Insider Trading, Volcker Rule, Carlyle IPO: Compliance

Seven people were charged in Manhattan federal court with securities fraud and conspiracy as part of a five-year investigation of insider trading at hedge funds by the FBI and the Justice Department.

Prosecutors said the alleged scheme, which involved trades in Dell Inc., netted $61.8 million in illegal profits. Among those charged are Level Global Investors LP co-founder Anthony Chiasson, who along with three other suspects was taken into custody yesterday, according to two people familiar with the matter.

Todd Newman, formerly of Diamondback Capital Management LLC, was arrested in the Boston area by the Federal Bureau of Investigation, and Jon Horvath was detained in New York, according to one of the people, who asked not to be identified because they weren’t authorized to speak publicly. Chiasson turned himself in, the second person said.

Also charged yesterday was Danny Kuo, who was arrested in Southern California. Spyridon “Sam” Adondakis, Jesse Tortora and Sandeep Goyal have pleaded guilty and are cooperating with the probe, according to a person familiar with their cases.

Goyal, a former junior technology analyst at Neuberger Berman, admitted to passing material nonpublic information to a hedge fund, according to Alexander Samuelson, a company spokesman. Goyal left the firm this month.

Justine Harris, a lawyer for Adondakis; Gregory Morvillo, who represents Chiasson; Jessica Margolis, who represents Goyal; Alfred Pavlis, who represents Newman; and Ralph Caccia, who represents Tortora, didn’t immediately return phone messages seeking comment. Steven Peikin, who represents Horvath, declined to comment. A lawyer for Kuo couldn’t be immediately determined.

Manhattan U.S. Attorney Preet Bharara said yesterday at a press conference in New York that the defendants formed a “criminal club” that reaped almost as much in illegal profits as the central figure of the nationwide probe of hedge funds, technology companies and so-called expert networking firms.

The five-year insider-trading probe has resulted in charges against at least 56 people. More than 50 have pleaded guilty or been convicted after trial since 2009, including Galleon Group LLC co-founder Raj Rajaratnam, who was found guilty in May and is serving 11 years in prison, the longest ever for insider trading. The U.S. said he earned $72 million in illegal gains.

Horvath formerly worked at Stamford, Connecticut-based SAC Capital, according to a person familiar with the matter, who asked not to be identified because he wasn’t authorized to speak publicly. A representative of SAC Capital couldn’t be immediately reached for comment.

Level Global told clients last February that it was shutting down -- eight years after David Ganek and Chiasson founded the hedge fund -- because of the U.S. probe.

Steven Goldberg, a spokesman for New York-based Level Global, didn’t return a call seeking comment on the arrests. Steve Bruce, a spokesman for Stamford-based Diamondback, declined to comment immediately.

The Securities and Exchange Commission yesterday filed a civil insider-trading complaint in Manhattan federal court against the seven men, Diamondback Capital and Level Global.

Peter Neiman, of Wilmer Hale, a lawyer for Diamondback Capital, declined to comment on the SEC lawsuit. MaryJeanette Dee, a lawyer for Level Global, didn’t immediately return a voice mail left at her office seeking comment on the suit.

The case is U.S. v. Newman, 12-00124, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Compliance Policy

Volcker Rule Regulators Resist Lawmakers Calls to Scrap Proposal

U.S. regulators, responding to criticism of their Volcker rule proposal, told lawmakers they will refine plans for the ban on banks’ proprietary trading while resisting calls to scrap the measure and start over.

Federal Reserve Governor Daniel Tarullo joined top officials from four other agencies in defending the 298-page rule yesterday at a House Financial Services joint subcommittee hearing in Washington, faulting Congress for imposing complexities that led Committee Chairman Spencer Bachus to say the measure as proposed would be a “self-inflicted wound.”

“Congress actually laid out seven key permitted activities, or if you wish, exceptions,” Commodity Futures Trading Commission Chairman Gary Gensler told lawmakers, citing underwriting, market-making and hedging as critical exemptions. “We want to fully comply with the intent of Congress.”

Lawmakers called the regulators to testify amid criticism from House Republicans and banking-industry groups that the Dodd-Frank Act measures proposed by four agencies in October and the CFTC this month would sow confusion among banks over which activities were permitted and put firms such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. at a competitive disadvantage to overseas rivals. Tarullo, who said regulators would review comment letters in determining the need for adjustments, resisted suggestions that the rule be withdrawn.

