‘Big Four’ Probe, EU Utilities, Regulators Named: Compliance

The “Big Four” accounting firms’ dominance over corporate audits in Britain will be investigated after an antitrust regulator said the market is bad for customers and small competitors.

The U.K. Office of Fair Trading, which has examined the issue since 2002, referred the matter Oct. 21 to the Competition Commission to find any distortions in the industry and potentially force changes. The probe will focus on KPMG LLP, Deloitte LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP.

Large audit firms also face potential European Union restrictions on offering consulting services and may be forced to share work with smaller rivals. The OFT said the U.K. investigation will complement the parallel EU probe and address competition concerns found only in Britain.

The OFT has said the size of the Big Four’s market share is propelled by the cost of switching auditors, the ease of explaining the choice of accounting firms to investors, the extensive international networks held by bigger auditors and the risk associated with auditing larger companies.

For more, click here.

Compliance Policy

EU Rules May Force Utilities to Raise Capital, Shearman Says

The European Union’s plan for regulating energy and commodity markets may require power utilities and commodity traders to raise fresh capital, said a lawyer from Shearman & Sterling LLP.

The EU’s plan to expand its Markets in Financial Instruments Directive, or Mifid, rules will seek to regulate companies not subject to financial regulation such as energy utilities and commodity businesses, said Thomas Donegan, a senior associate in London at Shearman & Sterling, which advises financial institutions and utilities on regulation. Those companies may currently have regulatory exemptions, he said.

The EU Oct. 20 proposed new regulations to reduce market volatility, increase regulatory oversight and promote competition. Specific measures include requiring trading venues to either cap the number of commodity derivative contracts that traders can enter into, or make “alternative arrangements” with the same effect.

After losing exemptions, some companies may need to set aside capital that would otherwise be spent on projects or raise cash by issuing shares or subordinated debt, Donegan said. Some exemptions are still available, he said.

EU energy associations urged the bloc’s executive and national governments to exempt the industry from financial rules proposed Oct. 20, citing concern that over-regulation may curb investment.

Indonesia Tussle Over Financial Body Ends as Government Prevails

Indonesia ended months of impasse over the board composition of a planned financial regulator as lawmakers yielded to the government’s efforts to reduce the risk of political interference in bank supervision.

The Financial Services Authority parliamentary working committee agreed Oct. 20 to the government’s plan for two former finance ministry and central bank members on the agency’s board of commissioners, along with seven presidential picks vetted by parliament, Achsanul Qosasi, a vice chairman of the committee, said by phone in Jakarta Oct. 20. Parliament had wanted two of its members in the mix.

The new regulator, known in the Indonesian language as Otoritas Jasa Keuangan, or OJK, is due to start operating in January 2013, supervising capital markets, insurers, pension funds and other non-bank institutions, Qosasi said. Oversight of commercial banks will start from January 2014, he said.

The World Bank and Moody’s Investors Service are among those who have called for financial regulators to be non-politicized in a nation that has for years attempted to rein in corruption.

For more, click here.

EU Should Impose Minimum Carbon Price, Border Tax, Group Says

The European Union should impose a minimum price for carbon permits in its emissions trading system and install a CO2 tax on imports into the region, according to the Centre for European Reform.

The border tax adjustments would apply to goods imported from countries where manufacturers aren’t obliged to pay carbon costs, Stephen Tindale, an associate fellow at the London-based policy research group said in a report published Oct. 21.

EU Weighs New Fund to Attract Outside Money to Fight Crisis

European leaders descended on Brussels in a last-ditch effort to stamp out a two-year-old financial crisis that threatens to tip the world into a recession.

Government chiefs took over, following two days of meetings by finance ministers with another set for Oct. 26. That’s their self-imposed deadline to complete a plan to beef up the euro bailout fund, cut Greece’s debt without triggering a default, shield banks from the fallout and ensure Italy and Spain don’t succumb to the contagion.

European finance ministers are considering setting up a fund to entice outside investors to buy troubled euro-area government bonds, as they struggled over how to tame the Greece-fueled debt crisis, said a person familiar with the matter.

The insured investment vehicle was one of two options being weighed, along with using the European Financial Stability Facility to boost the rescue firepower from 440 billion euros ($611 billion) currently, the person said.

Europe’s room for maneuver narrowed last week with a report that Greece’s economy is deteriorating, piling on pressure to build a stronger anti-crisis firewall by the self-imposed Oct. 26 deadline. Measures being considered include a boost in bailout funds to 940 billion euros, deeper writedowns on Greek debt, and a demand that banks increase Tier 1 capital to 9 percent by mid-2012.

For more, click here, click here and click here.

Compliance Action

Swiss Banks Said Ready to Pay Billions, Disclose Customer Names

Swiss banks will likely settle a sweeping U.S. probe of offshore tax evasion by paying billions of dollars and handing over names of thousands of Americans who have secret accounts, according to two people familiar with the matter.

