Citigroup Settlement, Fed Loans, MF Global: Compliance

Citigroup Inc.’s $285 million settlement with the U.S. Securities and Exchange Commission over mortgage-backed securities was rejected by a federal judge who said he hadn’t been given enough facts to approve it.

U.S. District Judge Jed Rakoff rejected the settlement in an opinion released yesterday and set a trial date. The judge has criticized the agreement for permitting New York-based Citigroup to settle without admitting or denying liability in the matter.

Citigroup, the third-biggest U.S. lender, agreed last month to settle a claim by the SEC that it misled investors in a $1 billion CDO linked to subprime residential mortgage securities. Investors lost about $700 million, according to the agency.

Rakoff wrote in the opinion that in any case like this, which “touches on the transparency of financial markets,” there is an “overriding public interest in knowing the truth.”

Robert Khuzami, Director of the SEC’s Division of Enforcement, said in a statement yesterday that while the agency respects the court’s ruling, his office believes that “the proposed $285 million settlement was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial.”

The SEC will continue to review the ruling and will take steps that “best serve investors’ interest,” according to the statement.

Rakoff yesterday consolidated the case with another SEC suit involving former Citigroup employee Brian Stoker and scheduled the combined case for trial on July 16, 2012. The parties may try to reach a revised settlement, which must be approved by Rakoff to take effect.

Stoker, a former director in Citigroup’s CDO structuring group, was responsible for structuring and marketing the investment, according to an SEC complaint filed last month. Brook Dooley, a lawyer for Stoker, didn’t immediately return a voice-mail message seeking comment on the SEC allegations.

Danielle Romero-Apsilos, a spokeswoman for Citigroup, declined to comment pending a review of the decision.

At a hearing this month, Rakoff asked whether the public interest doesn’t require determining whether Citigroup did what the SEC claims. Matthew Martens, the SEC’s chief litigation counsel, told Rakoff that the agency adopted its policy of allowing settlements without admission or denial of liability in 1972 to avoid having defendants claim publicly they hadn’t done anything wrong after agreeing to settle. Rakoff said he can’t endorse the settlement based only on the unproved allegations in the SEC’s complaint.

He rejected the SEC argument that he should defer to the agency’s determination that the settlement is fair, particularly as it asked him to issue an order requiring Citigroup not to violate the securities laws in the future.

Calling Citigroup “a recidivist,” Rakoff said the SEC hasn’t tried to enforce such an order against a financial institution in the past 10 years.

The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11-cv-7387, U.S. District Court, Southern District of New York (Manhattan).

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Compliance Policy

EU To Propose Regulation Overhaul for Auditors Tomorrow

The European Commission will tomorrow publish plans to overhaul regulation of the audit industry, Chantal Hughes, a spokeswoman for Michel Barnier, the region’s financial services commissioner, said in an e-mail.

The proposals will address concerns that insufficient competition between auditors has led to poor quality assessments, the EU said in a statement on its website.

Compliance Action

Jon Corzine Called to Testify for Senate Agriculture Panel

Jon S. Corzine, the former New Jersey Governor and U.S. senator who led MF Global Holdings Ltd. before the firm sought bankruptcy protection on Oct. 31, has been called to testify Dec. 13 at a Senate Agriculture Committee hearing on the collapse.

The hearing was announced yesterday in a statement released by the office of Agriculture Committee Chairman Debbie Stabenow, a Michigan Democrat.

Corzine has also been asked to testify by the House Financial Services Oversight and Investigations panel at a Dec. 15 hearing “on the decisions and events leading to the collapse of MF Global,” that panel said in a statement on Nov. 22.

Gary Gensler, chairman of the Commodity Futures Trading Commission; Robert Cook, director of trading and markets at the Securities and Exchange Commission; William C. Dudley, the president of the Federal Reserve Bank of New York; and Bradley Abelow, MF Global’s president and chief operating officer, have also been asked to appear at the hearing, a person with direct knowledge of the House panel’s plans said on Nov. 22.

Corzine, who was co-chief executive officer of Goldman Sachs Group Inc. before seeking public office as a Democrat, resigned from MF Global on Nov. 4 after the firm filed for bankruptcy protection.

Steven Goldberg, a spokesman for Corzine in New York, declined to comment on whether Corzine would appear voluntarily before the committees. The panels have the authority to subpoena witnesses.

Fed Gave Banks $13 Billion Undisclosed to Congress

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret.

No one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue. Betty Liu reported on the lending on Bloomberg Television’s “In the Loop.”

For the report, click here, and for more, click here.

Separately, U.S. Representative Elijah Cummings, the top Democrat on the House Oversight and Government Reform Committee, is seeking a hearing with Federal Reserve Chairman Ben S. Bernanke on the central bank’s loans to Wall Street firms during the 2008 financial crisis.