Bachus, who called on regulators to resubmit the proposal and consider extending the implementation timeline in a Dec. 7 letter, outlined his criticisms at yesterday’s hearing.

The proposed rule named for former Fed Chairman Paul Volcker, who championed the idea as an adviser to President Barack Obama, would ban banks from proprietary trading while allowing them to continue short-term trades for market-making or hedging. It also would limit investments in private-equity and hedge funds. Dodd-Frank, enacted in response to the 2008 credit crisis, requires that the rule be in place by July 21.

Regulators acknowledged industry concerns, including the idea that banks without U.S. operations could benefit because foreign jurisdictions haven’t adopted similar measures.

Securities and Exchange Commission Chairman Mary Schapiro said regulators have “no interest” in sanctioning banks that run afoul of Volcker rule limits on proprietary trading while attempting legitimate market-making.

For more, click here. To hear testimony from yesterday’s hearing, click here.

Carlyle Seeks to Ban Shareholder Lawsuits Before Public Offering

Carlyle Group LP, the Washington-based buyout company that’s preparing to go public, is seeking to bar its future shareholders from filing individual and class-action lawsuits.

The firm revised its governing documents last week to say that investors who purchase company shares must settle any subsequent claims against Carlyle through arbitration in Wilmington, Delaware. That could limit the ability of stockholders to win big awards for securities-law violations such as fraud, several attorneys said.

The U.S. Supreme Court has issued a series of rulings in recent years upholding the right of companies to require the use of arbitration to resolve disputes with consumers. Carlyle is seeking to extend this principle to public shareholders, a move that could run up against a bedrock of U.S. securities law, the ability of investors to seek redress in federal court.

“What we are talking about is legally uncharted territory,” said Donald Langevoort, a law professor at Georgetown University in Washington who previously worked for the U.S. Securities and Exchange Commission. “I would be surprised if the courts allow any company to entirely foreclose shareholder rights to sue under federal securities laws.”

Chris Ullman, a spokesman for Carlyle, declined to comment.

At issue are provisions of U.S. securities laws that bar investors from waiving their rights to seek damages.

Florence Harmon, a spokeswoman for the SEC, declined to comment.

For more, click here.

Compliance Action

SEC Sues BankAtlantic CEO Over 2007 Real Estate Loss Disclosures

The U.S. Securities and Exchange Commission sued BankAtlantic Bancorp Inc. and its chief executive officer over claims they misled investors about the deteriorating value of the bank’s real estate portfolio as the housing market worsened.

BankAtlantic and CEO Alan Levan made misleading statements in public filings and earnings calls to hide losses on the Fort Lauderdale, Florida-based bank’s commercial and residential land holdings and improperly recorded loans they were trying to sell from the portfolio in late 2007, the SEC said in a complaint filed in U.S. District Court in Florida yesterday.

According to the agency, Levan knew that a large portion of the loan portfolio, which consisted mainly of loans on land intended for development into single-family housing and condominiums, was worsening in early 2007 as borrowers struggled to make payments. In the first two quarters of 2007, BankAtlantic made only general warnings about risks related to Florida’s real estate market and failed to disclose the downward trend already occurring in its portfolio, the SEC said.

The bank acknowledged the problem in the third quarter of 2007 by announcing a large loss, which caused the bank’s stock to plunge 37 percent, the SEC said.

“BankAtlantic and Levan used accounting gimmicks to conceal from investors the losses in a critical loan portfolio,” SEC Enforcement Director Robert Khuzami said in a statement. “This is exactly the type of information that is important to investors, and corporate executives who fail to make the required disclosure will face severe consequences.”

Eugene Stearns, an attorney for BankAtlantic and Levan, said the bank provided a “candid and accurate analysis for the public to see exactly what was happening.”

“This is frankly a lawsuit that reflects the enormous pressure on the SEC to try to find someone to blame for what happened” in the credit crisis, Stearns said.

Stryker Biotech Agrees to Plead Guilty to Misbranding Charge

A Stryker Corp. unit agreed to plead guilty and pay a $15 million fine while the medical-device maker was on trial on charges it marketed an unapproved mixture of products for strengthening human bone growth.

The unit, Stryker Biotech, and three Stryker sales representatives were on trial in federal court in Boston on a 13-count criminal indictment claiming conspiracy and wire fraud. The trial began Jan. 9 with jury selection.

