years in prison.

His lawyer, Michael Schneider, couldn’t immediately be reached.

The case is U.S. v. Efrosman, 06-cr-95, U.S. District Court, Eastern District of New York (Brooklyn).

Former Citigroup Trader to Pay $1.49 Million Over Futures Fraud

Otmane El Rhazi, a Former Citigroup Inc. trader, was ordered to pay more than $1.49 million to resolve U.S. regulatory claims that he used noncompetitive and fictitious trades to steal money from the bank.

El Rhazi, a Moroccan national who worked for Citigroup Global Markets in the U.K., made platinum and palladium futures trades from November 2010 to April that diverted $373,860 to his own account, the Commodity Futures Trading Commission said yesterday in a statement citing a July 29 court order imposing restitution and a $1.12 million monetary penalty.

“El Rhazi consistently profited his personal account at the expense of the Citi account,” U.S. District Judge Denise L. Cote said in the order filed in the Southern District of New York. El Rhazi was also permanently banned from trading, the CFTC said, citing the court order.

Mark Costiglio, a Citigroup spokesman, declined to comment. The order listed no contact information for El Rhazi, and Dennis Holden, a CFTC spokesman, said the former trader had no defense attorney of record.

Education Management Violated Student-Aid Rules, U.S. Claims

Education Management Corp., the second-largest U.S. for-profit college chain, used improper recruitment practices to secure more than $11 billion in U.S. student aid, prosecutors said in a civil lawsuit.

Education Management, 41 percent owned by Goldman Sachs Group Inc. funds, illegally paid recruiters based on the number of students signed up, a violation of rules for colleges that get U.S. student grants and loans, the Justice Department said yesterday in a complaint filed in federal court in Pittsburgh.

Prosecutors spelled out their case against the company for the first time since May, when the Justice Department joined an employee whistle-blower suit. Colleges that receive federal aid are barred from paying recruiters incentives tied to enrollment because it may encourage companies to register unqualified students.

Education Management “fraudulently induced” the Education Department to make the company eligible for more than $11 billion in federal grants and loans since 2003, according to the complaint. “Each and every one of the claims it submitted or caused a student to submit violated” the U.S. False Claims Act, the government said.

The industry has been under scrutiny by Congress, state lawmakers and attorneys general who are looking into sales practices and students’ debt loads.

The whistle-blower suit was filed under seal in 2007 by a former Education Management employee. The Pittsburgh-based company has denied violating government rules. Jacquelyn Muller, a spokeswoman for Education Management, didn’t immediately respond to an e-mail request yesterday for comment.

State attorneys general in Illinois, Florida, California and Indiana have also intervened in the case, and filed yesterday’s suit along with the Justice Department.

The case is U.S. v. Education Management, 07-cv-00461, U.S. District Court, Western District of Pennsylvania (Pittsburgh).

Massachusetts Adopts Rule on Hedge Funds’ Use of Expert Networks

The Massachusetts Securities Division adopted a regulation on the use of expert networks by hedge funds and other investment advisers that is the first of its kind in the U.S., according to an e-mailed statement.

The rule requires funds to obtain certification describing any confidentiality restrictions that apply to the consultant and stating that the service won’t provide any confidential information to the investment adviser, the regulator said yesterday. The rule takes effect Dec. 1.

“This regulation is designed to thwart the misuse of inside information improperly obtained by these expert-network consultants and ensure that information they provide was properly obtained,” William F. Galvin, secretary of the commonwealth, said in the statement.

The U.S. government’s biggest insider-trading investigation in a generation has implicated hedge funds, technology firms and expert-network consulting firms, which connect investors with industry professionals who provide insight into a specific market.

Hedge-fund manager James A. Silverman was accused by Galvin’s office in March of using inside information obtained through Guidepoint Global LLC, an expert-network firm with an office in Boston, on clinical trials to generate profits for his Cambridge-based firm, RRC Bio Fund LP.

Compliance Policy

Obama May Seek to Reduce Truck Emissions 20 Percent, ATA Says

U.S. President Barack Obama’s plan to improve fuel economy for heavy-duty trucks will probably aim to cut carbon-dioxide emissions by about 20 percent by 2018, said Glen Kedzie, vice president at the American Trucking Associations.

The standard will probably set a 6 percent engine-efficiency improvement target, said Kedzie, who is also environmental counsel at the Arlington, Virginia-based industry group and has been briefed by the Environmental Protection Agency and the National Highway Traffic Safety Administration. The efficiency goals should help trucks improve fuel use to 7 or 7 1/2 miles per gallon by 2018, he said.

