Goldman Sachs Sued, H&R Block Settles, Munis: Compliance

The National Credit Union Administration has sued Goldman Sachs Group Inc., accusing the Wall Street firm of violating federal and state laws in the sale of securities to now-failed corporate credit unions.

NCUA is seeking damages in excess of $491 million from Goldman Sachs in the lawsuit filed yesterday in California. The suit is the fourth in a series aimed at recovering almost $2 billion from “sellers and underwriters of questionable securities,” NCUA said in a statement yesterday announcing the suit.

Stephen Cohen, a spokesman for New York-based Goldman Sachs, declined to comment on the NCUA lawsuit.

NCUA claims that Goldman Sachs misrepresented securities in offering documents, causing the credit unions to believe the risk of loss was minimal when in fact it was substantial, according to its statement. The regulator previously filed a complaint against JPMorgan Chase & Co. and two against Royal Bank of Scotland Group Plc.

The complaint against Goldman Sachs relates to the collapses of the U.S. Central and Western Corporate federal credit unions, two of the five liquidated under NCUA conservatorship, the regulator said in the statement.

Compliance Action

Ex-Point Blank Chief to Plead to Tax Charges, Lawyer Says

David Brooks, a founder and former chief executive officer of military contractor Point Blank Solutions Inc., will plead guilty to tax charges today, his lawyer said.

A federal jury found Brooks guilty last year of committing a $185 million fraud and looting the company, formerly called DHB Industries Inc., to pay for personal expenses. Three tax counts were separated from the other charges he was convicted of, including insider-trading, fraud and obstruction of justice. He has asked for a new trial on those charges.

“We are channeling our efforts into the other counts,” Brooks’s lawyer Gerald L. Shargel said in a phone interview yesterday.

Brooks, 56, and former Chief Operating Officer Sandra Hatfield were convicted last September in Central Islip, New York. Point Blank, which makes body armor for the military and police, filed for bankruptcy protection in April 2010. Brooks and Hatfield lied about the inventory of “Interceptor” combat vests that were shipped to the U.S. armed forces and falsely inflated the company’s value and their own stock, the government said.

Robert Nardoza, a spokesman for U.S. Attorney Loretta Lynch in Brooklyn, New York, declined to comment on the plea hearing.

The case is U.S. v. Brooks, 06-CR-550, U.S. District Court, Eastern District of New York (Central Islip).

H&R Block Unit Settles Mortgage Lawsuit with Massachusetts

The H&R Block Inc. mortgage lender formerly known as Option One Mortgage and Massachusetts reached a $125 million settlement of a state lawsuit over allegedly risky and discriminatory lending, the state said.

The unit, Sand Canyon Corp., agreed to pay $9.8 million to Massachusetts and will direct American Home Mortgage Servicing Inc., which services Option One loans in the state, to establish a loan-modification program for struggling borrowers, state Attorney General Martha Coakley said in a statement.

Option One was sued by Massachusetts in 2008 and accused of making risky loans that were doomed to fail and discriminating against black and Latino borrowers by charging more for their loans, Coakley said. The company’s practices were deceptive and illegal, she said at a press conference yesterday.

The settlement will provide an estimated $115 million in loan modifications to homeowners, Coakley’s spokeswoman Melissa Karpinsky said. The modifications will give Massachusetts homeowners writedowns of principal balances and interest rate reductions depending on features of their loans, according to Coakley’s office.

“We are pleased with the final outcome and believe this is good for all parties involved,” Dale Sugimoto, president of Sand Canyon, said in a statement.

The settlement comes as state attorneys general and federal officials are negotiating a settlement with the five largest mortgage servicers in the U.S., including Bank of America Corp. and JPMorgan Chase & Co., over their foreclosure and mortgage-servicing practices.

Some attorney generals, including Coakley, have raised concerns about liability releases in any agreement that would protect the banks from state and federal claims. Coakley has said that any agreement shouldn’t provide banks with releases tied to the packaging of mortgages into securities and conduct related to a mortgage database known as MERS.

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Citigroup Resolves Claims That Assistant Defrauded Clients

Citigroup Inc. will pay $500,000 to resolve Financial Industry Regulatory Authority claims that it failed to stop fraud by an employee who abused accounts belonging to elderly and ill clients as well as her own father.

Tamara Moon misappropriated almost $750,000 from 22 customers over eight years while working as a sales assistant at a branch office in Palo Alto, California, Finra said yesterday in a statement. Moon, who was barred from the securities industry for the misconduct in 2009, was indicted by a federal grand jury on related criminal charges in June.

Citigroup failed to investigate red flags including suspicious trades as Moon targeted customers she believed would be unable to monitor their accounts, Finra said. The Palo Alto branch didn’t have adequate systems to prevent Moon from falsifying records, the Washington-based regulator said.

