UBS’s $2 Billion Loss, Rescue Fund, Proxy Access: Compliance

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UBS AG, Switzerland’s biggest bank, said it may be unprofitable in the third quarter after a $2 billion loss from unauthorized trading at its investment bank.

London police arrested Kweku Adoboli, a UBS employee, in connection with the loss, according to a person with knowledge of the situation who requested anonymity. City of London police and UBS declined to identify the man.

UBS management aims to “get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened,” the bank’s group executive board, led by Chief Executive Officer Oswald Gruebel, said in a memo to staff yesterday.

The bank tumbled the most since March 2009 in Swiss trading following the announcement, which deals a blow to Gruebel’s attempts to rebuild the investment bank after the division recorded 57.1 billion Swiss francs ($65 billion) in cumulative pretax losses in three years through 2009. The trading loss may revive calls for Gruebel to shrink or shut the unit.

A 31-year-old man was arrested at business premises in central London at 3:30 a.m. yesterday on “suspicion of fraud by abuse of position,” City of London Police Commander Ian Dyson said in a statement yesterday. The man remains in custody while the police investigate, the police said.

Adoboli’s LinkedIn page lists him as a director in ETF and Delta1 Trading at UBS investment bank in London.

The matter is still under investigation, UBS said in a statement yesterday.

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Compliance Policy

Spain Becomes Fourth Country to Pass Expanded Powers for EFSF

Spain became the fourth country to approve expanded powers for the euro-region’s rescue fund, the European Financial Stability Facility, when the lower house of parliament voted on the plan in Madrid yesterday.

Spain joins France, Italy and Belgium in authorizing the enhanced powers for the 440 billion-euro ($604 billion) fund. Luxembourg was expected to become the next country to ratify when its parliament voted yesterday.

All euro-region nations, excluding Greece, Portugal and Ireland, which are already receiving emergency European Union funds, need to approve the plan adopted by European leaders on July 21. European Commission President Jose Manuel Barroso, German Chancellor Angela Merkel and French President Nicolas Sarkozy have called on governments to ratify the plan by the end of this month.

Under its expanded power, the EFSF would take over bond buying responsibilities from the European Central Bank and be able to lend to nations before they need a bailout.

For a table showing the status of the EFSF passage by country, click here.

Commodity Derivatives May Need More Regulation, IOSCO Says

Global regulators may need to tighten their rulebooks for commodity derivatives markets to ensure they operate transparently and free from abuse, the International Organization of Securities Commissions said.

IOSCO recommended supervisors use position limits, publication of open contracts and reporting of over-the-counter derivatives to tame commodity markets that operate in “disorderly conditions,” according to an e-mailed statement.

The Group of 20 Nations commissioned IOSCO to produce guidelines for commodity supervision last year. The use of derivatives to manipulate the price of foodstuffs and other raw materials is of “notable concern,” according to a European Union impact study on possible rules, as it can lead to “distorted” prices that harm the real economy.

Madrid-based IOSCO brings together national market regulators from more than 100 countries to coordinate rules and share information.

SEC Defeat Leaves Investors a Longer Path to Proxy Access

U.S. shareholders reeling from last month’s rejection of a measure that would have let them put board candidates on corporate ballots may find solace in a measure left standing after the federal court’s decision.

A Securities and Exchange Commission rule that will take effect in the wake of that legal challenge lets any investor who has held at least $2,000 of stock for a year submit a proposal for how a firm should open board elections to shareholder nominees. That measure, delayed by the court fight, may provide a two-step path to so-called proxy access.

U.S. lawmakers, responding to complaints that corporate risk-taking and pay incentives helped spark the 2008 credit crisis, empowered the SEC to adopt a rule requiring all publicly traded companies to include shareholder nominees on proxy ballots. On July 22, the U.S. Court of Appeals struck down the rule, agreeing with business groups that said the SEC didn’t adequately consider the impact on companies. The ruling didn’t affect the separate rule allowing investor proposals.

