BNY Mellon, MF Global, Bank Capital, Silver: Compliance

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Bank of New York Mellon Corp., the world’s largest custody bank, is in early stage talks with federal prosecutors to settle accusations the bank overcharged customers for foreign-exchange trading, according to a person briefed on the discussions.

The talks have just begun and it’s too soon to say whether they will result in a settlement, and whether any deal could serve as a model for resolving other lawsuits the bank is facing, said the person, who asked not to be identified because the discussions are confidential.

The U.S. Attorney in Manhattan filed suit against New York-based BNY Mellon on Oct. 4, the same day the bank was sued by New York Attorney General Eric Schneiderman, who said the bank defrauded public pension funds of $2 billion over 10 years. Attorneys general in Virginia and Florida have filed similar lawsuits, as have pension funds in Los Angeles and other California counties.

Chief Executive Officer Gerald Hassell, while denying the accusations, has said he would be “pragmatic” in his approach to resolving them.

Kevin Heine, a spokesman for BNY Mellon, declined to comment. Jerika Richardson, a spokeswoman for the U.S. Attorney, declined to comment on the talks, which were reported earlier by the Wall Street Journal.

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MF Global Developments

MF Global Holdings Said to Be Subject of FBI Investigation

MF Global Holdings Ltd., which filed for bankruptcy protection one week ago, is the subject of a formal FBI investigation opened late in the past week, a person familiar with the matter said.

The inquiry, in which Federal Bureau of Investigation agents are working with U.S. prosecutors, is in its preliminary stage, and no information requests had been issued as of the afternoon of Nov. 4, said the person, who declined to be identified because the matter isn’t public. The decision to begin the probe was made that day or late Nov. 3, the person said, adding that reports of an earlier investigation were wrong.

J. Peter Donald, a spokesman for the FBI in New York, and Ellen Davis, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined to comment. The person familiar with the FBI’s MF Global probe didn’t specify its scope or focus.

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MF Global Brokerage Can Subpoena Its Senior Executives

Officers and directors of MF Global Inc., the bankrupt brokerage that former Goldman Sachs Group Inc. co-chief executive Jon Corzine quit Nov. 4, can be subpoenaed by the company’s trustee in a probe of possible involvement in the commingling of customer accounts.

U.S. Bankruptcy court judge Martin Glenn said at a hearing on Friday that the brokerage trustee, James W. Giddens, can share documents and depositions with the Securities and Exchange Commission and the Commodity Futures Trading Commission. But, Glenn said, the trustee must probe management’s possible involvement without interference from the parent company.

“There have already been serious allegations of misconduct,” Glenn said, citing company lawyers who told the SEC on Oct. 31 that there was a significant shortfall in its collateral for segregated accounts.

MF Global’s commodity customer funds have a shortfall of $633 million, or about 11.6 percent, out of a segregated fund requirement of about $5.4 billion, according to the CFTC. The company has located $658.8 million in missing customer funds in a custodial account at JPMorgan Chase & Co., according to two people with knowledge of the matter.

The account contained a total of $2.2 billion as of Oct. 31, which includes both the firm’s own money and customer funds, according to one of the people, who declined to be identified because the information is private. MF Global’s customer funds had a shortfall of $633 million, or more than 11 percent, out of a segregated fund requirement of about $5.4 billion, regulators said Nov. 3.

Tiffany Galvin, an MF Global spokeswoman, declined to comment. Mary Sedarat, a spokeswoman for JPMorgan, had no immediate comment.

The case is In re MF Global Inc., 11-ap-2790, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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Gensler Said to Recuse Himself From MF Global Over Corzine Ties

U.S. Commodity Futures Trading Commission Chairman Gary Gensler will recuse himself from the agency’s investigation of MF Global Holdings Ltd. amid concern that his ties to the bankrupt firm’s former chief executive may give the appearance of a conflict of interest, two people with direct knowledge of the decision said.

Gensler decided this week against participating in the probe of MF Global because of his history with Jon Corzine, said the people, who spoke on the condition of anonymity because the decision isn’t public.

Corzine, who stepped down as MF Global’s chairman and CEO yesterday, worked with Gensler at Goldman Sachs Group Inc. and during his term in the U.S. Senate, where Gensler served as an aide.

