FDIC Nominee, Investor Fraud, MF Global, Sandoz: Compliance

Updated on

Federal Deposit Insurance Corp. nominee Thomas Hoenig told lawmakers that large financial firms must be accountable for their own capital and risk-taking and shouldn’t count on government help in the event of a collapse.

“I am not against big, I’m against too-big-to-fail,” Hoenig said yesterday at a Senate Banking Committee hearing on his nomination to serve as FDIC vice chairman. “These institutions should understand themselves and their risk capital. The burden is on them. I don’t support future bailouts.”

Hoenig, who started his career at the Federal Reserve Bank of Kansas City as an analyst 38 years ago and stepped down last month as president, said his experience in regulation and supervision would serve him well in the FDIC’s No. 2 role. President Barack Obama selected Hoenig, 65, to succeed Acting Chairman Martin J. Gruenberg, whose nomination for the top post is awaiting Senate approval.

Hoenig, who was president of the Kansas City Fed for 20 years, repeatedly urged the Federal Open Market Committee to tighten monetary policy to stifle inflation and prevent asset-price bubbles. He would join the FDIC as the agency takes on broader responsibility for systemically important financial firms, including resolution authority under the Dodd-Frank Act.

Compliance Action

Man Charged With Selling Fake Facebook, Groupon Investments

The U.S. charged a South Florida man with running an $11 million scam that lured investors into paying for non-existent shares in closely held companies including Facebook Inc. and Groupon Inc.

John Mattera, 50, is accused of operating a two-year scheme to sell shares in special-purpose vehicles set up to hold stock in non-public companies that were expected to make initial public offerings, according to a complaint unsealed yesterday in Manhattan federal court.

Mattera, who ran Praetorian Global Fund Ltd., instead diverted most of money to himself, using it to pay for jewelry, luxury cars and interior decorating, according to the complaint, which was filed by the office of U.S. Attorney Preet Bharara.

Another participant in the scheme, identified only as Praetorian’s managing director, pleaded guilty to criminal charges and is cooperating with the government, according to the complaint. Praetorian’s website and a civil complaint filed yesterday by the U.S. Securities and Exchange Commission identified Bradford van Siclen as the firm’s managing director.

The criminal complaint charges Mattera with wire fraud, securities fraud, money laundering and conspiracy. He faces as long as five years in prison on the conspiracy charge and up to 20 years on each of the other charges, Bharara’s office said in a statement yesterday.

A voice mail message left with Praetorian, a British Virgin Islands mutual fund, wasn’t immediately returned. Scott Lieberman, who represented Mattera in an unrelated civil suit, and Robert Pearce, who represented van Siclen in the same case, didn’t immediately return messages seeking comment on the charges.

The case is U.S. v. Mattera, 11-CR-2947, U.S. District Court, Southern District of New York (Manhattan).

Lake Shore Asset Management’s Baker Sentenced to 20 Years

Philip J. Baker, principal of the collapsed Chicago hedge fund Lake Shore Asset Management Ltd., was sentenced to 20 years in prison for his role in a fraud that prosecutors said cost investors $154.8 million.

Baker, 46, pleaded guilty to a single count of wire fraud in August. Accused of running a global fraud scheme that ensnared almost 1,000 investors over five years, he was indicted in absentia in February 2009.

“I just want to say I’m sorry to my family and to my former clients. Thank you,” Baker yesterday told U.S. District Judge John Darrah in Chicago, before being receiving the maximum sentence allowable under the law.

Prosecutors said Baker misappropriated at least $30 million in investor funds for his own use and that of another Lake Shore director. The U.S. Commodity Futures Trading Commission sued the firm in 2007, claiming it misled investors about its profitability.

The CFTC later won a court order barring Lake Shore from commodities trading.

Defense attorney Kurt Stitcher yesterday told the court his client will seek his unopposed transfer to a Canadian prison.

The criminal case is U.S. v. Baker, 1:09-cr-00175, and the civil case is U.S. Commodity Futures Trading Commission v. Lake Shore Asset Management Ltd., 1:07-cv-03598, U.S. District Court, Northern District of Illinois (Chicago).

U.S. Prosecutors Seek Delay in SEC Case Against Rajat Gupta

U.S. prosecutors asked a judge to delay the civil insider-trading case against Rajat Gupta brought by the Securities and Exchange Commission so that Gupta’s criminal trial can proceed first.

U.S. District Judge Jed Rakoff in New York has scheduled a hearing for today to decide whether to postpone the civil case against the former Goldman Sachs Group Inc. director until the criminal trial is completed, according to Stephanie Cirkovich, a spokeswoman for the Manhattan federal courts.

Gupta, who also sat on the board of Procter & Gamble Co. and led McKinsey & Co., was charged with five counts of securities fraud and one count of conspiracy to commit securities fraud in an indictment unsealed Oct. 26.

The SEC filed a related civil suit the same day against Gupta and his business associate Raj Rajaratnam, the Galleon Group LLC co-founder convicted in May of being at the center of the biggest insider-trading scheme in U.S. history.

