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ETF Hearings, Vacancies, Citigroup Settlement: Compliance

Oct. 20 (Bloomberg) -- BlackRock Inc., the world’s biggest provider of exchange-traded funds, urged U.S. lawmakers to bar products that rely on derivatives from being marketed as ETFs, or exchange traded funds, to avoid confusion with their traditional counterparts.

BlackRock Chairman and Chief Executive Officer Laurence D. Fink compared ETFs to the market for mortgage-backed bonds, which began with a simple product and evolved into complex variations with risks that investors didn’t understand.

ETFs, which hold $1.43 trillion in assets worldwide, have drawn scrutiny from regulators since 2009. The Securities and Exchange Commission has examined whether ETFs contributed to equity-market volatility in August and the intraday plunge on May 6, 2010. European ETFs that generate returns through derivatives add a layer of complexity and risk to financial markets, the International Monetary Fund said in April.

Archard, head of product development at iShares, testified before the Senate Committee on Banking, Housing and Urban Affairs’ subcommittee on securities, insurance and investment. Some complex and risky funds “should not be called ETFs,” BlackRock’s Noel Archard told a Senate subcommittee in Washington yesterday.

Michael Sapir, chairman and CEO of ProShare Advisors LLC in Bethesda, Maryland, the largest provider of leveraged and inverse ETFs, criticized BlackRock in a statement yesterday for using the hearing “as a platform to promote its own agenda.”

Eileen Rominger, head of the SEC’s division of investment management, and Harold Bradley, chief investment officer at the nonprofit Ewing Marion Kauffman Foundation in Kansas City, Missouri, also spoke at the hearing.

For more, click here and click here.

Compliance Policy

U.S. Bancorp’s Davis ‘Frustrated’ by Vacancies at Regulators

U.S. Bancorp Chief Executive Officer Richard Davis said he’s “frustrated” that Congress hasn’t confirmed regulators to lead agencies in charge of new banking rules because the vacancies are hindering his industry.

Davis, head of the nation’s fifth-largest commercial bank, made the remarks yesterday during a conference call with analysts. He cited jobs at the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the new Consumer Financial Protection Bureau.

Davis, whose bank is based in Minneapolis said that until the heads of the agencies are appointed,’’ you don’t get the same kind of definitive answers.’’

Some of the appointments are stalled in Congress, where Republicans are trying to head off tighter bank regulation and have opposed creation of the consumer bureau. He told bankers in June not to “overreact” to the CFPB’s creation, urging them to embrace the agency and work with whomever is appointed.

Davis said that banks are struggling with uncertainty as they await changes mandated by the Dodd-Frank Act, including tougher capital rules and the creation of the Consumer Bureau. Eighty percent of the country’s financial overhaul legislation is “yet to be defined,” and rules that dictate capital buffers for systemically important firms are unclear, he said.

The consumer bureau, which officially began work on July 21, won’t assume full supervisory powers over non-bank financial firms until a director is in place.

For more, click here.

Compliance Action

Citigroup Agrees to Pay $285 Million Over SEC’s CDO Fraud Claims

Citigroup Inc., the third-biggest U.S. lender, agreed to pay $285 million to settle U.S. regulatory claims it misled investors about a $1 billion financial product linked to risky mortgages that defaulted within months of its sale.

Citigroup structured and marketed the collateralized debt obligation known as Class V Funding III, without telling investors that it helped select the underlying assets and was betting that they would decline in value, the Securities and Exchange Commission said in a statement yesterday. The settlement is the third-biggest penalty paid for conduct related to the financial crisis, the SEC said.

Credit Suisse Group AG agreed to pay $2.5 million for its role in selecting the assets for the deal.

The SEC also sued Brian Stoker, a former Citigroup employee who the agency said was responsible for structuring the deal, according to a complaint filed yesterday at U.S. District Court in New York. Stoker’s attorney, Fraser Hunter, said his client will “defend this lawsuit vigorously.”

Samir Bhatt, a former Credit Suisse portfolio manager, agreed to pay $50,000 and a serve a six-month suspension from association with any investment adviser for his role in the transaction, the SEC said.