The SEC, which declined to appeal the court’s ruling, said in a statement that it will publish details on how the remaining rule takes effect. Advisers to companies and shareholder groups say the measure’s impact is likely to be felt during next year’s corporate proxy season.

The rule will be a new tool for activists that may enable shareholder groups to use the threat of proposals to pressure boards in unrelated arguments, said Jeff Morgan, president and chief executive officer of the National Investor Relations Institute in Vienna, Virginia.

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Twitter Gets Leeway From SEC in Issuing Restricted Stock Units

U.S. regulators gave Twitter Inc. the go-ahead to issue restricted stock units without running afoul of a rule that requires public disclosure of financial information.

The San Francisco-based company won’t have to comply with a Securities and Exchange Commission rule that compels private companies with 500 or more shareholders to make certain disclosures. Twitter requested the exemption in August; the SEC’s decision was posted on its website Sept. 13.

Closely held companies with fewer than 500 shareholders aren’t required to disclose financial data, such as revenue, profit, cash flow and debt. Before an initial public offering, that helps them pursue growth without the same degree of scrutiny directed toward publicly traded companies.

Some startups say the 500-shareholder rule is restrictive, and lawmakers have proposed raising the threshold to let firms with less cash expand by compensating employees with stock.

Facebook Inc. received a similar exemption in 2008, as did Zynga Inc. earlier this year.

Restricted stock units represent the right to a specified number of shares of common stock in the future if certain conditions are met.

Matt Graves, a spokesman for Twitter, didn’t immediately respond to a phone message seeking comment.

Compliance Action

Ex-Investment Adviser, Filmmaker Charged in Trading Scheme

Federal prosecutors in New York accused a former investment adviser and an independent film producer of taking part in a $2.6 million insider-trading scheme involving drug-company takeovers.

According to a criminal complaint unsealed yesterday in Manhattan federal court, Scott Allen of Atlanta, in his role at a consulting firm, learned inside information about the April 2008 acquisition of Millennium Pharmaceuticals Inc. by Takeda Pharmaceutical Co. and about the September 2009 purchase of Sepracor Inc. by Dainippon Sumitomo Pharma Co.

Before the deals were announced, Allen disclosed the information to John Bennett, a producer and a longtime friend, the U.S. said. Bennett, of Norwalk, Connecticut, reaped $1.1 million in profits trading on the information, the U.S. said. Allen and an unidentified person who is cooperating with the U.S. made $2.6 million, according to prosecutors.

Bennett has acted in several films, including the 1990 courtroom drama “Presumed Innocent,” according to the website He cofounded Bennett Robbins Productions in 2008, according to the company’s website. He worked for “a major Wall Street investment bank” before forming Bennett Robbins, the Securities and Exchange Commission said in a separate lawsuit against the two men.

Henry Mazurek, a lawyer for Bennett, declined to comment on the charges. Brian McEvoy, a lawyer for Allen, didn’t immediately return calls seeking comment on the charges.

According to the complaints filed by prosecutors and the SEC, FBI agents traced the activities of Bennett and Allen as they met secretly in Manhattan hotels, shared sushi lunches at the Time Warner Center and held sidewalk rendezvous.

The case is U.S. v. Allen, 11-MAG-2361, Southern District of New York (Manhattan).


Musicland Investor Teo Must Pay $21 Million in SEC Case

Alfred Teo Sr., a New Jersey plastics manufacturer who went to prison for insider trading, must give up $21 million in profit he made while fraudulently concealing his shares of Musicland Stores Corp., a judge ruled.

U.S. District Judge Susan Wigenton imposed the disgorgement order on Teo, who lost a jury trial May 25 in federal court in Newark, New Jersey, where he contested a civil complaint by the Securities and Exchange Commission. Teo also is liable for interest and penalties to be calculated by the SEC, she ruled.

Teo’s attorney, Eric Corngold of Friedman Kaplan Seiler & Adelman LLP in New York, didn’t immediately return a call seeking comment on the ruling.

