Contesting FCPA, CVS Caremark, Tata Motors: Compliance

Executives facing trial in U.S. courts over accusations of bribing foreign officials may be encouraged to fight charges as prosecutors regroup after two courtroom setbacks and await a verdict in their largest overseas corruption probe targeting individuals.

One of two cases hailed by the government as milestones in its enforcement of the Foreign Corrupt Practices Act was dismissed last year by a judge who said the jury verdict convicting two men at an electricity tower company of bribing Mexican officials was tainted by prosecutor misconduct in “a sloppy, incomplete and notably over-zealous investigation.”

In the first prosecution under the FCPA based on a sting operation, a judge declared a mistrial for four of 22 defendants accused of participating in a fake $15 million weapons deal involving Gabon. A separate trial is under way for a second group of defendants.

The 2011 outcomes will make individual defendants in FCPA cases more confident in contesting charges. This is so in particular because they may face long prison terms under the plea deals the Justice Department offers, even as corporations continue to self-report and settle, said Philip Urofsky, a former FCPA prosecutor who now defends cases at Shearman & Sterling LLP.

In a crackdown on overseas bribery that started during the Bush administration, the government settled 57 cases against companies from 2005 through 2011 without trial, reaping $4.1 billion for the U.S. treasury, according to Justice Department data. A push to prosecute more individual defendants during the same period has produced mixed results, with some beating charges outright and others getting less punishment than prosecutors sought.

Laura Sweeney, a spokeswoman for the Justice Department, said the government has had “great success” against individuals since increasing its enforcement actions in 2009.

The 1977 law bars companies or individuals regulated or based in the U.S. from paying bribes to foreign officials to win business. Foreign companies and nationals also can be prosecuted if their corrupt acts were committed in the U.S.

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Compliance Policy

Japan Tells U.S. Volcker Rule May Hamper Government Bond Trading

Japan’s central bank and financial regulator told U.S. authorities that the Volcker Rule restricting proprietary trading would hamper the market for Japanese government bonds, according to a letter released yesterday.

The proposed rule limiting banks’ ability to buy and sell securities for their own accounts would increase the cost of trading Japanese government bonds, the Financial Services Agency and Bank of Japan wrote in the letter dated Dec. 28.

“Some of the Japanese banks might be forced to cease or dramatically reduce their U.S. operations,” the central bank and FSA said in the letter to officials including Mary Schapiro, chairman of the Securities and Exchange Commission. “Those reactions could further adversely affect liquidity and pricing of the JGBs.”

The agency and central bank asked that the rule be amended to expand exempted securities “substantially” to include the country’s sovereign debt. They urged the U.S. to refrain from applying the restrictions overseas or consider amending them to exclude some overseas entities.

Regulators are seeking public comment on the proposal and may make changes before its scheduled effective date of July 21.

Broker Fiduciary Rule Delayed by Cost-Benefit Analysis, SEC Says

The U.S. Securities and Exchange Commission’s effort to impose a fiduciary duty on brokerage firms has been delayed for additional cost-benefit analysis, according to a letter from Chairman Mary Schapiro.

SEC economists are still working on the initial proposal for the rule, trying to quantify its impact, Schapiro wrote in a Jan. 10 letter to Representative Scott Garrett, a New Jersey Republican. A federal court setback in July has caused the SEC to rethink the cost-benefit assessments in its rulemaking.

The rule, authorized by the 2010 Dodd-Frank Act, would impose a fiduciary standard on broker-dealers that is as rigorous as the one for investment advisers, requiring them to put retail clients’ interests before their own. Currently, brokers are required only to provide advice “suitable” to customers at the moment of the sale.

The SEC released a study a year ago this month recommending the change, citing customer confusion over the difference between a broker and an investment adviser.

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Hong Kong to Review Professional Investor Definition, SFC Says

Hong Kong’s Securities and Futures Commission is considering changing the rules used to classify some individual investors as “professional.”

Ashley Alder, chief executive officer of the securities regulator, said Jan. 11 that the commission this year will probably revisit the “whole professional investor regime, including potentially the financial limits that define what a professional investor is.”

Alder made the remarks at an event hosted by the Hong Kong Corporate Counsel Association.

Compliance Action

CVS Caremark to Pay $5 Million to Settle FTC Investigation

CVS Caremark Corp., the largest U.S. provider of prescription drugs, will pay $5 million to settle claims it misrepresented certain Medicare drug prices, ending a two-year antitrust and consumer protection probe by the U.S. Federal Trade Commission.

The FTC said it decided to close its investigation “after a thorough and comprehensive review of the other consumer protection and competition issues in this matter,” and won’t take any further action “at this time,” according to a letter addressed to CVS Caremark’s lawyer.