Stryker Biotech agreed to plead to one misdemeanor count of misbranding a medical device, according to a letter dated yesterday from the U.S. Attorney’s Office in Boston and filed with the federal court.

Prosecutors agreed to drop the case against Hopkinton, Massachusetts-based Stryker Biotech and won’t call Stryker Corp. President Stephen P. MacMillan to testify “in connection with current or future trial proceedings” in the case before Judge George O’Toole.

The government yesterday dropped charges against former regional sales manager David Ard of California, according to a motion filed by prosecutors. Attorneys for former national sales representative William Heppner of Illinois and ex-regional manager Jeffrey Whitaker of North Carolina have asked the judge to declare a mistrial. Mark Philip, former chief executive officer of Stryker Biotech from 2004 to 2008, is scheduled to go to trial later this year.

The case is U.S. v. Stryker Biotech LLC, 09-cr-10330, U.S. District Court, District of Massachusetts (Boston).

Ex-Columbus Hill Capital CFO Admits Embezzling $10.4 Million

The former chief financial officer of Columbus Hill Capital Management LP, an investment management firm based in Short Hills, New Jersey, pleaded guilty to embezzling more than $10.4 million.

David Newmark, 39, admitted yesterday in federal court in Newark, New Jersey, that he created a phony account to collect deposits that he stole from the company. Newmark, who pleaded guilty to wire fraud and tax evasion, agreed to forfeit the entire amount he stole.

“Making personal use of company cash, it was only a matter of time before he was caught with his hand in the piggy bank,” U.S. Attorney Paul Fishman said in a statement.

Newmark, of Towaco, New Jersey, faces as many as 20 years in prison on the fraud charge and five years on the tax evasion count. U.S. District Judge William Walls set sentencing for April 24.

Newmark’s attorney, Michael Himmel, said his client confessed his theft to federal prosecutors and to his employer.

“Neither was aware of the theft he had engaged in before he advised them,” Himmel said yesterday in a phone interview. “David has had a sports-betting gambling problem since he was in high school. That problem has obviously escalated over the years and was the motivation behind the theft.”

The case is U.S. v. Newmark, U.S. District Court, District of New Jersey (Newark).

Citigroup to Pay $725,000 Over Finra Conflict Disclosure Claims

Citigroup Inc., the third-biggest U.S. bank by assets, agreed to pay $725,000 over regulatory claims its brokerage unit failed to disclose conflicts of interest in research reports and analysts’ public appearances.

Citigroup received investment banking revenue from some companies covered in research reports it published from January 2007 through March 2010, the Financial Industry Regulatory Authority said in a statement yesterday. Citigroup managed public securities offerings for some firms mentioned in the reports and had a 1 percent or greater stake in others, Finra said.

“Citigroup failed to make required conflict of interest disclosures, which prevented investors from being aware of potential biases in its research recommendation,” Finra Enforcement Chief Brad Bennett said in a statement.

Finra said the disclosures by the bank’s brokerage subsidiary, Citigroup Global Markets, were missed primarily due to technical deficiencies in Citigroup’s database for identifying and creating the disclosures. Citigroup, which didn’t admit or deny Finra’s claims, self-reported several of the deficiencies to the regulator and took remedial action to fix them, Finra said.

“We take our disclosure systems very seriously and began adopting enhancements to our procedures prior to the inquiry,” Citigroup spokeswoman Sophia Stewart said in an e-mailed statement. “We are pleased to have settled this matter with Finra.”

Suez, Veolia, Saur Probed by EU on Water-Services Collusion

Veolia Environnement SA, the world’s biggest water utility, Suez Environnement SA and Saur SA face a formal probe by European Union antitrust regulators into possible collusion to fix the price of water and waste-water services in France.

The European Commission will examine whether the French utilities and their trade group the Federation Professionnelle des Entreprises de l’Eau, or FP2E, “coordinated their behavior” on “elements of the price invoiced to final consumers,” usually French local government authorities, it said in a statement.

Regulators raided the three companies in 2010 over concerns that they colluded in public tenders for water distribution and treatment. The companies have a combined market-share of 69 percent for water distribution and 55 percent for water treatment, according to a study published by FP2E, on its website. Both markets are worth about 12 billion euros ($15.3 billion) a year.

Veolia shares fell 5.5 percent to 8.139 euros in Paris trading and Suez Environnement, Europe’s second-largest water company, declined 2.6 percent to 9.142 euros after sliding as much as 4.5 percent.

