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UBS Customer, Insider Trading, Deutsche Boerse: Compliance

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Kenneth Heller, a disbarred New York maritime lawyer, was sentenced to 45 days in jail for using an offshore UBS AG account to hide income from U.S. tax authorities.

Heller, 82, who pleaded guilty in June to three counts of tax evasion for the years 2006, 2007 and 2008, was sentenced Jan. 20 by U.S. District Judge Kevin Castel in Manhattan. The parties agreed that the amount of taxes Heller avoided was between $400,000 and $1 million.

Heller, who faced as long as 15 years in prison, has cancer, memory loss and other physical and mental problems, according to a defense filing in which his lawyers asked that he not be imprisoned.

“He is in dire physical condition, has a very short life expectancy and is in constant pain,” Heller’s lawyer, Robert Fink, told Castel Friday. Heller has already paid a $9.8 million penalty to the Internal Revenue Service.

He was one of seven ex-clients of Zurich-based UBS arrested on the same day in 2010 and charged with hiding more than $100 million from the IRS. UBS admitted in February 2009 that it helped U.S. clients evade taxes. The bank avoided prosecution by paying a $780 million fine and turning over the names of U.S. account holders to investigators.

Fink said his client cooperated with prosecutors, who this month charged three Wegelin & Co. bankers with conspiring to help U.S. clients hide more than $1.2 billion from tax authorities. He provided information supporting the charges, Assistant U.S. Attorney David Massey said in a sentencing memorandum filed with the court.

Castel rejected Heller’s plea for a non-jail sentence, saying it was necessary to deter others from evading taxes. Castel also ordered Heller to serve two years of supervised release and pay a fine of $180,000. Heller must surrender to begin his sentence on April 2, the judge said.

The case is U.S. v. Heller, 10-mg-742, U.S. District Court, Southern District of New York (Manhattan).

David Slaine, Who Led to Rajaratnam, Gets 3 Years’ Probation

David Slaine, a former Galleon Group LLC employee who helped lead U.S. authorities to investigate the hedge fund firm’s co-founder, Raj Rajaratnam, was sentenced to three years of probation for securities fraud.

Slaine, who wore a wire to record dozens of conversations with Zvi Goffer, another former Galleon employee, and others, provided help that prosecutors from the office of Manhattan U.S. Attorney Preet Bharara called “nothing short of extraordinary” in their insider-trading investigation. Slaine was also ordered by U.S. District Judge Richard Sullivan to perform 300 hours of community service and pay a $500,000 fine at his sentencing Friday in federal court in Manhattan.

Slaine’s evidence helped to spur what became the biggest probe of insider trading at hedge funds, prosecutors said in a letter to Sullivan this month.

Slaine, who pleaded guilty to conspiracy and securities fraud in December 2009, testified at the trial of Goffer, his brother Emanuel Goffer and Michael Kimelman that he cooperated with federal agents for about 2 1/2 years to try to avoid prison. He faced as much as 25 years in prison.

The case is U.S. v. Goffer, 10-cr-00056, U.S. District Court, Southern District of New York (Manhattan).

Compliance Action

Deutsche Boerse Pledges German Investment to Placate Regulator

Deutsche Boerse AG offered concessions to German regulators as the operator of the Frankfurt stock exchange sought to stem mounting concern about its merger with NYSE Euronext.

The exchange operator said it will invest 300 million euros ($388 million) over three years, promised not to fire any local employees for a minimum of two years and committed to making Germany “the operations hub” for Europe, according to a statement today. Deutsche Boerse has already pledged to keep its derivatives, market data, custody and settlement businesses in Germany.

Deutsche Boerse, which announced its takeover of New York-based NYSE almost a year ago, is struggling to save the deal in the face of opposition from the European Commission and the German State of Hesse, the company’s local regulator. Hesse must approve the deal if the European Union’s executive arm gives it the go ahead. Hesse has yet to be convinced the merger would be advantageous, Handelsblatt reported Friday, citing the state’s Economy Minister Dieter Posch.

