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ABS Conflicts, Investment Advisers, Swiss Risk: Compliance

Sept. 20 (Bloomberg) -- The U.S. Securities and Exchange Commission proposed barring bets against asset-backed securities by underwriters and securitization participants to root out conflicts of interest that might harm investors.

SEC commissioners voted 4-0 yesterday to seek comment on a rule, required by the Dodd-Frank Act, that would restrict those who package or sponsor asset-backed securities from engaging in deals that put their interests in conflict with buyers for a year after the first closing of a sale.

Goldman Sachs Group Inc. paid $550 million last year to settle SEC claims related to its marketing of collateralized debt obligations linked to subprime mortgages. The Wall Street investment firm acknowledged making a mistake in marketing materials and providing “incomplete information” after being accused of creating and selling the securities without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them.

Dodd-Frank specifies the restriction should be in place for a year from the security’s sale date, and it would also apply to third parties working with the securities’ underwriters.

The rule, now open for a 90-day comment period, was supposed to be completed in April, according to the law. The SEC’s Dodd-Frank schedule currently lists it for final adoption between January and June next year.

For more, click here.

For video of the SEC hearing, click here.

Compliance Policy

Labor Department Will Delay Its Fiduciary Rule, Borzi Says

The U.S. Labor Department is delaying a rule designed to make investment advisers more accountable for the advice they give to employers and individuals in retirement plans, Assistant Secretary of Labor Phyllis Borzi said in a conference call yesterday.

Borzi said the rule could have been more clear and the Labor Department is “trying to fix that,” and is “working closely with the White House,” which has approved its decision to move forward in this way.

Concerns from private companies such as Morgan Stanley that manage 401(k) plans or investments in IRAs and legislators caused the Labor Department to rethink the rule. The extra time will enable the department to strengthen and clarify this “important consumer protection,” she said.

The Labor Department wants to expand the scope of fiduciary responsibility to protect those saving for retirement from conflicts of interest, such as recommending investments with higher fees. The rule would require investment professionals who advise employers and workers in 401(k) plans or IRAs to act in the best interest of their clients.

The original proposal may have caused financial firms to offer fewer investment options in retirement accounts and shift to a fee-based model used by investment advisers, which will raise costs, Kenneth Bentsen, executive vice president of public policy and advocacy said in July at a Washington hearing before the House Subcommittee on Health, Employment, Labor and Pensions.

The SEC has been working on rules required by the Dodd-Frank Act that may overlap with the Labor proposal.

The revised rule will cover both 401(k) plans and IRAs, said Borzi. She anticipates the reproposal of the rule will be early next year.

Compliance Action

UBS Trading Loss Was $2.3 Billion; Parliament Makes Proposals

UBS AG, Switzerland’s biggest bank, announced that its loss from unauthorized trading amounted to $2.3 billion, more than initially reported, while Chief Executive Officer Oswald Gruebel said he will stay on.

The loss, first estimated on Sept. 15 at $2 billion, came from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, the Zurich-based bank said in a statement Sept. 18. UBS made the latest disclosures two days after London police charged a 31-year-old trader with fraud and false accounting.

“The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio,” UBS said in the statement. The magnitude of the risk was masked by “fictitious positions,” it said.

Gruebel, 67, told Swiss newspaper Der Sonntag that he doesn’t plan to resign because of the loss. His comments were confirmed by spokesman Serge Steiner. In a separate interview, he told Swiss TV that he is ultimately responsible and will have to “take the consequences.” Questions remain over whether investment-banking chief Carsten Kengeter or other senior executives will be pushed out following the loss.

While the bank said the trading losses occurred over the past three months, London police charged UBS trader Kweku Adoboli with false accounting offenses dating to October 2008, and fraud dating back to January 2009, according to the court charge sheet.

Adoboli didn’t enter a plea, and his law firm, London-based Kingsley Napley, declined to comment.

For more, click here.

Separately, Swiss lawmakers in the lower house of Parliament approved proposals to curb risk-taking at UBS AG and Credit Suisse Group AG, the country’s biggest banks.

Swiss rule-makers are running ahead of counterparts in the U.S. and Europe to make sure UBS and rival Credit Suisse cut risks and hoard capital to avert the type of banking collapse that hobbled Iceland’s economy. Yesterday’s decision paves the way for final approval by both houses of Parliament next week.

The Swiss Parliament is voting on proposals to limit risk-taking after UBS last week said it may be unprofitable in the third quarter after the loss from “unauthorized trading” at its investment bank. The loss, less than two months after Chief Executive Officer Oswald Gruebel said the bank had “one of the best” risk-management units in the industry, exposed flaws in its controls.