In one instance, Moon created an account in the name of a dead customer even after Citigroup had been notified that the person had died, Finra said. She then created a fraudulent account in the name of the customer’s widow, using it to funnel $7,500 to her own personal account, according to the statement.

When Citigroup discovered Moon’s suspicious activity in 2008, the firm “immediately notified the authorities, terminated her employment and reimbursed impacted clients,” the company said in an e-mailed statement. “We will provide any assistance necessary to ensure that the former employee is prosecuted to the fullest extent of the law.”

A phone call to Geoffrey Hansen, a federal public defender representing Moon in the criminal matter, wasn’t immediately returned.

Moon was employed by Citigroup’s Smith Barney unit, Elizabeth Fogarty, a bank spokeswoman, said in an e-mail.

Goldman Sachs Says EU Accuses Firm in Cable Price-Fixing

Goldman Sachs Group Inc. said the European Commission told the firm it may have to pay fines in a case relating to price fixing by power-cable companies.

The European Commission issued a “statement of objections” that proposed making the firm liable for some or all of any fine levied against an Italian cable company in which Goldman Sachs funds held stakes, the New York-based bank said in a filing with the U.S. Securities and Exchange Commission yesterday.

Goldman Sachs’s private-equity funds bought the power-cable unit and a telecommunications cable business from Milan-based Pirelli & C. SpA in 2005 and renamed the business Prysmian Cables & Systems, which became Prysmian SpA in an initial public offering in 2007.

Prysmian stock dropped in February 2009 after the company disclosed that it was cooperating with antitrust regulators’ investigation of the cable market. Goldman Sachs funds sold shares in Prysmian later that year.

Last month the European Commission sent complaints to 12 companies “that may have colluded to allocate markets and customers for underground and submarine power cable projects and fix prices,” the Commission said in a statement on July 6. Prysmian said on July 5 that it had received an antitrust complaint and that it would defend itself.

The Commission has proposed holding Goldman Sachs liable “under the concept of parental liability under EU competition law,” Goldman Sachs said in yesterday’s filing, referring to the European Union.

Compliance Policy

Muni Issuers Should Face Disclosure Penalties, MSRB Says

U.S. states and cities should face sanctions for failing to provide updated financial information after they sell bonds, the municipal market’s regulator said, challenging the lax disclosure that has unnerved investors.

The Municipal Securities Rulemaking Board, which writes regulations for the tax-exempt debt industry, made the comments in a letter to Securities and Exchange Commissioner Elisse Walter, who is leading an agency review into how to improve the municipal bond market.

Public borrowers aren’t penalized if they don’t provide annual financial reports and other disclosures on time after issuing debt. The failure by some borrowers to make timely disclosures has long rankled municipal-bond investors.

“There seem to be no significant regulatory repercussions for non-compliance,” the board wrote in the Aug. 8 letter, which was released yesterday. The board said the SEC should take steps “necessary to impose consequences for non-compliance with continuing disclosure undertakings.”

The SEC doesn’t directly regulate disclosures made by municipalities after bonds are sold, as it does with corporations that sell securities to the public. Instead, the agency requires underwriters that sell the securities to be assured by the municipalities that they will provide to investors annual financial statements and other information that could affect the value of the bonds.

The SEC has stepped up its enforcement of standards for municipal securities by establishing a unit to police fraud and last year settled a case against New Jersey for masking the state of its pension plans as it raised money from investors.

Walter has been holding hearings on the $2.9 trillion municipal bond market with the intention of recommending improvements. The SEC also is updating its 1994 guidance covering the disclosure obligations for the municipal industry, a review the MSRB was seeking to influence with its recommendations.

Banks Should Make Living Wills to Plan for Failure, FSA Says

Banks should prepare so-called living wills setting out how they may be broken up with the least possible disruption to the economy if they collapse, the U.K. Financial Services Authority said yesterday.

Lenders should be able to be shut down without roiling markets or requiring public support, according to the FSA. Failed lenders’ bondholders should also bear part of the costs of closure, the regulator said, as part of plans to shield taxpayers published on its website.

Banks are warning that rules considered by global regulators to limit the need for bailouts may harm the economic recovery. Michel Barnier, the European Union’s financial services chief, published draft proposals in January to impose losses on failing lenders’ bondholders -- a step that firms including Citigroup Inc. and Goldman Sachs Group Inc. have said may make it more expensive for banks to raise funds.

Living wills “are largely untested,” because the U.K. hasn’t had a major bank collapse since they have come under consideration by regulators, Darren Fox, a financial services lawyer at Simmons & Simmons LLP, said in a telephone interview. “They require quite a bit of work and possibly restructuring to design and implement and consequently can be intensive in terms of the level of financial and human resources that they absorb.”