Lawyers for Gupta and Rajaratnam oppose the civil case postponement sought by prosecutors in the office of Manhattan U.S. Attorney Preet Bharara, Cirkovich said.

Rakoff, who is presiding over both cases, has scheduled an April 9 trial date for Gupta’s criminal case and an Oct. 1 trial date for the SEC lawsuit.

The cases are U.S. v. Gupta, 11-cr-00907, and SEC v. Gupta, 11-cv-07566, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Ex-Olympus Chief Said to Face Questions by SEC in U.S. Probe

U.S. investigators have asked former Olympus Corp. President Michael C. Woodford to return for a second interview - - this time including the Securities and Exchange Commission -- in a federal probe of hundreds of millions of dollars in advisory fees paid by the Japanese company, a person familiar with the matter said.

Woodford, who was fired after he asked the board to review the payments made as part of acquisitions, traveled from the U.K. to New York last month to meet with FBI agents and prosecutors from the complex fraud unit of Manhattan U.S. Attorney Preet Bharara, said the person.

The meeting with U.S. authorities, which may take place as early as this month, would be the first to involve investigators from the SEC. Regulators are interested because Olympus’s American depositary receipts are traded in the U.S., the person said. The company admitted last week that three executives colluded to hide losses from investors.

The company first denied there was any wrongdoing involving $687 million in advisory fees paid on the $2 billion acquisition of Gyrus Group Plc in 2008, and later said it paid inflated fees to advisers to hide losses.

Woodford has already met with British investigators and may meet with those in Japan as well.

“If any official investigation requests information from Olympus, we are ready to provide our full cooperation,” Franziska Jorke, a spokeswoman for Olympus in Germany, said in an e-mail. She declined to comment further.

Nick Benwell, a lawyer for Woodford in London, couldn’t immediately be reached for comment and messages left at Miller & Chevalier, the Washington law firm also representing Woodford, weren’t immediately returned.

For more, click here.

Compliance Policy

U.S. Regulators Clarify Bank Asset Size Rules Under Dodd-Frank

Five U.S. banking regulators will use quarterly filings, known as “call reports,” to measure whether banks, thrifts and credit unions have assets of more than $10 billion, a key threshold under the 2010 Dodd-Frank financial-regulatory overhaul.

Following an initial determination of size based on June 30 call reports, banks won’t be reclassified unless their size goes above or below the threshold for four consecutive quarters, the agencies said in guidance released yesterday.

Under Dodd-Frank, institutions with over $10 billion in assets are supervised for compliance with federal consumer laws by the new Consumer Financial Protection Bureau. Firms below that level of assets will be examined by their prudential regulators.

This “avoids unwarranted uncertainty or volatility regarding the identity of an institution’s primary supervisor for federal consumer financial laws,” the agencies said in a statement.

The statement was jointly issued by the consumer bureau, the Federal Reserve, the National Credit Union Administration, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

Special Section: MF Global

CME May Face ‘Liability’ Related to MF Global, Goldman Says

CME Group Inc., the world’s largest futures exchange that has fallen about 10 percent this week, may face liability related to concerns it misled regulators over what it knew about MF Global Holdings Ltd., according to Goldman Sachs Group Inc.

“CME has been under pressure,” Daniel Harris, an analyst at New York-based Goldman Sachs, wrote in a note to clients Nov. 16. The concerns are “owing to worries it may face liability over the timing of communications with the CFTC following a discovery of a shortfall in MF Global’s segregated client accounts,” he said, referring to the Commodity Futures Trading Commission, the CME Group’s regulator.

Examiners from Chicago-based CME Group found unexplained wire transfers at the broker-dealer unit of MF Global and a $900 million shortfall in client funds during the weekend the failing broker was talking with possible buyers, a person briefed on the matter said this week. CME, which oversees its futures-broker members such as MF Global under its authority as a self-regulatory organization, noticed the shortfall by Oct. 30, about a day before the CFTC said they were told of the missing funds, according to the person, who spoke on condition of anonymity because the review isn’t public.

CME Group “followed CFTC requirements and CME rules and procedures in reviewing MF Global’s segregated funds statements and coordinating that review with the CFTC,” the company said in an e-mailed statement yesterday.

According to the CFTC, a self-regulatory organization like CME Group “must provide ‘immediate notification‘ when ‘a member has failed to segregate or has misused customers’ funds,’’’ according to Harris.

MF Global Trustee Can Transfer $520 Million to Customers

Some of MF Global Inc.’s commodity customers can get an immediate distribution of $520 million, or about 60 percent of their cash collateral, a judge ruled.

U.S. Bankruptcy Judge Martin Glenn yesterday approved a request to transfer the funds from James Giddens, the trustee overseeing the liquidation of the brokerage. The distributions may begin by Nov. 24, said Kent Jarrell, a spokesman for Giddens. The parent, MF Global Holdings Inc., filed for bankruptcy to apportion returns to creditors. Nov. 24 is Thanksgiving Day in the U.S.