The CFTC is trying to track down $593 million in missing client funds at MF Global after the New York-based brokerage sought bankruptcy protection on Oct. 31. Senator Charles Grassley, an Iowa Republican, said Friday that Gensler should recuse himself from the investigation because of his “close, longstanding ties” with Corzine.

Gensler couldn’t be reached for comment outside of normal business hours.

MF Global Customers Say Money Safeguards Failed Them

Customers of MF Global Holdings Inc. whose money is still trapped at the futures broker almost a week after filing for bankruptcy protection say the safeguards meant to protect them failed as exchanges and regulators work to move client positions.

CME Group Inc., the world’s largest futures exchange that’s also responsible for auditing its clearing members such as MF Global under its authority as a self-regulating organization, said on Nov. 4 it was in the process of transferring about 15,000 positions. Under a court order in the bankruptcy case, no funds or collateral not backing futures positions can be transferred to another futures broker.

“It shows a terrible weakness in the exchanges, the industry and the regulators,” said Elaine Knuth, an MF Global customer since 2005 who trades agricultural commodities for her own account. Her positions total between $100,000 and $500,000, she said. “The whole system broke down.”

MF Global customers may have to wait years to get their money back if the futures broker is sued, Frederick Grede, the liquidation trustee overseeing the bankruptcy of futures brokerage Sentinel Management Group Inc. said Nov. 2. A former chief executive officer of the Hong Kong Futures Exchange, he has sought to recover about $600 million of customer money from Sentinel, the futures broker that filed for bankruptcy in 2007. “I still have extensive litigation with regard to the customers” of Sentinel, he said. “It’s been four years.”

“We understand the frustration and the need for accurate information,” Michael Shore, a spokesman for the CME Group, said in an e-mailed statement. “We have been using a number of channels to communicate with customers as soon as information has been available and will continue to provide updates throughout the process.”

The CME is working with the CFTC and the Securities Investor Protection Corp., or SIPC, trustee to transfer MF Global accounts and CME Clearing-held collateral to other qualified clearing firms, as is legally permitted, he said.

Dave Gary, a CFTC spokesman, didn’t immediately return a call for comment.

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MF Global’s Repo Transactions Drew Regulator Attention in March

U.S. regulators questioned MF Global Inc.’s use of so-called repo-to-maturity transactions as early as March, concerns that eventually led them to demand the brokerage come up with more capital.

The Securities and Exchange Commission sent a letter to MF Global on March 16 asking the firm to justify how it accounted for the repo-to-maturity transactions in the year ending March 31, 2010, according to the letter signed by Jennifer Monick, an SEC senior staff accountant. Monick also asked the firm to disclose how the accounting treatment affected its financial metrics and ratios, according to the letter, which was included in MF Global’s public filings with the agency.

MF Global treated the repo transactions as sales under U.S. accounting rules, letting the firm remove the assets it pledged as collateral from its balance sheet while maintaining exposure to the creditworthiness of the bonds’ issuers.

In a March 30 response, MF Global said its repo-to-maturity transactions for that year increased net revenue by $2 million and the underlying collateral for such trades were U.S. Treasury securities, according to the letter, also filed with the SEC.

In June, the Financial Industry Regulatory Authority, the brokerage industry’s self-funded regulator, noticed the company’s use of European sovereign debt as collateral in similar repo-to-maturity transactions, according to a person with direct knowledge of the situation. Finra objected and told the firm to build up its capital, the person said.

The CFTC has subpoenaed MF Global’s auditor, PricewaterhouseCoopers LLP, requesting information on the segregation of assets belonging to clients trading on U.S. commodity exchanges, according to a person briefed on the matter. The accounting firm’s spokesman, Chris Atkins, declined to comment, and it was unclear what contact the firm had with MF Global after its last clean audit opinion in May.

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Compliance Action

Samsung, Apple Quizzed by EU Over Patent Enforcement

Samsung Electronics Co. and Apple Inc. were questioned by European Union antitrust regulators over the use of smartphone patents, the European Commission said.

Samsung and Apple were sent requests for information on “the enforcement of standards-essential patents in the mobile-telephony sector,” according to a spokeswoman for the Brussels-based regulator who declined to be identified, citing office policy. The requests are standard procedure, she said.