Cummings requested the hearing in a letter yesterday to the panel’s chairman, California Republican Darrell Issa, according to an e-mailed statement from Cummings’s office. He sent the letter following the Bloomberg Markets story describing how the largest U.S. banks benefited from secret Fed lending.

UniCredit Asset Seizure on Alleged Tax Fraud Annulled, Ansa Says

UniCredit SpA won an appeal to have returned 245 million euros of assets that were seized as part of a probe into alleged tax fraud, Ansa news agency reported yesterday.

A spokeswoman for UniCredit didn’t have an immediate comment when contacted by Bloomberg News.

Eurohypo Sale to Germany Should Be ‘Last Option,’ Lawmaker Says

A sale of Commerzbank AG’s unprofitable commercial-real estate unit Eurohypo to the German government should be the “last option,” according to Bjoern Saenger, a lawmaker from Chancellor Angela Merkel’s Free Democratic Party pro-market coalition ally.

Saenger, who is also on the parliament’s finance committee, said in a telephone interview today that there are other alternatives to the state taking it over. He cited a possible closure of the lender as one of the options.

Commerzbank is considering a sale of Eurohypo at a loss to Germany to avoid another European Union state-aid investigation, Financial Times Deutschland reported today, citing unidentified people. The EU already ordered the sale of the unit by the end of 2014 as part of the conditions for 18 billion euros ($24 billion) in rescue funds that Commerzbank received during the credit crunch.

Spokesman Reiner Rossmann declined to comment.

The German government in 2009 took control of Hypo Real Estate Holding AG, a commercial-property and public finance lender that competes with Eurohypo, in the country’s first bank nationalization since the 1930s after the company ran out of funding amid the credit crunch.

Commerzbank Chief Financial Officer Eric Strutz said in August that it would be difficult to sell Eurohypo because of funding challenges. The Eschborn-based lender, which has more than 200 billion euros in assets, had a first-half pretax loss of 871 million euros after impairments on Greek government bonds.

For more, click here.

Capital One to Exit $150 Million in Funds, Citing Volcker Rule

Capital One Financial Corp., the top performer this year in the KBW Bank Index, plans to sell or restructure hedge-fund and private-equity investments prohibited by new U.S. regulations.

Capital One holds about $150 million in stakes disallowed under the so-called Volcker rule, the McLean, Virginia-based lender said in a letter to the Securities and Exchange Commission dated July 29 and made public yesterday. The rule would bar banks from owning more than 3 percent of hedge funds and private-equity funds and investing more than 3 percent of Tier 1 capital in such funds.

The bank, which doesn’t have units that sponsor or invest in hedge funds or private-equity funds, acquired the investments through the purchase of other lenders and doesn’t expect the rule to have a “material effect,” according to the letter.

The SEC, as part of a review of the bank’s first-quarter filing, asked Capital One in a July 19 letter to discuss how the Volcker rule would affect business units that sponsor or invest in private-equity or hedge funds. The agency said in an Oct. 12 letter that it had completed its review. Such correspondence is typically released about 45 days after a review is completed.


PwC Should Get Record Fine in JPMorgan Case, U.K. Regulator Says

PricewaterhouseCoopers LLP should get a record fine of at least 1.5 million pounds ($2.33 million) for failures concerning reports on client-money accounts at JPMorgan Chase & Co.’s London securities unit, the U.K.’s accounting watchdog told a tribunal yesterday.

The Accountancy & Actuarial Discipline Board is seeking fines that top the 1.2 million-pound sanction against Coopers & Lybrand LLP in 1999. The independent arbitrators in London will make a decision within 15 days.

J.P. Morgan Securities Ltd. was fined a record 33.3 million pounds last year by the Financial Services Authority, Britain’s banking regulator, for not properly separating client money from the firm’s accounts. An average of $8.6 billion wasn’t properly segregated in an error that went undetected by PwC for seven years.

Tim Dutton, a lawyer for PwC, argued the fine should be capped at 1 million pounds because the firm had admitted and apologized for the error, which was a “result of information technology changes made by JPM treasury staff,” and that no clients of the bank had lost money.

“We acknowledge that we did not maintain our usual high standards,” PwC spokesman David Jetuah said in an e-mail. He added that the firm takes its reporting requirements “very seriously” and hopes “the regulatory response will be proportionate to the issue.”

Consultant Facing Insider-Trading Charges Goes on Trial

A management consultant used tips from a hedge fund employee to profit by betting on shares in companies including Julius Baer Group Ltd. and Swatch Group AG, prosecutors said in a London court yesterday.

Rupinder Sidhu faces 23 insider-trading charges and one count of money laundering in a jury trial that began yesterday and is expected to last three weeks. Sidhu pleaded not guilty in April.