U.S. and Swiss officials are concluding negotiations on a civil settlement amid U.S. criminal probes of 11 financial institutions, including Credit Suisse Group AG, suspected of helping American clients hide money from the Internal Revenue Service, according to five people with knowledge of the talks who declined to speak publicly because they are confidential.

Switzerland, the biggest haven for offshore wealth, wants an end to new U.S. probes while preserving its decades-old tradition of bank secrecy, the people said. The U.S. seeks data on Americans who have dodged U.S. taxes and a pledge by Swiss banks to stop helping such clients, according to the people. The Swiss reached accords this year with Germany and the U.K. on untaxed assets.

The Swiss government seeks to outline a final accord for the Foreign Affairs Committee of its Parliament’s upper house on Nov. 10, according to a person familiar with the matter. The number of banks that will pay to resolve the U.S. negotiations may extend beyond the 11 under criminal investigation, the people said.

For more, click here.

State Regulators in U.S. Combine to Probe Structured-Notes Sales

State regulators in the U.S. are combining forces to investigate whether brokers improperly sold structured notes, securities that package debt with derivatives that are typically offered to individual investors.

About 10 states including Florida and Texas are examining whether the debt instruments were marketed without adequate disclosure of their risks, said Franklin L. Widmann, head of the structured products working group for the North American Securities Administrators Association.

Widmann, who’s also director of securities for Florida’s Office of Financial Regulation, said Oct. 21 in a telephone interview that it’s not clear to the association that people who invested in the products “in certain circumstances even realized the risks.” He declined to comment further about the ongoing investigation.

Florida joined Massachusetts and Georgia in July in probing sales of structured notes such as reverse convertibles, which convert into stock if a company’s shares plummet. The “complex” securities can be difficult for investors and brokers to evaluate, according to a July 25 statement from the Financial Industry Regulatory Authority.

Sales are poised to match last year’s record $49.5 billion as investors frustrated by record-low interest rates on savings seek higher returns through riskier investments. As sales have grown, brokers may have taken advantage of some individual investors when selling the notes, the Securities and Exchange Commission said in July.

For more, click here.

BofA Said to Get Subpoena From California’s Attorney General

Bank of America Corp. was given a subpoena by California’s attorney general for information related to the packaging and sale of mortgage-backed securities, a person familiar with the matter said.

The subpoena, delivered Oct. 18, involves mortgage securitization by the Charlotte, North Carolina-based bank and its Countrywide Financial unit, said the person, who wasn’t authorized to speak and didn’t want to be identified

The subpoena follows a decision by California Attorney General Kamala Harris to withdraw from talks among state officials, the U.S. Justice Department and the five largest mortgage servicers.

The attorneys general of all 50 states last year announced they were investigating the foreclosure practices of banks following disclosures that faulty documents were being used to seize homes. A group of attorneys general and federal officials are negotiating a settlement with the lenders, which also include JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Ally Financial Inc.

Several attorneys general are conducting their own investigations of bank mortgage practices and have raised concerns about the scope of the releases that would be included in any agreement.

Shum Preston, a spokesman for Harris, declined to comment Oct. 20 on the subpoena. Lawrence Grayson, a Bank of America spokesman, also declined to comment on it. News about the subpoena was first reported in the Los Angeles Times.

Johnson & Johnson, Novartis Face Antitrust Probe on Generics

Johnson & Johnson and Novartis AG are under investigation by the European Union’s antitrust regulator over contracts that may have hampered the sale of generic versions of pain killer Fentanyl in the Netherlands.

The EU authority said it’s probing contractual arrangements between J&J and Novartis that may have had the “object or effect of hindering entry” of the generic drug onto the Dutch market. Basel, Switzerland-based Novartis owns Sandoz, a generic-drug maker.

Antitrust regulators on both sides of the Atlantic are focusing on how settlements between companies that make branded medicines and generics producers might harm consumers. Bayer AG was among drug firms told by EU officials in January to submit details of patent-settlement deals that may be used to delay the sale of generic versions of medicines. Drug developers use various ways to delay generics, the EU said in a 2009 report.

The investigation is related to a contractual agreement J&J had with Sandoz in the Netherlands and is limited to that country, Stefan Gijssels, a spokesman for J&J’s Janssen subsidiary, said in a telephone interview Oct. 20. The company will cooperate fully with authorities, he said.

“It’s important to underline that the commission has not made a finding that Janssen did something wrong in the Netherlands,” Gijssels said. “It’s the start of an investigation.”

“We don’t comment on ongoing procedures,” Eric Althoff, a spokesman for Novartis, said in an e-mail.

EU Probes Arcelor Mittal, Vimetco Romanian Units on Energy

European Union competition regulators are investigating the Romanian units of Arcelor Mittal and Vimetco NV for allegedly buying electricity at below market prices from the country’s hydropower operator, Commissioner Joaquin Almunia said.