“This is all about Samsung,” said Florian Mueller, a Munich-based consultant who has done work for rival mobile-phone operating system-maker Microsoft Corp. “Apple does not assert any standards-essential patents in court.”

Apple and Samsung have filed at least 30 lawsuits against each other in 10 countries, according to Samsung. While Apple has also sued Motorola Mobility Holdings Inc. and HTC Corp. over phones using the same operating system, the company’s now-deceased founder Steve Jobs took particular interest in Samsung devices because of what he saw as blatant similarities to the sleek look of its iPhone and iPad tablet computer.

Apple said in a filing in a California court case last week that Samsung faced an EU antitrust investigation into its “egregious” misuse of patents. The Cupertino, California-based company didn’t indicate it also received a request for information in the filing. Apple wouldn’t confirm whether it received a request for information from the EU and declined to comment beyond the California court filing.

Samsung is cooperating with the EU request and “has at all times remained committed to fair, reasonable and non-discriminatory licensing terms for our wireless standards-related patents,” according to a statement from Brendon Gore, Samsung’s European spokesman.

The California case is: Apple Inc. v Samsung Electronics Co. Ltd., U.S. District Court for the Northern District of California (San Jose), 11-cv-01846.

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CFTC Says Probe of Silver Market Analyzed 100,000 Documents

A multiyear investigation into the possibility of unlawful acts in the silver market is continuing after regulators analyzed more than 100,000 documents, the U.S. Commodity Futures Trading Commission said.

“In September of 2008, the commission announced the existence of an enforcement investigation into the possibility of unlawful acts in silver markets,” the CFTC said Nov. 4 in a statement on its website. “Since that time, the staff has analyzed over 100,000 documents and interviewed dozens of witnesses and obtained expert advice. It has been a long, detailed and thorough investigation, and it continues in an appropriate and considered manner.”

JPMorgan Chase & Co. and HSBC Holdings PLC were sued in October 2010 by investors who alleged that starting in March 2008, the banks manipulated silver in futures and options, partly by placing so-called spoof trading orders.

The banks reduced their collusive trading and their holdings in futures market after a government investigation began in March 2008, according to the complaint.

In September, investors said in a consolidated class-action complaint that they had signed a tolling agreement with HSBC and weren’t naming the bank as a defendant.

Tolling agreements are often used to stop statutes of limitation from running while the parties discuss settlement or dismissal of a claim.

New York-based JPMorgan declined to comment on Friday.

Allergan Says Massachusetts AG Wants Documents on Group

The Massachusetts attorney general has asked Allergan Inc., the maker of Botox, to provide documents on its eye-care group, according to a regulatory filing.

The Medicare Fraud Division of the attorney general’s office requested the information relating to Allergan’s Eye Care Business Advisor Group, Allergan Access and BSM Connect for Ophthalmology, according to a regulatory filing Nov. 4.

The company, based in Irvine, California, said it received a so-called civil investigative demand in September.

“It is our office policy to neither confirm nor deny investigations,” Grant Woodman, a spokesman for Massachusetts Attorney General Martha Coakley, said in a telephone interview.

Allergan made $2.3 billion from sales of its eye care pharmaceuticals, accounting for 47 percent of its total revenue last year.

Compliance Policy

Fed Will Require Banks to Increase Capital, Tarullo Says

The Federal Reserve will compel the largest U.S. banks with $50 billion or more in assets to take “affirmative steps” to increase capital during the phase-in of higher capital standards.

“The Federal Reserve will require bank holding companies that are subject to our proposed capital plan rule, generally companies with $50 billion or more in total assets, to take affirmative steps to improve capital ratios, such as external capital raises,” ensuring compliance deadlines under Basel III, Tarullo said Friday in Washington. He was referring to the international bank capital agreement in Basel, Switzerland.

Global regulators said in June banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis. The additional capital buffers will range from 1 percentage point to

2.5 percentage points, the Basel Committee on Banking Supervision said. U.S. banking regulators are also under orders by the Dodd-Frank Act to impose heightened standards on the biggest U.S. banks to curtail systemic risk.

Last month, MetLife Inc., the largest U.S. life insurer said the Fed rejected its plan to increase its dividend and resume share purchases. The insurer said it will try to sell its banking businesses, thus reducing government oversight.