Chief Executive Officers Duncan Niederauer for NYSE and Reto Francioni for Deutsche Boerse, are trying to appeal to politicians and other European regulators as they seek to salvage their plan to create the world’s largest exchange company. Two people familiar with the talks told Bloomberg last month that negotiators for the Commission planned to block the deal because the concessions offered by the exchanges didn’t go far enough.

NYSE and Deutsche Boerse’s deal is the last remaining after a year in which populist outcry, antitrust concern and some of the most volatile markets on record have prevented the completion of more than $37 billion in announced transactions, according to data compiled by Bloomberg on deals valued at $1 billion or more.

The European Commission will decide on the deal on Feb. 1.

Compliance Policy

EU Urges Accelerated Ship-Safety Review After Concordia Accident

European Union Transport Commissioner Siim Kallas called for an accelerated review of EU passenger-ship safety rules after the Costa Concordia accident off the coast of Italy left at least 11 people dead.

“We will ensure that any lessons from the Costa Concordia are fully taken into account in the already ongoing review of EU passenger-ship safety law,” Kallas said Friday in a statement in Brussels. “And we want to accelerate this work wherever possible.”

Carnival Corp., owner of the Costa Concordia cruise ship, on Friday announced a review of safety procedures in the aftermath of the Jan. 13 accident. Carnival’s Costa Crociere SpA unit on Jan. 19 suspended the ship’s captain, Francesco Schettino, who was placed under house arrest on Jan. 17 for allegedly causing the shipwreck.

“The safety record of passenger ships in EU waters has been strong over the last 10 years, but there is no room for complacency when it comes to safety,” Kallas said. “The challenge is to ensure that safety rules for passenger ships fully keep pace with the latest designs and technologies in a fast-changing sector.”

EU May Allow Asset-Backed Securities in Bank Liquidity Measures

Banks may be allowed to include asset-backed securities in the liquid assets that regulators demand to defend against a credit squeeze, according to a version of the draft law published by the European Union.

“Asset-backed instruments of high liquid and credit quality” as deemed by the European Banking Authority may count as a buffer by regulators, the document prepared by Denmark, which holds the rotating presidency of the EU, shows. Securitizations are excluded as liquid assets under rules known as Basel III, making the debt less attractive for banks.

The so-called liquidity coverage ratio, a buffer of easy-to-sell assets to survive a 30-day credit squeeze, is one of several measures from the Basel Committee on Banking Supervision to prevent financial crises. The collapse of Lehman Brothers Holdings Inc. and Belgium’s Dexia SA were blamed in part on the lenders running out of short-term funding.

“It’s very good news for European ABS where demand has been dominated by a few clients mostly in the U.S.,” said Stefano Loreti, a senior portfolio manager at Cairn Capital that manages and advises on over $20 billion of assets, including European ABS. “This development could help bring back European banks to the investor base.”

Issuance of asset-backed securities have tumbled in Europe after bonds linked to U.S. subprime debt slumped, prompting investors to shun the hard-to-value securities. Sales of the debt fell to 74 billion euros ($96 billion) last year from as much as 510 billion euros in 2006, according to JPMorgan Chase & Co data.

The proposals follow the European Central Bank’s decision in December to lower the minimum credit rating on collateral it accepts for loans.

The Jan. 9 document has to be approved by national governments in the 27-nation EU and the European Parliament before they can become law.

EU Privacy Rules to Include Leak Disclosure Within 24 Hours

A European Union proposal to simplify and toughen the region’s data-protection rules will require companies to disclose data breaches within 24 hours of their occurrences, Justice Commissioner Viviane Reding said.

The EU will this week outline an overhaul of its 17-year-old data-protection policies addressing online advertising and social-networking sites. The bill, which includes stricter sanctions and will equip national data-protection authorities with powers to levy administrative sanctions and fines, will “become a trademark people recognize and trust worldwide,” Reding said at a conference in Munich yesterday.

