Some defense lawyers need to pay closer attention to possible conflicts of interest when they represent both companies and their employees in front of the U.S. Securities and Exchange Commission, the agency’s top enforcement official said.
The SEC has seen “situations where counsel represents 20, 30 or 40 witnesses and the company in a case,” SEC Enforcement Director Robert Khuzami said at a securities law conference Oct.28 in Los Angeles. “It’s conceivable that there are no conflicts, but when you see those kinds of numbers you start to get concerned.”
Khuzami said that lawyers representing multiple defendants pose problems for people who may wish to cooperate with investigators in exchange for lighter sanctions. In some cases, attorneys have represented both a manager under investigation for supervisory failures as well as the subordinate who engaged in the questionable conduct.
Khuzami also faulted some defense attorneys for coaching their clients aggressively, resulting in witnesses who recall facts that exonerate them while claiming to forget basic facts that might incriminate them.
Referring to internal investigations at companies, Khuzami said that “the firm conducting the investigation obviously should be representing the best interests of the company and the shareholders, but the concern is sometimes much more about representing management and those who made decisions.”
Europe Tries to Recapitalize Its Banks Without Injecting Capital
Europe’s largest banks may raise just a tenth of the total capital shortfall estimated by regulators, fueling concern policy makers’ plans to bolster the region’s lenders could fail.
European Union leaders ordered banks last week to increase the ratio of “highest quality” capital they hold by the end of June, creating a shortfall of 106 billion euros ($150 billion). Of Europe’s 28 largest lenders, only eight will need to raise a total of 11 billion euros from investors, Huw Van Steenis, a Morgan Stanley analyst, wrote in an Oct. 28 report.
Rather than tapping investors or governments, firms are trying to hit the 9 percent core capital target by adjusting risk-weightings, limiting dividends, retaining earnings, reducing loans and selling assets. Banks had threatened to curb lending, risking a recession, to meet the goal rather than take government aid that would bring limits on bonuses and dividends. EU leaders already are pressing banks to restrain payments to employees and shareholders until they meet the capital target.
Lenders may sell as little as 6 billion euros of new stock to investors to plug the shortfall, according to Alastair Ryan, an analyst at UBS AG in London. That’s seven times less than the amount banks will raise from retaining earnings and adjusting risk-weightings, he said.
Spanish bankers said lenders in other European countries benefit from looser standards after regulators found the country’s banks had a 26.2 billion-euro ($37 billion) capital shortfall.
Banco Santander SA Chief Executive Officer Alfredo Saenz pointed to “fudges beyond our frontiers” as he highlighted the differences between the rules used to calculate capital ratios on his bank’s balance sheet and those in Switzerland. Jacobo Gonzalez-Robatto, chief financial officer of Banco Popular Espanol SA, complained to analysts about the “stark and massive” differences in regulation for computing capital ratios.
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Nasdaq OMX Plans ‘Minimum Life’ Orders on PSX Stock Exchange
An exchange owned by Nasdaq OMX Group Inc. asked for permission to introduce a type of order for stocks that must last for a tenth of a second, 10 times longer than some of those placed by the fastest traders.
The Nasdaq OMX PSX market is seeking to attract volume with the orders, which would earn anyone using them a higher payment from the exchange. Equity venues employ a variety of strategies including rebates to spur market makers and trading firms to provide orders at the best prices nationally.
Nasdaq OMX PSX made the proposal as regulators study the impact of high-speed automated trading on the ability of investors to get the prices and transactions they want. Exchanges, traders and government officials have examined whether orders that remain accessible for as long as a second would assure investors that they can trade with the prices they see on their screens.
The PSX proposal requires SEC approval to go into effect.
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Power Hedges May Be Mifid Exempt, Banks May Win, Lobby Says
Power hedging by utilities will probably be exempted under the European Union’s plan for financial regulation including energy and commodity derivatives, said Eurelectric, the electricity lobby group.
Marco Foresti, an adviser on energy markets for the Brussels-based lobby, which represents companies including Germany’s EON AG and Italy’s Enel SpA, said if utilities “want to do trading to make money they would need to get a Mifid license for that.” He made the remarks in an by e-mail, citing preliminary analysis by the group of Oct. 20 EU proposals.
The EU’s plan to expand its Markets in Financial Instruments Directive, or Mifid, will seek to regulate some companies and transactions that are currently exempt, to better protect investors in the wake of the financial crisis.
