Corzine on Transfers, EU Derivatives, SEC: Compliance

Jon S. Corzine, former chairman and chief executive officer of MF Global Holdings Ltd., told lawmakers yesterday that the firm’s back-office staff “explicitly” informed him that funds transfers made before the company filed for bankruptcy were legal.

Bradley Abelow, chief operating officer, also testified.

Corzine, who testified yesterday before U.S. lawmakers for the third time in a week, was responding to allegations made at a U.S. Senate hearing earlier this week when the executive chairman of Chicago-based CME Group Inc. told lawmakers Corzine had known of a $175 million loan using client money that was made before the Oct. 31 bankruptcy.

The former New Jersey governor used yesterday’s hearing by an oversight panel of the House Financial Services Committee to rebut the suggestion that he may have authorized improper use of customer money.

Lawmakers and U.S. authorities are investigating what happened to as much as $1.2 billion in customer funds that is missing from MF Global accounts.

“I did not instruct anyone to lend customer funds to anyone,” Corzine said.

He suggested Terrence Duffy, CME Group executive chairman, may have been referring to some funds transfers that occurred as MF Global was selling billions of dollars in securities. JPMorgan Chase & Co., which was involved in the transactions, told MF Global the sale couldn’t be completed until overdrafts in some accounts in London were corrected.

Corzine said he contacted the firm’s “back office in Chicago and asked them to resolve the issues, which I understood they did.” He didn’t say explicitly whether he was aware at the time that the loan may have included funds from customer accounts.

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MF Global and Corzine didn’t receive preferential treatment in a bid to become a primary dealer of government securities, said Thomas C. Baxter Jr., general counsel of the New York Federal Reserve.

Corzine met with officials at the New York Fed on June 1, 2010, and discussed the broker’s efforts to improve its credit structure by raising $150 million in equity, Baxter said in testimony prepared for a hearing yesterday of the House Financial Services subcommittee on oversight and investigations.

MF Global, starting before Corzine became CEO, sought to expedite a New York Fed review in order to become a primary dealer. The firm was under orders from the Commodity Futures Trading Commission to overhaul its internal controls. The Fed’s policy was to impose a one-year waiting period after such an enforcement action. MF Global argued the matter wasn’t material to its application, Baxter said.

The New York Fed disagreed and reviewed MF Global’s application “without fear or favor,” Baxter said in the testimony. MF Global was approved as a primary dealer on Feb. 2,

2011. That status was revoked by the Fed on Oct. 31, the same day the firm filed for bankruptcy.

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Separately, the trustee overseeing the liquidation of MF Global’s brokerage subsidiary is investigating whether client funds were used to support as much as $6.3 billion in trades tied to European sovereign debt, according to James Kobak, chief counsel to the trustee.

The tie to European debt is “certainly something we’re looking into,” Kobak said yesterday at the hearing.

Compliance Policy

U.K. Said to Face Derivatives-Law Setback After EU Summit Clash

European Union officials may abandon U.K.-backed safeguards on derivatives legislation, four people familiar with the situation said, less than a week after Prime Minister David Cameron’s demands to protect London’s financial industry almost wrecked an EU summit.

Ambassadors for the EU’s 27 nations, scheduled to meet yesterday in Brussels, discussed weakening an October agreement to grant national regulators powers over clearinghouses, according to the people, who couldn’t be identified because the talks are private. The British government has argued that the accord was essential to protect U.K.-based clearing firms from pressure to move part of their business to the euro area.

The possible unraveling of the derivatives deal follows Cameron’s decision to break ranks with French President Nicolas Sarkozy and German Chancellor Angela Merkel at an EU summit last week. Lawmakers in the European Parliament have “demanded” that the October compromise be reconsidered, according to an EU document dated Dec. 14 and obtained by Bloomberg News. The Parliament and national governments must agree on the law before it can enter into force.