The FTC began investigating the business practices of the company in 2009 after CVS bought Caremark for $27.2 billion, the largest acquisition ever by a drugstore. After industry and consumer complaints, the FTC took a second look at the combination of the pharmacy chain and pharmacy-benefits manager. A 24-state task force also conducted a review.

The settlement, which requires CVS to reimburse consumers who overpaid for certain prescription drugs, also bars CVS Caremark from making deceptive claims with regard to Medicare Part D drug prices, the FTC said yesterday in an e-mailed statement.

Douglas A. Sgarro, executive vice president and chief legal officer of CVS Caremark, said in a statement that at the conclusion of “this comprehensive investigation, the FTC made no allegations of antitrust law violations or anti-competitive behavior associated with any of our business practices, products or service offerings.” CVS Caremark “cooperated fully” with the FTC’s investigation, he said.

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Tata Motors Gets SEC Inquiry on Africa, Mideast Exports

Tata Motors Ltd., the Indian owner of Jaguar Land Rover, said it received an inquiry from the U.S. Securities and Exchange Commission on some of its exports.

“The SEC wanted details of our exports to Africa and the Middle East,” said Debasis Ray, a spokesman for Mumbai-based Tata Motors. Ray declined to name the countries that the SEC wanted information about and why the agency inquired about exports to those countries.

Tata Motors, which said yesterday in a statement it will respond to the SEC within 10 working days, exported 58,044 vehicles, or 7.2 percent of total sales, during the year ended March 31, 2011, according to its website. The Indian company, which makes the Nano, the world’s cheapest car, doesn’t break down exports by geography.

SEC spokesman John Nester declined to comment.

Banks Said to Curb Conversion of French Stocks Amid Tax Concern

Citigroup Inc., JPMorgan Chase & Co. and Tullett Prebon Plc started restricting orders to convert French stocks into American Depositary Receipts amid concern about how taxation changes will affect share dealing.

The brokerages suspended taking orders yesterday for so-called cross-book swaps, where a client exchanges French shares for U.S.-listed ADRs, or didn’t quote prices for the trades, according to four people familiar with the situation, who asked not to be identified because the information isn’t public.

The move was prompted by legislation introduced on Jan. 1 that extends duties on the sale of shares outside France, one of the people said. It wasn’t related to concern President Nicolas Sarkozy will impose a new tax on financial transactions. The law removed a 5,000-euro ($6,400) cap on the tax payable on a sale, KPMG LLP wrote in a report on its website dated Dec. 21.

Kate Haywood, a spokeswoman for JPMorgan in London, Jeff French, a spokesman for Citigroup, and Nigel Szembel of Tullett Prebon all declined to comment on the trading changes.


MF Global Has Distributed $3.8 Billion to Date, Trustee Says

MF Global Inc. has distributed about $3.8 billion so far and has about $1.5 billion under its control, while there’s still $1.2 billion missing, said the trustee for the failed brokerage.

About 100 customers gathered at the New York Marriott Downtown hotel to hear James Giddens, the trustee appointed to liquidate the brokerage, describe his investigation. A lawyer for the trustee, James Kobak, said the investigation involves looking at a “wide variety” of institutions, individuals, the holding company and other parties to try to claw back property for distribution to customers.

Giddens said assets are divided into four categories: for U.S. commodity customers, U.S. security customers, foreign units, and general estate property.

In the largest pool, the trustee has control of about $1.4 billion and has already distributed $3.8 billion, or 72 percent of what is owed to commodity customers.

At this point the trustee “does not know with certainty the extent of the shortfall,” Giddens said, noting that $1.2 billion remains his best estimate. That sum covers all four pools: customer, foreign, commodity and securities accounts.

Customers and creditors are already arguing about who has priority to be repaid, even as regulators are investigating.

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Hedge Fund CEO Brownstein Gets One Year for Insider Scheme

Drew “Bo” Brownstein, the founder and chief executive officer of Denver-based Big 5 Asset Management, was sentenced to one year and a day in prison for trading on inside information about a corporate merger.

U.S. District Judge Robert Patterson in Manhattan yesterday also ordered Brownstein to perform 500 hours of community service and to forfeit $2.44 million. Brownstein also will serve six months’ house arrest after his prison release and was fined $7,500.

Brownstein, 35, made more than $2.5 million in illegal profits for his hedge fund and for relatives by trading on a tip in advance of Apache Corp.’s $2.7 billion acquisition of Mariner Energy Inc. in April 2010, prosecutors said.

Brownstein said he was sorry for what he called a “terrible mistake” that he will “have to live with” for the rest of his life. Patterson told Brownstein he considered his offense serious.

The case is U.S. v. Peterson, 11-CR-665, U.S. District Court, Southern District of New York (Manhattan).