Banks may win new trading business in the region’s energy industry from utilities because of the tighter restrictions, Foresti said. “Heavy capital requirements deriving from the Capital Requirements Directive” may result in fewer buyers and sellers trading in markets for energy commodities, slashing trading volumes, he said.
The draft Mifid directive offers exemption from compliance duties on the condition that the trading activity is ancillary to the entity’s main business and that it isn’t part of a financial group.
Coordinate Single-Stock Halts, Marketwide Curbs, Sifma Says
U.S. circuit breakers that halt futures and securities trading during market plunges should also be triggered when 25 stocks in the Standard & Poor’s 500 Index undergo individual pauses, according to an industry group.
The Securities Industry and Financial Markets Association told regulators in a letter Oct. 27 that expanding the events triggering marketwide halts to include pauses in 5 percent of S&P 500 companies is necessary because the index calculation may become unreliable. The broader halts, adopted after the 1987 stock rout, are currently set off only by crashes.
Sifma told the Securities and Exchange Commission that the agency should analyze data to assess the impact that trading halts in individual stocks “may have on the measurement of the performance of the index,” and decide whether another percentage may be more appropriate.
Regulators and exchanges are overhauling rules adopted a quarter century ago to shut down the equity market and related futures trading during periods of volatility. Among other changes, the New York Stock Exchange, Nasdaq Stock Market and other venues proposed that the curbs be triggered when the S&P 500 falls 7 percent. The circuit breaker is currently set off when the Dow Jones Industrial Average drops 10 percent. The proposal also shortens the length of most halts.
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Tocqueville, Fund Manager Accused of Price Manipulation by AMF
Tocqueville Finance SA, a Paris-based portfolio management company, and one of its executives were accused by France’s financial markets regulator of manipulating share prices.
Tocqueville and Marc Tournier, a fund manager there, bought shares in June 2009 in order to drive up the price, representatives of the Autorite des Marches Financiers told the regulator’s board at a hearing Oct. 28, asking the board to fine them a total of 250,000 euros ($354,000).
Tocqueville and Tournier disputed the accusation, saying the purchase decision was triggered when the share price fell and that the motivation was to increase their stake rather than inflate the price.
“It is their job to find stocks” whose prices may rise, said Francois Klein, a lawyer representing them. “That is what Mr. Tournier did.”
SEC Enforcers Frozen as Watchdog Unleashes ‘Chilling’ Probes
The U.S. Securities and Exchange Commission’s internal watchdog Inspector General H. David Kotz has castigated the agency for missing the Bernard Madoff fraud, spotlighted employees who viewed online pornography, and called for a criminal probe into the ethics of the SEC’s former top lawyer.
While his blunt reports have won admiration on Capitol Hill, a backlash against Kotz among staff and managers has grown in intensity at the SEC and spread to the legal community outside the agency. Now critics led by former SEC Chairman Harvey Pitt say Kotz is undermining the market regulator’s effectiveness.
Pitt, who has represented several people involved in Kotz’s investigations, described the atmosphere at the SEC as a “reign of terror” in an e-mail last month to securities lawyers obtained by Bloomberg News.
Kotz’s supporters say he’s a zealous investigator who arrived when the SEC’s lapses in the run-up to the credit crisis called for a tough in-house cop. His critics say that some of Kotz’s reports lacked evidence of wrongdoing and unfairly damaged the reputations of those he accused.
In interviews, almost three dozen current and former SEC staff members, speaking on condition of anonymity to avoid reprisals from Kotz, raised concerns similar to Pitt’s.
Kotz, 45, disputed his critics in an e-mailed statement, saying his work has had “an extremely positive impact” on the SEC.
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Avon’s Jung Under Scrutiny as SEC Starts New Investigation
With the U.S. Securities and Exchange Commission probing Avon Products Inc.’s dealings with analysts, Andrea Jung may be facing the toughest challenge of her 12-year tenure as chief executive officer.
The investigation increases scrutiny of the world’s largest door-to-door cosmetics company, which has trailed Wall Street’s forecasts and earlier this year fired four executives amid a probe involving possible bribes to Chinese officials.
The SEC’s subpoena seeks information about the company’s contacts with financial analysts, Avon said Oct. 27. The SEC is also investigating Avon’s international operations.
“We are going to conduct in-depth operational and financial reviews and reassess the internal and external factors that impact our performance,” Avon spokeswoman Jennifer Vargas said. She declined to comment further.
In 2008, Avon began investigating its Chinese operations’ compliance with the Foreign Corrupt Practices Act, which outlaws bribing foreign officials. The four executives were fired in May, and Avon expanded the probe to other developing countries.