The prosecution claims Sidhu got inside information from a man who worked at a hedge fund about his firm’s trading, said Michael Brompton, a lawyer for the prosecution. The information enabled him “to engage in successful spread betting on stocks and shares.”

Sidhu, 40, was charged with trading securities of companies such as Julius Baer, Swatch, Reed Elsevier Plc and Michael Page International Plc, while knowing London hedge fund AKO Capital LLP planned transactions in the same shares, according to the indictment.

Film Producer John Bennett Pleads Guilty to Insider Trading

Independent film producer John Bennett pleaded guilty to participating in a $2.6 million insider-trading scheme in which he paid a colleague for secret tips about drug-company takeovers.

Bennett, of Norwalk, Connecticut, who worked for Merrill Lynch & Co. from 2005 to 2007, was accused of later making illegal trades using information from a friend about the April 2008 acquisition of Millennium Pharmaceuticals Inc. by Takeda Pharmaceutical Co. and about the September 2009 purchase of Sepracor Inc. by Dainippon Sumitomo Pharma Co., according to court filings.

Bennett told the judge he met his colleague, identified by prosecutors as Scott Allen, a former investment adviser from Atlanta, at Manhattan restaurants and paid him an unspecified amount of money for the tips. He pleaded guilty to one count of conspiracy to commit securities fraud and two counts of securities fraud.

Bennett, who remains free on bond and is scheduled to be sentenced April 23, gained $1.1 million in profits trading on the information he got from Allen, according to prosecutors in the office of Manhattan U.S. Attorney Preet Bharara.

Henry Mazurek, Bennett’s lawyer, said he didn’t have an immediate comment after court.

The case is U.S. v. Bennett, 11-cr-927, U.S. District Court, Southern District of New York (Manhattan).

Rajaratnam Seeks to Remain Free While Appealing Wiretap Use

Raj Rajaratnam, the Galleon Group LLC hedge fund co-founder convicted of directing the biggest insider trading scheme in a generation, said the use of wiretapped calls by the U.S. raises “substantial” issues of law that should allow him to remain free during his appeal.

Rajaratnam, 54, who is scheduled to report to prison on Dec. 5, is seeking to remain free pending the outcome of his appeal, according a letter his lawyers sent yesterday to Catherine O’Hagan Wolfe, clerk of the U.S. Court of Appeals in Manhattan. Lawyers for the fund manager argue there were “glaring omissions” in the wiretap affidavit used to monitor Rajaratnam’s calls that are likely to be grounds for reversing his conviction.

Before trial, Rajaratnam’s lawyers unsuccessfully argued against the use of the telephone intercept evidence. He was convicted by a jury in May and sentenced to 11 years in prison.

Last November, U.S. District Judge Richard Holwell, who presided over Rajaratnam’s criminal trial, ruled that the government had complied with federal wiretapping laws in its investigation. Prosecutors, who used 45 wiretap recordings at trial, said it was the first insider-trading case in which the government made significant use of wiretaps.

Terence Lynam, a lawyer for Rajaratnam, didn’t immediately return a voice-mail message left at his office seeking comment on the letter.

Ellen Davis, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, whose office prosecuted the case, declined to comment on yesterday’s filings.

The case is U.S. v. Rajaratnam, 11-4416, U.S. Court of Appeals for the Second Circuit (Manhattan). The lower-court case is U.S. v. Rajaratnam, 09-01184, U.S. District Court, Southern District of New York (Manhattan).


Levitt Says U.S. Financial Regulators Are Underfunded

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, said the funding of U.S. financial regulators like the Commodities Futures Trading Commission is “atrocious.” Levitt talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Comings and Goings

Barney Frank Won’t Seek Re-Election in 2012, Plans to Retire

U.S. Representative Barney Frank, co-author of the biggest rewrite of Wall Street rules since the Great Depression, will retire instead of seeking another term after Massachusetts re-shapes his congressional district.

Frank, a Democrat serving his 16th term, led the House Financial Services Committee during the 2008 credit crisis and was a top negotiator on the $700 billion banking-industry bailout. In 2009 and 2010, he was the lead House negotiator on what would become the Dodd-Frank Act -- a 2,300 page overhaul of the U.S. financial regulatory system.

Frank, 71, said he had “tentatively” decided to retire after this term when he completed the Dodd-Frank Act last year. He said he changed his mind when Republicans took control of the House and he saw their plans for financial regulation.

Frank also said the new congressional map, which substantially changed his constituency, played a role in his decision to step down. He said he plans to write, teach and lecture.

The Massachusetts congressman led the push for the regulatory overhaul that bears his name along with Christopher Dodd, the Connecticut Democrat who retired from the Senate instead of seeking re-election in 2010. They shepherded the measure through a yearlong battle fraught with partisan fights and fueled by millions of dollars from groups lobbying to shape the future of financial oversight.

For more, click here and click here.

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