Suez Environnement and its unit Lyonnaise des Eaux “will continue to fully cooperate with the European Commission competition services in charge of this investigation and reiterate their commitment to respecting the rules of competition in the markets where they operate,” the company said in an e-mailed statement.

CIN, Tirrenia Ferry Deal Faces In-Depth Probe by EU Watchdog

Compagnia Italiana di Navigazione Srl faces an in-depth European Union probe into a plan to buy Tirrenia di Navigazione SpA, Italy’s insolvent state-owned ferry operator.

The European Commission said there were “serious competition concerns” over the high market shares held by CIN’s owners Marinvest Srl, Grimaldi Compagnia di Navigazione SpA and Onorato Partecipazioni Srl, which has joint control over Italian ferry company Moby SpA. It set a deadline of June 4 to rule on the deal.

The companies “have very high, if not monopolistic, combined market shares on a number of maritime routes in Italy, and in particular on certain routes to and from Sardinia,” regulators said in an e-mailed statement.

Grimaldi, Onorato and Moby didn’t respond to e-mails for comment outside of usual business hours. Marinvest didn’t respond to a call for comment.

Treasury Code Stolen by New York Fed Programmer, U.S. Says

U.S. Treasury Department software used to track federal collections and payments was stolen by a government contractor’s employee who worked at the Federal Reserve Bank of New York, federal prosecutors said.

Bo Zhang, 32, who worked for an unidentified technology company, was a computer programmer assigned to work on source code at the New York Fed from May until August, the U.S. said in a criminal complaint against him that was unsealed yesterday in federal court in Manhattan. Zhang is a Chinese citizen, said a person with knowledge of the matter who didn’t want to be identified because the information wasn’t public.

The software system relates to the “tracking of the billions of dollars that are electronically transferred every day in the U.S.’s general ledger,” prosecutors said.

Zhang has been in the U.S. on a work visa since 2000, said another person familiar with the matter who also didn’t want to be identified because the information isn’t public. Zhang worked previously at Goldman Sachs Group Inc. and Bank of America Corp., the person said.

U.S. Magistrate Judge James Cott yesterday agreed to release Zhang on a $200,000 bond secured by a condominium located in the Flushing, Queens, section of New York City. Cott ordered that he surrender all of his travel documents and restricted his movements to parts of New York and to New Jersey, where Zhang’s lawyer said his client works. Cott set the next court appearance in the case for Feb. 17.

After court yesterday, Zhang’s lawyer, Joseph Grob, declined to comment on the charges or whether his client is a citizen of China or a naturalized U.S. citizen.

The New York Fed detected the breach through its established security procedures and referred it to law enforcement officials, Jack Gutt, a spokesman, said in an e-mailed statement.

After being questioned by Federal Bureau of Investigation agents on Aug. 11, Zhang admitted he stole the proprietary software code belonging to the Treasury in July, according to the criminal complaint.

Matt Anderson, a Treasury spokesman, said the department has worked to strengthen security procedures for Federal Reserve contractors working on Financial Management Service projects.

The case is U.S. v. Zhang, 12-mag-00108, U.S. District Court, Southern District of New York (Manhattan).


TD Bank Loses $67 Million Verdict Over Rothstein Fraud Role

Toronto-Dominion Bank lost a $67 million jury verdict over claims it helped Scott Rothstein, the disbarred Florida attorney who admitted running a $1.2 billion Ponzi scheme, by telling victims their money was safe as he depleted accounts.

A jury in federal court in Miami returned the verdict yesterday in a lawsuit brought by Coquina Investments, based in Corpus Christi, Texas. The panel deliberated about four hours before reaching its verdict after a trial before U.S. District Judge Marcia Cooke.

“It was clear cut for us,” the jury forewoman, Shonda Smith, said after the verdict. “We were all surprised at how much stuff they allowed to go through, all the deposits and transfers. At any point, someone could have stopped it.”

Coquina’s lawyer David Mandel on Jan. 17 urged the jury to award $32 million in compensatory damages and $140 million in punitive damages.

“They didn’t lift a finger,” Mandel said of the bank in closing arguments. “Once fraud was evident, it was their obligation to report it and stop it.”

Yesterday’s verdict was for $32 million in compensatory damages and $35 million in punitive damages, the type designed to punish.

“This Ponzi scheme would have been impossible if it weren’t for TD Bank’s actions,” Mandel said after the verdict, referring to the Miami unit.