UBS and smaller rival Credit Suisse will have to hold capital equal to at least 19 percent of assets, weighted according to risk, by 2019, according to the bill. That’s almost double the percentage proposed by the Basel Committee on Banking Supervision for banks deemed too big to fail.

For more, click here.

For commentary by Arthur Levitt, see Interviews, below.

IBM Offers to Settle EU Antitrust Probe, Second Case Closed

Remedies International Business Machines Corp. offered to resolve a dispute over anti-competitive behavior that may have blocked rival mainframe software makers are being reviewed by the European Union.

The European Commission, the antitrust regulator for the 27-nation EU, today asked for comments on IBM’s commitments to ensure the availability of certain spare parts and technical information. The Brussels-based regulator said it closed a separate probe over IBM’s mainframe computers after three competitors dropped complaints.

The commission in 2010 opened investigations into Armonk, New York-based IBM over possible conduct that may have blocked competitors in mainframe software and maintenance contracts by restricting access to parts. While IBM has shifted its focus away from hardware toward its more profitable software and services businesses, the mainframe operations have high gross margins and help pull in revenue for other divisions.

The remedies “aim to resolve concerns that IBM may have imposed unreasonable conditions for supplying competing mainframe maintenance service providers with such inputs, in breach of EU antitrust rules prohibiting the abuse of a dominant market position in Europe,” the commission said.

IBM began developing mainframe computers in the 1940s and 1950s and is now among the few companies selling the systems.

The company “welcomes” the commission’s decision “to close the investigation of IBM’s mainframe and associated intellectual property rights,” the company said in an e-mailed statement. The company said it also looked forward to providing the basis for the final resolution of the probe into maintenance practices.


Jefferies Sues Nasdaq Unit Over Rate Swap Futures Contracts

Jefferies Group Inc. sued International Derivatives Clearing Group LLC, accusing the Nasdaq OMX Group Inc. unit of fraud and breach of contract in connection with interest-rate swap futures contracts.

Jefferies & Co., the investment bank that has been expanding since the financial crisis, claimed in the suit that IDGC and its International Derivatives Clearinghouse unit induced it to enter into interest-rate swap futures contracts by saying the investment would be “economically equivalent” to engaging in transactions in similar instruments on the over-the-counter market. The suit was filed in New York state court on Sept. 16.

“The suit is without merit,” said Frank DeMaria, a spokesman for the company, who added that Nasdaq will fight the litigation.

The case is Jefferies & Co. vs. Nasdaq OMX Group Inc., 652560/2011, New York State Supreme Court (Manhattan).

Michigan Agency Loses Bid to Move Court Fight With Lehman

The Michigan State Housing Development Authority failed to persuade a federal district court to review a bankruptcy judge’s interpretation of swap contracts in its lawsuit against Lehman Brothers Holdings Inc. over derivatives transactions.

U.S. District Judge John Koeltl in Manhattan declined to take the case, according to a court filing yesterday.

The Michigan agency said in May that it is “one of many” derivatives trading partners of Lehman disputing who gets paid first on a swap agreement as a result of a previous ruling by U.S. Bankruptcy Judge James Peck. The Lehman bankruptcy judge’s interpretation of swap contracts is “surpassingly broad” and requires U.S. District Court review because it has ramifications for international securities markets, the authority said.

The global over-the-counter derivatives market is valued at around $600 trillion by the Bank for International Settlements.

The authority sells bonds to raise money to help fund home mortgages and rental housing developments. Peck put on hold the housing agency’s lawsuit -- and a Lehman countersuit -- making it impossible for the agency to defend itself, it said.

The lawsuit is Michigan State Housing Development Authority v. Lehman Brothers Derivative Products, 09-01728, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The bankruptcy case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

SEC Alleges Insider Trading in Global Industries, Technip Deal

U.S. regulators filed a lawsuit alleging insider trading in Global Industries Ltd. days before the U.S. company agreed to a $937 million takeover by Technip SA, Europe’s second-biggest oil services company.

The complaint by the U.S. Securities and Exchange Commission alleges that on Sept. 8 and 9 “unknown purchasers” bought 685,840 shares of Global Industries common stock through an account in the name of Raiffeisen Bank International AG Vienna, Austria, at $5.14 to $5.39 a share.