At least 22,000 customers who only had cash in their MF Global accounts as of the time of its bankruptcy on Oct. 31 will get 60 percent of their $869 million on deposit. The transfers will now include investments considered ‘‘cash equivalents,’’ such as Treasury bills. Glenn urged the trustee to seek a similar solution for customers who have a mix of cash and open positions in their accounts.

The cash distribution approved yesterday follows a first transfer of around $1.5 billion in 14,500 customer accounts to other commodities futures merchants, and the total number of commodity customer accounts is around 38,000, according to Jarrell.

About $593 million of MF Global customer funds, or 11 percent, are unaccounted for, according to a person with knowledge of probes of the firm’s collapse. Some customers had objected to yesterday’s motion, saying they should get closer to 80 percent distributions given the alleged 11 percent shortfall.

Separately, Scott D. O’Malia, a CFTC commissioner, said MF Global’s frozen funds have affected confidence in the markets and customers in Australia, Canada, Germany, Singapore, the U.K. and other countries. Although the trustee has been working to return funds faster, it still hasn’t happened quickly enough, he said.

‘‘The livelihood of market participants has been dangling by a thread for over two weeks,” O’Malia said, according to a speech posted on the CFTC’s website.

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

For more, click here.

In the Courts

Buffett’s NetJets Sues U.S. Over $642.7 Million in Taxes

NetJets, the private-aircraft company owned by Warren Buffett’s Berkshire Hathaway Inc., sued the U.S. over excise taxes and penalties totaling $642.7 million assessed against the company.

The Internal Revenue Service improperly assessed the so-called ticket tax, an excise tax on payments made in exchange for air transportation, NetJets said in its complaint in federal court in Columbus, Ohio, dated Nov. 14.

NetJets seeks a refund and abatement of the ticket tax. The company claims in its suit that Congress intended the tax to apply to passengers who use commercial or charter aircraft owned by others.

NetJets also claimed that the IRS didn’t provide any guidance about the types of fees for which the company would have to collect the ticket tax from passengers.

Anthony Burke, a spokesman for the IRS, said in a telephone interview that the agency doesn’t discuss pending litigation.

The suit was filed by subsidiaries of Columbus-based NetJets Inc., which isn’t a party to the suit

The case is NetJets Large Aircraft Inc. v. U.S., 2:11-cv-01023, U.S. District Court, Southern District of Ohio, (Columbus).

Barclays Sues UniCredit Units on $108 Million Credit Deal

Barclays Bank Plc sued two affiliates of UniCredit SpA in a London court over credit guarantees worth about 80 million euros ($108 million).

Barclays agreed to provide credit protection to two of the Italian bank’s units, HVB and UniCredit Bank Austria, in September 2008. The two subsidiaries stopped making payments in June 2010 and said the credit-protection agreement was terminated because of a regulatory change, according to court documents.

Barclays, based in London, says the contracts, valued at around 80 million euros, are valid.

In a pretrial ruling, a London judge yesterday rejected an application for an additional hearing on “a series of preliminary issues.”

UniCredit sent a letter to Barclays in June 2010 saying its guarantee was no longer recognized by the Bank of Italy as “providing regulatory capital relief” and should be terminated, according to court documents. Barclays replied, refusing the request because it “would deprive Barclays of a significant proportion of the overall revenue that it had bargained for.”

The trial is scheduled to take place at London’s High Court as early as next year. A UniCredit spokeswoman had no immediate comment.

Sandoz Agrees to Pay $150 Million to Resolve Drug-Price Case

Novartis AG’s Sandoz unit agreed to pay $150 million to resolve claims that it caused the U.S. and state governments in California and Florida to overpay for drugs, court records show.

The U.S. would recover $86.5 million, California would get $40 million and Florida would receive $15.2 million under the agreement filed Nov. 16 in federal court in Boston, where U.S. District Judge Patti Saris is overseeing the so-called average wholesale price litigation against drugmakers.

Ven-A-Care of the Florida Keys Inc., a specialty pharmacy, sued Sandoz under the U.S. False Claims Act, as well as similar laws in California and Florida, which allow whistle-blowers to sue on behalf of the government and share in any recovery. Ven-A-Care would get $8.3 million from Florida and California. Its U.S. share wasn’t stated in court documents.

Ven-A-Care has settled at least 20 lawsuits since 2000 that allowed state and federal governments to collect about $3 billion. Ven-A-Care reaped more than $400 million in whistle-blower fees during that period. James Breen, an attorney for Ven-A-Care, declined to comment on the settlement.

“This agreement will allow Sandoz to focus on its core mission to deliver high-quality, affordable medicines to patients” while avoiding “the expense, inconvenience and uncertainty of protracted litigation,” the company said in an e-mailed statement.

The pricing claims “are unfounded,” Sandoz said. Sandoz agreed in September to pay $66 million to settle another average wholesale price case filed by Ven-a-Care.

Novartis, Europe’s second-biggest pharmaceutical company, is based in Basel, Switzerland.

The case is In Re Pharmaceutical Industry Average Wholesale Price Litigation, MDL No. 1456, U.S. District Court, District of Massachusetts (Boston).

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