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CFTC Offered to Settle Lawsuit for $175,000, McCrudden Says

An ex-commodities trader who pleaded guilty to threatening to kill financial regulators, including Commodity Futures Trading Commission Chairman Gary Gensler, said the CFTC offered to settle a civil case against him for a $175,000 fine and a lifetime ban from the industry.

Vincent P. McCrudden, awaiting sentencing in a Queens, New York, jail, told U.S. District Judge Denis R. Hurley in Central Islip, New York, about the offer in a letter made public Jan. 9. Settlement negotiations on Dec. 12 were unsuccessful, according to an order by U.S. Magistrate Judge A. Kathleen Tomlinson, who, according to McCrudden “endorsed” the CFTC’s offer.

McCrudden, 50, pleaded guilty to two counts of transmission of threats to injure before opening arguments were scheduled to begin in his trial on July 18. The charges carry a maximum sentence of 10 years in prison. McCrudden has been held without bail since he was arrested in January 2011 returning from Singapore.

Dennis Holden, a CFTC spokesman, declined to comment on the settlement negotiations.

The criminal case is U.S. v. McCrudden, 11-cr-61, and the civil case is U.S. Commodity Futures Trading Commission v. McCrudden, 10-cv-5567, U.S. District Court, Eastern District of New York (Central Islip).

Alliance One Should Lose Appeal Over EU Fines, Court Aide Says

Alliance One International Inc. should lose a challenge at the European Union’s highest court over antitrust fines levied in 2004 for fixing the prices paid to Spanish growers for tobacco, an adviser to the region’s top court said.

The EU’s Court of Justice should uphold a fine of 1.8 million euros ($2.3 million) levied on Alliance One and its subsidiary Standard Commercial Tobacco Co. by the European Commission for their liability concerning another unit’s involvement in the cartel, said Advocate General Juliane Kokott in a non-binding opinion yesterday. The court follows this advice, at least in part, most of the time.

A call to Alliance One in Morrisville, North Carolina, wasn’t immediately returned outside business hours.

The case is C-14/11, Alliance One International and Others v. Commission, at the European Union Court of Justice. For the video, click here.


MF Global’s Regulators: Part of the Problem or Solution

James Keneally, a partner at Kelley Drye & Warren LLP, talked with Bloomberg Law’s Spencer Mazyck about federal investigations surrounding MF Global Inc.’s collapse and regulatory coordination before and after the firm’s bankruptcy.

For the video, click here.

Cobden’s Kerr Says RBS’s Accounts Are ‘Deeply Flawed’

Gordon Kerr, founder of Cobden Partners, talked about the solvency of Royal Bank of Scotland Group Plc, a government-owned bank that received a bailout during the financial crisis of 2008.

He spoke with Caroline Hyde on Bloomberg Television’s “First Look.”

Comings and Goings/Notable Passings

SEC Names Robert Fisher Deputy Director of International Affairs

The U.S. Securities and Exchange Commission named Robert Fisher to the position of deputy director in the Office of International Affairs, according to a statement issued by the agency yesterday.

Fisher, who will oversee policy issues, had been assistant director, the SEC said in the statement. The office advises the commission on cross-border enforcement and regulatory matters, according to a statement on the SEC’s website.

NAIC’s Vaughan Named Head of International Regulation Group

Therese Vaughan, head of the U.S. National Association of Insurance Commissioners, will lead a group coordinating the work of international financial standard setters.

Vaughan was appointed head of the so-called Joint Forum until the end of 2013, the Basel Committee of Banking Supervision, International Association of Insurance Supervisors and International Organization of Securities Commissions said today in a statement.

She succeeds Tony D’Aloisio of the Australian Securities and Investments Commission in the role.

Suspended Korean Savings Bank Chairman Found Dead in Seoul

The biggest shareholder of Ace Mutual Savings Bank, a South Korean lender whose operations were suspended last year by the regulator, was found dead yesterday ahead of scheduled questioning by prosecutors.

The body of Kim Hak Heon, chairman of Incheon, South Korea-based Ace Mutual, was discovered in a Seoul hotel room, the city’s Bangbae district police authorities said in a statement posted on their website. Prosecutors had planned to question Kim yesterday regarding allegations of illicit lending and accounting fraud, the police said.

Kim owned a 56 percent stake in closely held Ace Mutual, according to the bank’s regulatory filing.

Ace Mutual was one of 16 savings banks shuttered by South Korean regulators last year as developers defaulted on loans amid a slowdown in the real-estate market.

A woman who answered two calls to the Supreme Prosecutors’ Office of Korea declined to comment or further connect the call and refused to give her name, and there was no response to an e-mail sent by Bloomberg News. A person who answered the phone at Ace Mutual’s headquarters in Seoul also declined to comment and refused to provide her name.

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