“Over the last 20 to 25 years, we’ve been flatlining at 6 1/2 miles per gallon, and that’s not a good way to go,” Kedzie said in a telephone interview. “This is going to really help the industry overall. Everyone will move ahead and move on. We’ll get used to it.”

Obama is scheduled to announce the first U.S. greenhouse-gas emissions rules for trucks today in Springfield, Virginia. The administration said in a preliminary proposal in November that lower fuel costs would counter the added expense of new technology. Big rigs may cost $5,901 more, and use between $9,567 and $9,746 less in diesel fuel in the first year, according to the preliminary rule.

Matt Lehrich, a White House spokesman, didn’t immediately provide comment.

Industry executives, trade associations and environmental groups have been briefed by regulators in the weeks leading up to the announcement.

For more, click here.

Courts

Sirius XM Subscribers Urge Judge to Reject Antitrust Accord

A federal judge yesterday heard objections to the settlement of a lawsuit by Sirius XM Radio Inc. subscribers who claimed the satellite radio broadcaster broke the law when it raised prices after merging with its only rival.

U.S. District Judge Harold Baer in Manhattan made no decision on approving the accord after subscribers argued at a hearing that the agreement gives them too little and the lawyers too much.

Subscriber Carl Blessing of Florida sued Sirius XM in 2009, claiming it violated federal antitrust and state consumer-protection laws when it raised prices and levied a music royalty fee after Sirius Satellite Radio and XM Satellite Radio completed their merger in 2008. Blessing said in his complaint his monthly rate jumped 40 percent to $27.88 after the merger.

“I rely on satellite radio every day for weather and news,” Marguerite Willis, a subscriber from South Carolina who commutes 180 miles a day for work, told the judge. “I have no alternative. Combining Sirius and XM created a firm with monopoly power in rural South Carolina.”

The subscribers said New York-based Sirius XM broke promises it made to win approval of the merger from the U.S. Federal Communications Commission and Justice Department. Sirius XM said the increases were imposed to cover higher costs.

Baer in March let the federal antitrust claim proceed as a class-action, or group, lawsuit, on behalf of Sirius XM subscribers. He denied class-action status on the state-law claims.

The class and Sirius XM reached a pretrial settlement, and Baer gave preliminary approval to the agreement in May.

“The settlement is appropriately scaled to the scope of the case,” John Marjoras, a lawyer representing Sirius, told the judge yesterday. “There were hard-fought negotiations. We fully expected to go to trial.”

The accord, valued at $180 million, provides that prices for basic service and Internet access, as well as the music royalty fee, will remain at current levels through the end of the year. Subscribers who canceled can reconnect without paying a fee. Those whose plans expire after Dec. 31 can renew before that time at current rates. Subscribers will get no cash.

Objectors argued that Sirius XM never said it would raise prices before year-end. Some objected to language in the accord that would release Sirius from further claims. They also objected to the $13 million Sirius would pay for fees and expenses to the lawyers representing the class.

The case is Blessing v. Sirius XM Radio, 1:09-cv-10035, U.S. District Court, Southern District of New York (Manhattan).

Speeches/Interviews

Hochberg Says Ex-Im Bank Won’t Ease Domestic Content Rules

U.S. Export-Import Bank President Fred Hochberg said the lender won’t ease requirements that 85 percent of any export it finances be made in the U.S., rebuffing demands from General Electric Co. and Boeing Co.

The two companies have said in congressional testimony that the domestic content threshold doesn’t take into account the nature of modern supply networks.

“We will not relax the requirements,” Hochberg said yesterday in an interview in Panama City.

The lender, backed by the U.S. government, is playing an expanded role as President Barack Obama seeks to double exports by 2015. The bank has backed projects valued at more than $24.5 billion this year, eclipsing a 2010 record, and may seek to increase financing in South Korea, Colombia and Panama after Congress passes free-trade agreements, Hochberg said.

Demand for the bank’s support from companies such as GE, Boeing, KBR Inc. and Caterpillar Inc. surged after financial markets seized up in 2008 and banks tightened borrowing requirements.

The bank loaned $500 million this year to Panama-based Copa Airlines, a unit of Copa Holdings SA, for the purchase of Boeing 737 aircraft, Hochberg said yesterday.

The bank is considering loans for infrastructure projects in Panama, where the government plans to spend more than $10 billion in the next five years to build roads and a subway, Hochberg said.

Congress must reauthorize the Export-Import Bank before Sept. 30, when its five-year approval expires. While Hochberg said he expects Congress to act, the lender can function temporarily if lawmakers miss the deadline, he said.

“We prefer not to have approval delayed,” he said.

To contact the reporter on this story: Ellen Rosen in New York at erosen14@bloomberg.net.

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.

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