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NYSE to Raise Hurdle for Reverse Merger Listings Amid Scrutiny

NYSE Euronext, the U.S.’s biggest operator of exchanges, said it will tighten the listing requirements for reverse merger companies following allegations of accounting fraud, according to a regulatory filing.

The operator of NYSE Amex and the New York Stock Exchange will implement a “seasoning” period for companies that seek listing after completing a reverse merger, according to the proposal, which is subject to approval by the Securities and Exchange Commission. In a reverse-merger process, a closely held firm buys a publicly traded shell company, gaining a stock listing without the scrutiny of an initial public offering.

“Significant regulatory concerns, including accounting fraud allegations, have arisen with respect to a number of reverse merger companies in recent times,” said the filing dated July 22. Because of these concerns, “the exchange believes it is appropriate to codify in its rules specific requirements with respect to the initial listing qualification of reverse merger companies.”

Chinese companies trading in the U.S. through reverse mergers such as China MediaExpress Holdings Inc. have faced investor scrutiny this year after disclosing financial irregularities or auditor resignations, raising concern there may be widespread fraud. Carson Block, a short seller at Muddy Waters LLC, helped fuel that speculation with bearish reports on corporations including Rino International Corp. and Sino-Forest Corp., which trades in Canada.

NYSE is proposing a waiting period of at least one year of trading on the U.S. over-the-counter market or other national market, or a foreign exchange, before companies can list on the bourse.

Nasdaq OMX Group Inc., the second-biggest operator of U.S. stock exchanges, has also proposed to evaluate reverse-merger companies more closely, according to filings to the SEC from April and May.

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Ex-Primary Global Manager Loses Bid to Throw Out Wiretaps

A former sales manager at expert networking firm Primary Global Research LLC lost his bid to bar government wiretaps at his insider trading trial later this month.

James Fleishman had argued that the wiretaps of more than 100 callers to two Primary Global conference lines were illegal. U.S. District Judge Jed Rakoff rejected Fleishman’s request in a two-page order made public in Manhattan federal court yesterday and also declined to hold an evidentiary hearing on the matter.

Primary Global, based in Mountain View, California, is at the center of a nationwide probe of insider trading at hedge funds, technology companies, banks and consulting firms. Winifred Jiau, a former Primary Global consultant, was convicted of securities fraud and conspiracy on June 20 after a trial before Rakoff.

Of the 14 people charged in the investigation by Manhattan U.S. Attorney Preet Bharara’s office, 12 have pleaded guilty and one, Jiau, was convicted at trial. Fleishman has pleaded not guilty and is scheduled to go on trial before Rakoff on two counts of conspiracy Aug. 29.

Ethan Balogh, a lawyer for Fleishman, didn’t immediately return a voice-mail message seeking comment on the ruling.

The case is U.S. v. Fleishman, 11-CR-32, U.S. District Court, Southern District of New York (Manhattan).

Rajaratnam Sentence of More Than 24 Years Sought by U.S.

Galleon Group LLC co-founder Raj Rajaratnam, labeled by prosecutors as the “face of illegal insider trading,” should spend as long as 24 years and five months in prison, the U.S. told the judge who will sentence him.

Lawyers for Rajaratnam, in a separate court filing yesterday, asked U.S. District Judge Richard Holwell in Manhattan for a prison term “substantially below” what federal guidelines recommend. Rajaratnam’s attorneys, citing their client’s poor health, urged Holwell not to force him to die in prison.

Rajaratnam, 54, was convicted in May of all 14 criminal counts of conspiracy and securities fraud he was charged with. He’s scheduled to be sentenced Sept. 27. Prosecutors said he should serve at least 19 years, seven months in prison.

“Rajaratnam repeatedly leveraged the power of money and his position as the head of a $7 billion hedge fund to induce friends, employees and associates to participate in his criminal activities,” Justice Department lawyers said in their sentencing memorandum yesterday. “He is the modern face of illegal insider trading.”

Prosecutors called Rajaratnam the most “egregious violator” of insider-trading laws ever to be caught. He engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies including Goldman Sachs Group Inc., they said. He gained $63.8 million as a result of the scheme, according to the government.

Prosecutors and defense lawyers are awaiting a pre-sentencing report from the federal probation office to help determine a range under U.S. sentencing guidelines, according to yesterday’s filing by John Dowd, the lead lawyer for Rajaratnam. Holwell is free to disregard the guidelines, which are advisory.

“Mr. Rajaratnam is not a healthy man,” his lawyers wrote, citing “significant and challenging medical issues” that are known to the court’s probation department. “His death will be hastened by a term of imprisonment,” they said.

Rajaratnam’s lawyers submitted letters on his behalf from his family members, former business associates, ex-employees and even his apartment doorman. Some of the letters detail what the defense said is more than $45 million in charitable donations by Rajaratnam in the U.S. and abroad, including millions of dollars to help victims of a tsunami that devastated his native Sri Lanka.

The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

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