The defendants made a profit of $1.73 million by selling the shares on Sept. 12 after the deal was announced on that day for Technip to pay $8 a share, according to a copy of the lawsuit filed on Sept. 16 in federal court in New York and posted on the commission´s website. It said the account was at broker-dealer Brown Brothers Harriman & Co.

Raiffeisen Bank said in a statement that the stock purchases “were made through an omnibus account in the name of Raiffeisen Bank International” rather than by the bank itself. They were “placed by a counterparty” and “routed through the execution desk automatically without any indication of being unusual.”

Technip spokeswoman Floriane Lassalle-Massip declined to comment on the case.

The court issued a temporary restraining order freezing the assets related to the trading, according to the SEC statement on the case. The purchasers of the shares have to identify themselves and are prohibited from destroying documents.

The case is U.S. Securities and Exchange Commission v. One or More Unknown Purchasers of Securities of Global Industries, Ltd., U.S. District Court, Southern District of New York (Manhattan).

Italian Consumer Groups to Sue S&P After Italian Downgrade

Two Italian consumer groups said they will sue Standard & Poor’s after it lowered the nation’s creditworthiness, the latest challenge to the rating companies amid a mounting public backlash.

S&P cut Italy’s credit rating last night to A from A+, with a negative outlook, on concern that weakening economic growth and a “fragile” government mean that the nation won’t be able to reduce the euro-region’s second-largest debt burden. S&P last downgraded Italy in 2006.

Adusbef and Federconsumatori, another consumer group, said earlier this month that S&P and Moody’s Investors Service don’t have the right to rule on Italy’s credit rating as they lack a license from the European Securities and Markets Authority. Both groups confirmed today their intention to sue S&P within a week.

ESMA confirmed that the rating company may continue to operate normally and issue ratings even with the registration process still ongoing, S&P said in an e-mailed statement.

The rating companies already face legal challenges in Italy as prosecutors in the southern city of Trani investigate market-moving statements by S&P and Moody’s. Rome-based stock-market regulator Consob questioned both companies in July after they placed the country on review for a possible downgrade. A small group of protesters rallied last week outside S&P’s Milan office against its policies.

Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries whose credit ratings were cut this year.

For more, click here.

For more news on the euro crisis, click EXT4 <GO> .

Fleishman Jury to Begin Deliberating Insider-Trading Charges

A federal jury in New York is set today to begin deliberating the fate of James Fleishman, an ex-Primary Global Research LLC executive charged with helping pass confidential information as part of an insider-trading scheme.

Fleishman, of Santa Clara, California, is charged with conspiracy to commit securities fraud and conspiracy to commit wire fraud. He pleaded not guilty and faces as long as 25 years in prison if convicted.

Prosecutors allege that Fleishman, as a salesman for the firm, obtained and passed confidential data from employees at technology companies who were moonlighting as consultants for Mountain View, California-based Primary Global, also known as PGR. The secret tips were given to fund managers who paid Primary Global for consultation calls, prosecutors said.

In his closing argument yesterday, Ethan Balogh, a lawyer for Fleishman, said there was no evidence his client knew that consultants were violating compliance agreements with their employers.

Since November, 15 people have been charged by federal prosecutors in the office of Manhattan U.S. Attorney Preet Bharara in a probe of expert networkers and fund managers.

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


Levitt Says UBS Leaders Will Lose Jobs Over Trade

Arthur Levitt, a former chairman of the U.S. Securities and Exchange Commission, said leaders of UBS “are going to pay the price” for an unauthorized trade that cost the company $2.3 billion. Levitt talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Comings and Goings

Two SEC Veterans Leaving to Counsel Law Clients on Rules

Two veteran U.S. Securities and Exchange Commission officials who played key roles overseeing financial companies are stepping down to join law firms helping clients cope with rules spawned by the 2008 credit crisis.

James Brigagliano, who served as deputy director of the SEC’s trading and markets division, is leaving after 25 years to join the Washington office of Chicago-based firm Sidley Austin LLP, the law firm said yesterday in a statement.

John H. Walsh, associate director and chief counsel in the office of compliance inspections and examinations, is quitting after 23 years, to join Sutherland, Asbill & Brennan LLP in Washington on Oct. 1, that firm said last week.

The two men are leaving with the agency in the midst of implementing rules imposed by the Dodd-Frank Act, the sweeping regulatory overhaul enacted last year, and may play key roles in helping respond to the new oversight.

Brigagliano, who was promoted to deputy director of trading and markets in 2009, also had a stint as acting director that year.

To contact the reporter on this story: Carla Main in New Jersey at

To contact the editor responsible for this report: Michael Hytha at

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