In March 2010, Teo agreed to pay $996,783 to cover the profits and interest that the SEC alleged he made through insider trading.

The SEC case is Securities and Exchange Commission v. Alfred S. Teo Sr., 04-cv-1815, U.S. District Court, District of New Jersey (Newark). The criminal case is U.S. v. Teo, 04-cr-00583, U.S. District Court, District of New Jersey (Newark).

SABMiller’s Grolsch Wins EU Court Appeal of Antitrust Fine

Grolsch, a unit of SABMiller Plc, the world’s second-largest brewer by volume, won a European Union court appeal of a 31.7 million-euro ($43.8 million) fine levied for colluding on beer prices in the Netherlands.

Antitrust officials didn’t give sufficient proof to “establish the direct participation of Grolsch” in the cartel and “failed to explain” why the company should be held liable for the conduct of a Dutch subsidiary, the EU General Court, the region’s second-highest tribunal, said in a ruling yesterday.

The commission will “analyze the ruling carefully” and will then consider whether to appeal the judgment or readopt the cartel decision, Amelia Torres, a spokeswoman for the EU regulator, said in an e-mail.

The case is: T-234/07, Koninklijke Grolsch v. Commission.

BAA Says It Will Seek Court Review of Ordered Airport Sales

BAA Ltd., the owner of London’s Heathrow Airport, said it will seek a judicial review of a U.K. regulator’s order that it sell the U.K. capital’s Stansted terminal and a base in either Edinburgh or Glasgow.

BAA will ask an appeals tribunal tomorrow to review the March 2009 decision by the U.K. Competition Commission, the company said yesterday in a statement. The regulator said in July that the breakup is “fully justified,” while BAA has said the decision was based on outdated information.

BAA, based in London, was first ordered to find buyers for Gatwick and Stansted in March 2009, together with either Edinburgh or Glasgow in Scotland. While Gatwick was sold to Global Infrastructure Partners Ltd. for 1.51 billion pounds ($2.39 billion), BAA was able to delay the other disposals when the Competition Appeal Tribunal upheld claims that an adviser to the regulator had a conflict of interest.

The Competition Commission has said that any changes since the decision was issued two years ago have been considered and customers would still be best served by greater competition.


EU Still Considering Final Form of Basel Bank Liquidity Rules

The European Commission is still determining what minimum liquidity rules it should impose on its banks as part of a broader overhaul of financial regulation in the region.

“The definition of the liquidity coverage ratio is still quite liquid as far as we are concerned,” Mario Nava, an official in the commission’s financial services department, said yesterday at the Eurofi Financial Forum in Wroclaw, Poland.

The liquidity coverage ratio, which requires banks to hold enough easily cashable assets to survive a 30-day seizing-up of credit markets, was published by the Basel Committee on Banking Supervision in December 2010 as part of the so-called Basel III rules for banks. It must be written by nations into their laws before it can enter into force.

Date Says Consumer Bureau Looking at Need for Overdraft Rules

The Consumer Financial Protection Bureau is considering whether to impose rules on bank overdraft programs to ensure they’re being applied “in an even-handed way,” said Raj Date, the adviser running the new agency.

U.S. regulators including the Federal Reserve have imposed rules on overdraft programs, and that may lead to inconsistent supervision of different kinds of financial institutions, Date said yesterday in a Philadelphia speech.

“We will be monitoring the impact of the recent regulatory and supervisory interventions,” he said. “If we find that these interventions are not working as intended, we will adjust. And if we find that additional action is needed, we will act.”

Date’s speech outlined the agenda for the consumer bureau, which officially started work on July 21. The agency, created by the Dodd-Frank Act, is working on issues related to credit cards, mortgages, student loans and checking accounts, he said.

As part of its work on mortgages, the bureau is developing a two-page “mortgage shopping sheet” to help homebuyers determine what a mortgage costs and whether they can afford it. The agency is also looking at changes to mortgage regulations, he said. “We want to establish some common-sense safeguards to prevent bad practices from harming consumers,” Date said.

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