The European Commission is looking “into potential aid” given to steel producer Arcelor Mittal Galati SA and aluminum smelter Alro SA through lower electricity tariffs from state-owned company Hidroelectrica SA, Almunia said in a speech in Bucharest Oct.21.

The EU is urging Romania, its newest member together with Bulgaria, to liberalize electricity and gas prices and overhaul its unprofitable state-owned energy companies.


Kimelman Appeals Conviction, Sentence for Insider Trading

Michael Kimelman, the co-founder of Incremental Capital LLC, appealed his conviction and sentence for insider trading.

Kimelman, sentenced Oct. 12 to 2 1/2 years in prison, appealed to the U.S. Court of Appeals in New York, according to a court filing dated Oct. 20. He was found guilty in a bribery scheme involving secret information about companies including 3Com Corp. and Hilton Hotels Corp. Also found guilty were brothers Zvi and Emanuel Goffer.

Kimelman was sentenced a day before Raj Rajaratnam, the founder of Galleon Group LLC, received an 11-year sentence for insider trading. Kimelman’s lawyers include Michael Sommer.

The case is USA v. Goffer, 10-00056, U.S. District Court, Southern District of New York (Manhattan).

Hedge Fund CEO Brownstein Pleads Guilty to Insider Trading

Bo Brownstein, the founder and chief executive officer of Denver-based Big 5 Asset Management, pleaded guilty to trading on inside information about a corporate merger.

Brownstein made more than $5 million in illegal profits for his hedge fund and for relatives by trading on a tip in advance of Apache Corp.’s $2.7 billion acquisition of Mariner Energy Inc. in April 2010, the government said.

The tip originated with H. Clayton Peterson, of Denver, a retired former Arthur Andersen partner who served on Mariner Energies board of directors, prosecutors said. His son, Drew, a Denver financial adviser, pleaded guilty to the same charges.

The case is: U.S. v. Peterson, 11-CR-665, U.S. District Court, Southern District of New York (Manhattan).


Volcker Rule Could Stabilize Financial System, Cephas Says

Derrick Cephas, head of the Financial Institutions Regulatory practice group at Weil Gotshal & Manges LLP, talked with Bloomberg Law’s Lee Pacchia about the recently proposed version of the Volcker Rule and the future of regulations governing the U.S. banking system.

Mr. Cephas is the former president and chief executive officer of Amalgamated Bank and previously served as the Superintendent of Banks for the State of New York.

Comings and Goings

Financial Regulators Approved by Senate to Play Dodd-Frank Roles

The U.S. Senate confirmed three of President Barack Obama’s nominees for financial-regulator posts, including additions to the Securities and Exchange Commission and Commodity Futures Trading Commission who will have a say in Dodd-Frank Act rulemaking.

Lawmakers Oct. 21 approved Republican Daniel M. Gallagher and incumbent Democrat Luis A. Aguilar as SEC commissioners and Mark P. Wetjen to serve on the CFTC.

Gallagher, a former SEC deputy division chief, will join Aguilar and the agency’s other three commissioners as the agency works to implement more than 100 rules it was assigned to write under Dodd-Frank. Wetjen, a policy adviser to Senate Majority Leader Harry Reid, will replace Democrat Michael Dunn on the five-member CFTC, which is writing rules for the $601 trillion global swaps market.

Acting FDIC Chairman Martin J. Gruenberg, Obama’s choice to lead the agency, and Thomas Curry, the FDIC board member nominated to become comptroller of the currency; and Richard Cordray, the president’s pick to lead the consumer bureau, are awaiting Senate confirmation after they were approved by the Banking Committee.

The confirmations came the day after Obama nominated former Federal Reserve Bank of Kansas City President Thomas Hoenig Oct. 20 to serve as the FDIC’s vice chairman.

Legg Mason’s Bowden Named to Head SEC Examination Program

The U.S. Securities and Exchange Commission said Andrew J. Bowden will join the agency as an associate director to lead the National Investment Adviser/Investment Company Examination Program.

Bowden, who will take the post in the Office of Compliance Inspections and Examinations on Nov. 1, joins the SEC from Legg Mason Inc., where he held senior executive positions in its legal/compliance and business units, the agency said in a statement Oct. 21. He will oversee a staff of about 450 lawyers, accountants, and examiners responsible for inspecting U.S.- registered investment advisers and firms, the SEC said.

With assistance from Catherine Airlie, Erik Larson and Mathew Carr in London; Matt Robinson, Don Jeffrey, Bob Van Voris, Greg Farrell and David McLaughlin in New York; Jesse Hamilton and Gregory Mott in Washington; Novrida Manurung in Jakarta; Andra Timu and Irina Savu in Bucharest; David Voreacos in Newark, New Jersey; Klaus Wille in Zurich; Giles Broom in Geneva; Tony Czuczka, Thomas Penny and Fred Pals in Brussels; and Stephanie Bodoni in Luxembourg. Editor: Glenn Holdcraft

Before it's here, it's on the Bloomberg Terminal. LEARN MORE