Chantal Hughes, spokeswoman for Michel Barnier, the EU’s financial services chief, declined to immediately comment and the U.K. government’s office in Brussels declined to comment.

SEC Cheaper Than Finra for Regulating Advisers, Study Says

Inspections of investment advisers by the Financial Industry Regulatory Authority may cost at least twice as much as more frequent examinations by the U.S. Securities and Exchange Commission, according to the Boston Consulting Group.

An expanded SEC oversight program is estimated to cost from $240 million to $270 million a year, compared with $550 million to $610 million annually for examinations and enforcement by Finra as well as SEC supervision of Finra, according to the study released yesterday, which was conducted by the Boston-based firm.

BCG was hired by several adviser industry groups, including the Investment Adviser Association, which represents SEC-registered investment advisers, to do the report and an online survey of 424 investment advisers. The study evaluated the costs of three options the SEC recommended in January for improving oversight of advisers. The firm didn’t consult or interview the SEC or Finra for either the report or the survey.

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Compliance Action

DuPont, Honeywell Said to Face EU Car-Refrigerant Probe

DuPont Co., the largest U.S. chemicals company by market value, and Honeywell International Inc. face a European Union antitrust probe over a refrigerant for car air-conditioning systems, according to four people familiar with the plan.

The European Commission will soon open a formal investigation to examine whether DuPont and Honeywell may have concealed their ownership of patents for the refrigerant before the car industry agreed to use the technology as a standard, said the people who couldn’t be identified because the issue isn’t yet public.

Honeywell and DuPont are expecting growth from the technology they jointly developed to meet EU environmental rules to cut greenhouse gases from air-conditioning systems. DuPont told investors this week that the low-emission refrigerant promises “nice growth and some healthy margins.” Honeywell’s specialty chemicals division has said it expects coolants to help it make “extremely solid” profits.

DuPont “has responded to inquiries from the European Commission regarding the competitive dynamics and intellectual property landscape” concerning the refrigerant, said Janet Smith, a DuPont spokeswoman. The company will continue to cooperate fully, she said.

Honeywell has “received requests for information from the European Commission about the new refrigerant” and is “fully cooperating,” said spokesman Peter Dalpe.

Amelia Torres, a spokeswoman for the commission, didn’t immediately respond to an e-mail seeking comment.

Diamond Gets SEC Probe Notice Amid Walnut Investigation

Diamond Foods Inc., conducting an internal probe into whether money paid to walnut growers violated accounting rules, said the U.S Securities and Exchange Commission began an investigation into the snack maker.

The SEC’s probe isn’t an indication that the company has broken the law, Diamond said in a filing yesterday. San Francisco-based Diamond said it will cooperate with the investigation and didn’t provide further details. The shares fell.

“Our commitment to this transaction is predicated on the favorable resolution of all these current investigations,” Paul Fox, a Procter & Gamble spokesman, said in an e-mail.

John Christiansen, an external spokesman for Diamond at Sard Verbinnen & Co., declined to comment.

The audit committee may conclude the investigation by the middle of February, Diamond said Dec. 12. As a result, the company delayed filing its Form 10-Q for the fiscal first quarter.

U.K. Fraud Prosecutor Conduct Investigated by Cabinet Office

The U.K. Cabinet Office investigated allegations of improper conduct at the British agency that prosecutes white-collar crime and corruption after staff members raised concerns.

The Cabinet Office oversees the workings of government departments and the civil service.

The probe found no evidence of wrongdoing at the Serious Fraud Office, a spokeswoman for Attorney General Dominic Grieve’s office said in an e-mail. The spokeswoman, who declined to be named citing office policy.

The investigation focused on corporate-governance issues related to top SFO officials, including Chief Executive Officer Phillippa Williamson, said two people familiar with the probe who declined to be identified because the subject matter isn’t public. The review was prompted when Cabinet Secretary Gus O’Donnell was alerted to concerns raised by an internal whistle-blower. The investigation was conducted by Alex Allan, a former Permanent Secretary at the Cabinet Office.