Tarullo is the Fed’s leading governor on supervisory matters. He has redesigned the central bank’s approach to oversight, centralizing much of the information gathering and decision making to the Board of Governors and subjecting it to more rigorous and horizontal analysis by multiple Fed departments.

To listen to Tarullo’s comments, click here.

Deutsche Bank, BNP Among 29 Banks Facing FSB Capital Buffer

Deutsche Bank AG, BNP Paribas SA and Goldman Sachs Group Inc. are among banks that must hold additional capital buffers ranging from 1 to 2.5 percentage points under plans approved Nov. 4 by the Group of 20 nations.

A total of 29 lenders may have to meet the requirements, according to a provisional list published by the Financial Stability Board. The measures were agreed on by regulators to prevent any so-called systemically important financial institution from failing and roiling the global economy. The list doesn’t specify the exact surcharges banks may face.

Systemically important banks need “higher capital requirements which will reflect the cost of their possible failure,” Mario Draghi, the FSB’s chairman, told reporters in Cannes, France.

Bank watchdogs have clashed with some lenders including HSBC Holdings Plc, Citigroup Inc. and BNP over the plans, with the banks warning they could cause them to cut lending or support to international trade. The Basel Committee on Banking Supervision, which drafted the surcharge plans, in September rejected calls to scrap additional capital buffers, instead agreeing to changes to how it calculates them. The measures were published Friday after approval by Group of 20 leaders in France.

For more, including a list of the banks affected, click here.

U.S. House Approves Looser SEC Rules for Closely Held Firms

The U.S. House passed two measures aimed at removing barriers to investments in closely held firms, including a proposal President Barack Obama’s administration backed in its jobs package.

House lawmakers voted 407-17 to pass a measure that would exempt from Securities and Exchange Commission registration firms that solicit and pool small investments, often online, of up to $1 million. The practice, known as crowdfunding, garnered bipartisan support after Obama’s Sept. 8 speech to Congress.

“What we’re doing is giving investors the power, the opportunity and relieving this restriction that prevents them from having an equity stake in their favorite business, their favorite idea, their local coffee shop, their favorite band or even the next Facebook,” Patrick McHenry, a North Carolina Republican and the sponsor of the measure, said on the House floor before the vote.

Lawmakers in the Republican-led House have found bipartisan consensus this week on four measures that would loosen SEC rules.

Representative Kevin McCarthy, the third-ranked Republican in the House, sponsored a second bill passed Nov. 3 that would allow closely held firms to market offerings to accredited investors. The SEC currently bans closely held firms from soliciting funding from investors.

“This opens up a whole new group of capital for someone that has an idea, even if they don’t have a prior relationship,” McCarthy, of California, said Friday in an interview. “If you have an idea, you have another opportunity to try to raise capital to go to the market.”

The House passed the measure 413-11.

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House Republicans Consider Fate of Grab Bag of Expiring Tax Cuts

Republicans in the U.S. House of Representatives are starting to discuss extending dozens of tax breaks that expire Dec. 31, including benefits for corporate research and U.S.- based banks’ overseas operations.

“I know they’re there,” Ways and Means Chairman Dave Camp said in a brief interview Nov. 4. “We usually deal with them by the end of the year.”

Lawmakers said their efforts to advance a bill on the so-called tax extenders have been complicated and delayed by deliberations of the deficit-reduction supercommittee, which may address related issues and is occupying Camp’s time. Camp sits on the 12-member panel.

A one-year extension of the expiring provisions that have been routinely moved forward would cost the Treasury more than $30 billion in forgone revenue.

Lawmakers also will separately consider the Dec. 31 expiration of the 2 percentage-point cut in the payroll tax. President Barack Obama has called for Congress to extend and expand that break.

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Rail Regulator Defers Decision on New Track-Sharing Rules

A U.S. freight regulator said it will decide whether to write a rule on rail-track sharing sought by shippers after it finishes reviewing broader issues of competition among railroads.

The National Industrial Transportation League, a freight shippers’ trade group, has asked the Surface Transportation Board to give shippers served by only one railroad more freight options by forcing a railroad to let others use its tracks. The board said in a statement on its website Nov. 4 it is reviewing similar issues.

The board is considering the new rules as congressional Republicans press President Barack Obama’s administration to roll back costly or unnecessary regulations. It held hearings on the matter in June.