As Jung, 53, deals with those distractions, her company vies to compete with larger rivals in emerging economies.
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Deutsche Boerse Says Has ‘Strong Arguments’ in Antitrust Probe
Deutsche Boerse AG, seeking to acquire NYSE Euronext to form the world’s largest exchange, has “strong arguments at hand” for European antitrust regulators who have sent the companies a statement of objections, Chief Financial Officer Gregor Pottmeyer said.
Deutsche Boerse and NYSE Euronext are defending their proposed $7.26 billion deal at a regulatory hearing in Brussels against European Union criticism that the combination may harm competition and restrict innovation in financial markets. The EU’s antitrust authority can block anti-competitive deals or require companies to sell off units or change the way they do business to eliminate antitrust concerns.
Pottmeyer, on a conference call Oct. 28 to discuss third-quarter earnings, said the impact on competition “is negligible,” because regulatory reform ensures competition between listed and over-the-counter derivatives markets “will not only continue, but be invigorated.”
The exchange is confident that the regulators will see the benefit of the deal, he added. Regulators told the exchanges their merger would monopolize derivatives trading in Europe, according to a person familiar with the situation.
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HomeServe Suspends Phone Sales Operations After Internal Review
HomeServe Plc, a U.K.-based emergency-repair service provider, suspended all telephone sales operations and marketing activity following an internal investigation.
The monthlong review, which included the commissioning of an independent report from Deloitte LLP, found cases where sales processes failed to meet company standards, HomeServe said in an e-mailed statement.
It will begin taking incoming customer calls again in the next few days after staff are retrained and new scripts developed, according to the statement. Outgoing calls won’t be restarted until the relevant staff have been through a “comprehensive retraining program,” the company said.
HomeServe has been in regular talks with the Financial Services Authority and still plans to announce first-half results on Nov. 22, according to the statement.
Horlick Shelves Plans for Fund Supermarket, Telegraph Reports
Nicola Horlick, the chief executive officer of Bramdean Asset Management LLP, shelved plans to launch a new fund-management business aimed at retail investors because of regulatory uncertainty, the Sunday Telegraph reported.
Horlick put on hold plans to start her Bees and Honey online fund supermarket, or interface between retail investors and asset-management companies, pending a review of such offerings by the Financial Services Authority, the newspaper said without specifying where it got the information.
The U.K. regulator is reviewing how investment products are sold to individuals and aims to bolster its supervision of the process, the Telegraph reported.
Swiss Want to Solve Tax Problems With U.S. Soon, Minister Says
Switzerland wants to resolve the dispute with the U.S. on untaxed assets of American account holders in Swiss banks as soon as possible, Swiss Finance Minister Eveline Widmer-Schlumpf said at an event in the Swiss capital Bern Oct. 28.
Any deal with the U.S. would be based on existing agreements and not on new legislation, Widmer-Schlumpf said.
O’Leary Says Ireland Won’t Need Corporate Tax Increase
Barry O’Leary, chief executive officer of IDA Ireland, talked about the corporate tax rate and investing in Ireland.
He spoke from Dublin with Linzie Janis on Bloomberg Television’s “Countdown.”
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Comings and Goings
China Regulator Reshuffle Makes Shang Biggest Banks Watchdog
China moved its securities regulator Shang Fulin to head the nation’s banking watchdog, overseeing a 106 trillion-yuan ($17 trillion) industry that includes four of the world’s 10 largest lenders by market value.
Shang’s appointment as chairman of the China Banking Regulatory Commission to replace Liu Mingkang is part of the biggest reshuffle of financial officials in a decade. China Construction Bank Corp. Chairman Guo Shuqing will become head of the securities watchdog and Agricultural Bank of China Ltd. Chairman Xiang Junbo will take the top job at the insurance regulator, the government said on Oct. 29.
Shang, 59, takes over at the watchdog for an industry whose assets have more than tripled during the past eight years as China’s economy became the world’s second-largest. After almost nine years as the securities regulator, Shang will be in charge of curbing a potential surge in bad loans following a record $2.7 trillion two-year credit boom that propelled China’s expansion after the global financial crisis.
Guo, 55, who resigned from Construction Bank on Oct. 28, will replace Shang at the China Securities Regulatory Commission. Xiang, 54, who quit Agricultural Bank the same day, will move to the China Insurance Regulatory Commission, replacing Wu Dingfu. The government’s announcement didn’t say whether Liu and Wu, both 65, are retiring.
The websites of the three regulators have been updated to reflect the changes.
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