Sam Jaffa, an SFO spokesman, declined to comment. Williamson didn’t answer a call to her office or an e-mail seeking comment, and Jaffa declined to make her available.

PwC Investigated Over Barclays Capital U.K. Client Money Reports

A U.K. accounting regulator is investigating whether PricewaterhouseCoopers LLP’s reports on client assets at Barclays Capital Securities Ltd. broke financial rules.

The Accountancy & Actuarial Discipline Board is reviewing PwC’s reports to the Financial Services Authority outlining Barclays Capital’s compliance with client-asset separation rules between December 2001 and 2009, the London-based accounting regulator said in a statement today.

The FSA fined the bank 1.12 million pounds ($1.7 million) in January for failing to put as much as 752 million pounds a day of client money into protected accounts that were separate from its own money-market deposits. The AADB is already seeking a record fine of at least 1.5 million pounds against PwC in a similar case concerning regulatory reports on client-money accounts at JPMorgan Chase & Co.’s London securities unit.

Spokespeople for PwC and Barclays Capital in London couldn’t be immediately reached to comment on the investigation.


‘Greedy’ Insider Trader Jailed for Using Hedge-Fund Tips

A London management consultant was sentenced to two years in prison after being convicted of making about 500,000 pounds ($774,000) using confidential tips from a hedge-fund trader.

Jurors found Rupinder Sidhu guilty on 22 of 23 insider-dealing charges yesterday, said Chris Hamilton, a spokesman for the U.K. Financial Services Authority, which filed the case. A separate charge of money laundering wasn’t considered.

When imposing the sentence, Judge Michael Gledhill told Sidhu yesterday that “sheer greed is behind all these offenses.”

Sidhu, 40, used information from AKO Capital LLP trader Anjam Ahmad about the hedge fund’s trading plans to spread bet on companies including Julius Baer Group Ltd., Swatch Group AG and Michael Page International Plc between June and August 2009, prosecutors said. He is the eighth person sentenced to prison for insider trading in a case brought by the FSA.

Sidhu denied all the charges, claiming he didn’t know Ahmad was passing on inside information. Ahmad was given a suspended jail sentence, community service and fined 50,000 pounds after pleading guilty to insider trading.

SEC Appeals Rejection of $285 Million Citigroup Settlement

The U.S. Securities and Exchange Commission appealed a federal judge’s decision to reject its proposed $285 million settlement with Citigroup Inc.

The appeal, filed yesterday in the U.S. Court of Appeals in New York, challenged U.S. District Judge Jed Rakoff’s rejection last month of the settlement, which involved claims that Citigroup misled investors in a $1 billion financial product linked to risky mortgages.

Rakoff criticized the agency’s practice of resolving cases without requiring the subject of the allegations to admit wrongdoing. SEC Enforcement Director Robert Khuzami said yesterday in a statement that Rakoff’s decision “is at odds with decades of court decisions that have upheld similar settlements.”

Rakoff’s approach “could in practical terms press the SEC to trial in many more instances, likely resulting in fewer cases overall and less money being returned to investors,” Khuzami said in the statement.

Danielle Romero-Apsilos, a Citigroup spokeswoman, said the New York-based bank disagrees with the court’s rejection of the settlement. The agreement “fully complies with long-established legal standards,” she said.

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Barofsky Sees ‘Strong Indication’ of Fraud at MF Global

Neil Barofsky, former special inspector for the U.S. Treasury’s Troubled Asset Relief Program and a Bloomberg Television contributing editor, talks about former MF Global Holdings Ltd. Chief Executive Officer Jon Corzine’s testimony yesterday before the House Financial Services subcommittee about the collapse of MF Global.

Barofsky speaks with Stephanie Ruhle and Erik Schatzker on Bloomberg Television’s “InsideTrack.”

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(Boston Consulting Group corrects cost range for Finra oversight in second paragraph of SEC-Finra study item in Compliance Policy section.)
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