The Arlington, Virginia-based shipper group proposed a rule in July to provide competitive freight services for coal-fired electric plants, chemical makers, grain producers and others that say they can only use rail to move bulk shipments.

Its proposal calls for railroads to switch freight onto a competitor’s tracks under some conditions for a fee.

In the Courts

Simon Property Sues to Force Indiana to Tax E-Commerce Sales

Simon Property Group Inc. sued the state of Indiana to force it to collect taxes from Internet retailer Inc. for sales made to residents.

“SPG is not seeking money damages,” the biggest U.S. shopping mall operator said Nov. 3 in a statement announcing its filing in Indianapolis state court. “This action is being filed to benefit all of Indiana’s taxpayers and the state’s brick-and-mortar retailers,” many of whom are Simon tenants.

The mall operator claims the state has ignored requests that it collect the taxes even as annual Amazon sales to Indiana residents exceed hundreds of millions of dollars.

That volume of business gives Amazon--the world’s largest on-line retailer--sufficient contact with the state to become liable for collecting tax on sales there, according to the Simon complaint.

Simon is also the biggest U.S. real estate investment trust by market value. The Indianapolis-based company on Oct. 25 reported occupancy at its U.S. properties in the third quarter rose to 93.9 percent from 93.8 percent one year ago, while average rent increased 3.4 percent to $38.87 per square foot.

Drew Herdener, a spokesman for Seattle-based Amazon, didn’t immediately reply to a voice-mail message seeking comment on the lawsuit.

The case is State of Indiana ex rel. Simon Property Group LP v. Indiana Department of Revenue, 49D13 11 11 PL 042652, Marion County, Indiana, Superior Court (Indianapolis).

Citigroup Sued by Moneygram Over Collateralized Debt Losses

Moneygram Payment Systems Inc., the electronic cash-transfer business, accused Citigroup Inc. of fraud by in a lawsuit seeking to recover an alleged $140 million in collateralized debt obligation losses.

The bank and two of its units, Citigroup Global Markets Inc. and Citigroup Global Markets Ltd., undertook a “fraudulent scheme” to sell nine mortgage-related CDOs to Moneygram from 2005 to 2007, according to a complaint filed Oct. 26 in state court in Minneapolis. Citigroup allegedly marketed the CDOs as investment grade.

“In reality, however, the CDOs that Citi sold to Moneygram were ‘junk’ on the very day that Citi sold them,” according to the complaint. The CDOs weren’t backed by the promised overcollateralization of assets, Minneapolis-based Moneygram said.

The third-biggest U.S. lender, Citigroup last month agreed to pay $285 million to settle U.S. regulatory claims that it misled investors about the nature of a $1 billion collateralized debt offering in 2007.

“We believe the suit is without merit,” Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, said in an e-mail.

The case is Moneygram Payment Systems Inc. v. Citigroup Inc., 27cv11-21348, Hennepin County, Minnesota, District Court (Minneapolis).

Union Bank to Settle $35 Million Overdraft-Fee Litigation

Union Bank NA will settle a lawsuit over its overdraft-fee policy for $35 million, according to a filing in federal court in Miami.

U.S. District Judge James Lawrence King ruled in September that Union Bank would have to defend the civil claims.

Customers claimed in more than 30 nationwide lawsuits that more than 30 banks process checking account debit card transactions non-sequentially to deplete the accounts and trigger overdraft fees.

Last year, the Federal Reserve imposed rules prohibiting lenders from automatically charging fees when consumers have insufficient funds for electronic or debit transactions.

Bank of America, the second-largest U.S. lender, goes to court this week for final approval of its $410 million settlement announced in February. The Charlotte, North Carolina-based bank doesn’t admit liability.

At least five suits in other states that weren’t part of the multidistrict suit but claimed the same overcharge-fee practices have settled.

Daniel Weidman, a spokesman for San Francisco-based Union Bank, declined to comment on the settlement.

“We’re very happy that we could come together with Union Bank,” said Aaron S. Podhurst, attorney for the plaintiffs. “I think it will be a very fair settlement.”

The case is In Re Checking Account Overdraft Litigation, 09-cv-02036, U.S. District Court, Southern District of Florida Miami).

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