Bhatt’s lawyer, James Masella , declined to comment, as did Steven Vames, a New York-based spokesman for Credit Suisse. Citigroup, Credit Suisse and Bhatt didn’t admit or deny the SEC’s claims.

“We are pleased to put this matter behind us and are focused on contributing to the economic recovery, serving our clients and growing responsibly,” Citigroup said in an e-mailed statement.

For more, click here.

To see a Bloomberg Television interview with SEC Enforcement Director Robert Khuzami discussing the settlement, click here.

UniCredit’s Profumo Faces Probe as Bank’s Assets Seized

Former UniCredit SpA Chief Executive Officer Alessandro Profumo is among 20 executives being examined in a tax-evasion probe that led a Milan court to seize 245 million euros ($337 million) of the bank’s assets, court documents show.

Prosecutors are examining whether UniCredit, Italy’s largest lender, committed fraud through an international investment plan dubbed Brontos arranged by Barclays Plc, according to the documents. Three people from London-based Barclays are also under investigation, the documents show.

UniCredit was “very surprised” by the seizure and “remains convinced that both it and its employees acted correctly,” the Milan-based lender said in a statement. The assets being held represent the firm’s suspected profit from false declarations for fiscal 2007 and 2008, according to a separate statement from Italy’s finance police, which conducted the seizure.

Profumo, 54, declined to comment on the inquiry as did Simon Eaton, a Barclays spokesman in London.

UniCredit used a tax plan named Brontos to increase the bank’s “economic benefits,” Profumo said at the company’s annual meeting in April 2010. The plan boosted the bank’s pretax profit, a UniCredit spokesman said at the time.

Vittorio Ogliengo, UniCredit’s co-head of financing and advisory, and Barclays bankers Rupak Chandra and Stefano Filippi are being examined, court documents show. Chandra declined to comment, while Ogliengo and Filippi didn’t immediately return a phone call and e-mail seeking comment.

Barclays Capital “fully” supports its employees named in the probe, the company said in an e-mailed statement.

UBS Trader’s Case Sent to U.K. Crown Court for Nov. 22 Hearing

Kweku Adoboli, the trader accused of costing UBS AG $2.3 billion by making unauthorized trades, had his case transferred to a criminal court in London where he will be expected to enter a plea at a Nov. 22 hearing.

The 31-year-old has been in custody since his arrest on Sept. 15, when UBS asked London police to detain him after he reported the losses. He was charged two days later with fraud and false accounting dating back to 2008. He was fired from the Swiss bank on Sept. 17, prosecutor David Williams said.

Adoboli, who holds a Ghanaian passport, appeared before a panel of three magistrate judges today and his lawyer, Patrick Gibbs, said he wouldn’t offer a plea at the hearing. Prosecutors amended the charges against Adoboli to indicate he falsified transactions on exchange-traded funds.

He faces as many as 10 years in prison if found guilty, according to U.K. sentencing guidelines. Time spent in custody beforehand would be deducted from any sentence. He said through his lawyer at a hearing last month he was “sorry beyond words” for his “disastrous miscalculations.”

The alleged trading losses have led to the departures of UBS Chief Executive Officer Oswald Gruebel and the co-heads of global equities, Francois Gouws and Yassine Bouhara. “A number of front office staff” have been suspended pending further disciplinary action, Carsten Kengeter, head of the investment bank, said in a memo to staff.


Citigroup, McGraw-Hill Win Appeals in Retirement Plan Suits

Citigroup Inc. and McGraw-Hill Cos. won appeals-court decisions upholding dismissal of lawsuits brought by employees claiming their retirement plans lost money invested in company stock.

The U.S. Court of Appeals in Manhattan upheld the dismissals in companion rulings yesterday. In 2009, U.S. District Judge Sidney Stein in New York found that Citigroup, the third-biggest U.S. lender, didn’t breach its duty to the workers by offering Citigroup stock as an investment option. In February 2010, U.S. District Judge Richard Sullivan ruled similarly in favor of McGraw-Hill, the finance and media company that is splitting into two.

The Citigroup suit was filed on behalf of 150,000 employees covered by two retirement plans. The plaintiffs in the McGraw-Hill case participated in one of two defined-contribution plans offered by the company. Both cases were brought under the federal Employee Retirement Income Security Act of 1974, also known as ERISA. Both companies are based in New York.