A spokeswoman, Rebecca Acevedo, said the bank is disappointed with the verdict “and is considering all of its options.”

“We still maintain that we were Rothstein Rosenfeldt Adler’s bank and that it was Scott Rothstein who defrauded investors,” she said by e-mail, referring to Rothstein’s law firm. “We will continue to defend the bank against claims of wrongdoing.”

The case is Coquina Investments v. Rothstein, 0:10-cv-60786, U.S. District Court, Southern District of Florida (Miami).

U.S. Bank National Association Sues Nesbitt for Loan Default

US Bancorp’s U.S. Bank National Association sued a group of Nesbitt companies that own eight Embassy Hotels in the U.S. over claims they defaulted on a $187.5 million loan.

The loan, made by Greenwich Capital Financial Products to Nesbitt in 2006, was assigned to U.S. Bank in January 2011 and was in default by February, according to a complaint filed yesterday in federal court in New York. Nesbitt owes $175 million in principal plus interest, the plaintiffs said.

“Each of the eight hotels are being required by the franchisor to undergo improvements for which defendants lack the adequate funds to undertake,” the complaint states.

The hotels are in Bellevue, Washington; Blue Ash, Ohio; Colorado Springs, Colorado; Denver; Livonia, Michigan; Lynwood, Washington; Tigard, Oregon, and El Paso, Texas.

U.S. Bank asked the court to appoint a receiver to take possession of the hotels. The Nesbitt companies are accused of breach of contract.

Windsor Management Services, led by Patrick Nesbitt, is the owner of the Embassy Suite Hotels named in the suit, according to Windsor’s website. Bill Upshaw, Windsor’s chief operating officer, didn’t immediately return a call seeking comment on the suit.

The case is U.S. Bank National Association v. Nesbitt Bellevue Property LLC, 12-0423, U.S. District Court, Southern District of New York (Manhattan).

RBS Says Former Singapore Trader Sought to Manipulate Libor

Royal Bank of Scotland Group Plc said it did nothing wrong when it fired a former Singapore trader because he sought to manipulate London interbank offered rates to boost his own profits.

Tan Chi Min, the former trader, sued the bank over his dismissal and is seeking to recoup $1.5 million in bonuses and 3.3 million RBS shares that he claims he’s owed.

Tan deserved to be fired because he was guilty of “gross misconduct,” RBS, Britain’s biggest government-owned lender, said in court papers filed in Singapore High Court late yesterday. He tried to improperly influence RBS’s rate setters from 2007 to 2011 and persuade them to submit Libor rates at particular levels to his benefit, RBS said.

RBS is cooperating with investigations by the U.S. Commodity Futures Trading Commission, U.S. Department of Justice and European Commission into whether Libor had been manipulated. Since as early as 2007, investors have accused several banks on the Libor panel of distorting market prices by hiding true borrowing costs, leading to a series of lawsuits filed in 2011 that are making their way through courts in Europe and the U.S.

Tan said in his complaint dated Dec. 27 that he was in no position to influence the rate on his own. The former head of delta trading for RBS’s global banking and markets division in Singapore said the bank failed to detail the allegations against him and didn’t specify how he had improperly influenced the setting of Libor.

Suresh Nair, Tan’s lawyer, declined today to comment.

The case is Tan Chi Min v The Royal Bank of Scotland Plc S939/2011 in the Singapore High Court.

Comings and Goings

FTC Commissioner Rosch Says He Will Not Seek Another Term

Thomas Rosch, a Republican member of the Federal Trade Commission who has pressed to strengthen U.S. antitrust and consumer-protection enforcement, said he won’t seek to be reappointed when his term expires in September.

Rosch, 72, one of four FTC commissioners, disclosed his plans in an interview yesterday in Washington. He was nominated to the commission by former Republican President George W. Bush, confirmed by the Senate and took office in 2006. A slot for a fifth commissioner is open.

Before serving at the FTC, Rosch distinguished himself as a litigator for corporate clients. He said he wants to return to California, where he practiced law in San Francisco.

“I have no intention at all of litigating again,” he said. “Whether I fully retire is another matter.”

Rosch has supported the efforts of commission Chairman Jon Leibowitz, a Democrat, to use the law that established the agency to broaden its antitrust enforcement powers. The FTC shares responsibility for enforcing antitrust law with the Justice Department.

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