Marc I. Machiz, of Cohen Milstein Sellers & Toll PLLC in Philadelphia, a lawyer for the Citigroup employees, who expressed disappointment with the ruling, said it was likely the Citigroup plaintiffs would as the full appeals court to rehear the case.

Edwin Mills, a lawyer for the McGraw-Hill employees at Stull, Stull & Brody in New York, didn’t immediately return a call for comment on the decision.

The cases are Gray v. Citigroup Inc., 09-3804, and Gearren v. McGraw-Hill Cos., 10-792, 2nd U.S. Circuit Court of Appeals (Manhattan).

Ex-KLA-Tencor, Juniper Executive to Pay SEC Settlement Fine

The former general counsel of KLA-Tencor Corp. and Juniper Networks Inc. agreed to pay $350,000 to settle allegations by the U.S. Securities and Exchange Commission related to backdating of stock options.

Lisa Berry, the former executive, also agreed give up $77,120 that the SEC said she made as a result of the backdating, according to an agency statement. Berry didn’t admit or deny backdating option grants at the two companies from 1997 to 2003.

Her attorney, James Kramer of Orrick, Herrington & Sutcliffe LLP, said in an e-mailed statement that Berry “is pleased to have reached a resolution in the case.”

“While the agreement with the SEC prevents her from discussing the case, it makes clear that Ms. Berry does not admit to any of the SEC’s assertions, and she looks forward to continuing her career as a practicing lawyer,” Kramer said. Kenneth Schroeder, according to the SEC’s statement.

Berry also agreed to be suspended from appearing as an attorney before the SEC, the commission said. She may apply for reinstatement in five years.

The commission previously settled claims against the companies and KLA-Tencor’s former chief executive officer, Kenneth Schroeder, according to the SEC’s statement.

The case is SEC v. Berry, 07-cv-4431, U.S. District Court, Northern District of California (San Jose).

BofA’s Mortgage-Bond Accord Kept in Federal Court for Review

Bank of America Corp.’s proposed $8.5 billion settlement with mortgage-bond investors must be considered in federal court and not in New York state court where it was first filed, a U.S. judge said.

“The settlement agreement at issue here implicates core federal interests in the integrity of nationally chartered banks and the vitality of the national securities markets,” U.S. District Judge William Pauley in Manhattan said in a decision filed yesterday.

The proposed agreement would settle claims from investors in Countrywide Financial Corp. mortgage bonds and is a move by Charlotte, North Carolina-based Bank of America to resolve liabilities tied to its 2008 purchase of the home lender. The deal was reached with an institutional investor group that includes BlackRock Inc. and Pacific Investment Management Co. and would apply to 530 mortgage-securitization trusts.

Bank of New York Mellon Corp., the trustee for the mortgage-bond trusts, filed the settlement in state court and planned to seek approval at a November hearing. Under the state proceeding, approval would bind investors outside the group that negotiated the agreement.

Kevin Heine, a Bank of New York spokesman, declined to comment on the ruling. The bank had asked Pauley to return the case to state court after it had been moved to federal court. Kathy Patrick, a lawyer for the institutional investor group that negotiated the agreement, didn’t respond to an e-mail seeking comment on it yesterday.

The proposed settlement agreement has been criticized by some investors in the bonds, including American International Group Inc., which said in a court filing that Bank of America is “drastically underpaying on its liability.” Other investors have filed objections to the agreement, saying they need more information to evaluate it.

The case is Bank of New York Mellon v. Walnut Place LLC, 11-cv-5988, U.S. District Court, Southern District of New York (Manhattan).

Comings and Goings

Consumer Bureau Hires Humphrey to Head Older Americans Office

The Consumer Financial Protection Bureau named Hubert H. “Skip” Humphrey III, Minnesota’s former attorney general, to lead the agency’s Office of Older Americans, according to an e-mail statement released yesterday.

In a blog post on the Consumer Bureau’s website yesterday, Humphrey wrote that his mission is to help seniors in areas such as preventing becoming the victims of fraud, financial planning, and gathering research to help policy makers in the financial services industry.

To contact the reporters on this story: Carla Main in New Jersey at; Ellen Rosen in New York at

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

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