Sony Corp. was criticized last year by U.S. lawmakers for taking six days to warn customers about a cyber attack that exposed more than 100 million customer accounts, the second-largest online data breach in U.S. history. Industry groups with members including Microsoft Corp. and Google Inc. have warned the EU against setting overly strict data-privacy rules, saying that may stifle innovation.

The legislation will require companies to obtain “specific and explicit” consent from Internet users to store information, and delete data unless there is a “legitimate and legally justified interest” to keep them on their servers, Reding said at the annual Digital Life Design conference.

“Companies that suffer a data leak must inform the data protection authorities and the individuals concerned, and they must do so without undue delay,” Reding said. She cited a survey showing 72 percent of Europeans are concerned about how companies use their data.

The draft rules aim to establish common legislation for the 27-member European Union, as well as national points of contact that can make decisions that will be valid for the region. Uniform legislation will save businesses 2.3 billion euros ($3 billion) a year by, for example, reducing paperwork, Reding said.


Boeing to Pay U.S. $4.4 Million to End Chinook Billing Case

Boeing Co., the second-largest defense contractor, agreed to pay the U.S. $4.4 million to resolve allegations that it overbilled the government for work on Chinook military helicopters.

The settlement requires Boeing to retrain its employees and make improvements to software it uses to track its billing, Philadelphia U.S. Attorney Zane Memeger said Jan. 20 in a statement. A whistle-blower lawsuit alerted the government to the issue, according to the statement.

The U.S. Justice Department awarded Boeing a contract in 2003 to produce and modify new Chinook helicopters as part of the Army’s effort to modernize its fleet. More than 100 Chinooks were ordered.

A government probe revealed that Boeing managers instructed mechanics to perform non-billable work while separately billing the U.S. for their time resulting in the government being charged for work for which it had already paid, according to the statement.

Damien Mills, a spokesman at Boeing’s Chinook plant in Ridley Park, Pennsylvania, said the company cooperated fully with the government’s investigation.

“As the investigation revealed, this is a matter of inadequate charging discipline in the past, not of any deliberate wrongdoing,” Mills said in an e-mailed statement.

The case is U.S. v. The Boeing Co., 10-cv-00634, U.S. District Court Eastern District of Pennsylvania (Philadelphia).

Stanford Investors Endure ‘Living Hell’ on Eve of Trial

R. Allen Stanford’s investors, after waiting three years to see the Texas financier go to trial on charges of leading a $7 billion fraud, must hold on even longer before learning when they will get some of their money back.

Stanford’s customers have received nothing since the U.S. Securities and Exchange Commission closed his businesses in February 2009.

Stanford, accused of misleading people who bought certificates of deposit from his Antigua-based bank, spent their money on bad investments, sports sponsorships and a lavish lifestyle that included yachts, a fleet of jets, mansions and a private Caribbean island, U.S. prosecutors said. Jury selection in his criminal trial is scheduled to start today in federal court in Houston. Stanford, who denies any wrongdoing, faces as long as 20 years in prison if convicted.

“It’s not fair that we have to be put through this living hell,” said Blaine Smith of Louisiana, who claims to have lost $1 million in life savings invested with Stanford.

A court-appointed receiver for Stanford Group Co. has spent at least $103 million on litigation, wind-down costs and other expenses, while collecting less than $212 million in cash and material assets since the SEC sued Stanford in February 2009.

The expenditures include professional fees and expenses of $52.1 million through October, with $1.3 million of this going to receiver Ralph Janvey’s firm, Dallas-based Krage & Janvey LLP, according to a Bloomberg review of court records. That sum covers the $21.3 million Janvey asked court permission to pay his primary outside law firm, Houston-based Baker Botts LLP, for work done from Feb. 17, 2009, to Sept. 30, 2011.

The total also includes $21 million Janvey requested in fees and expenses for FTI Consulting Inc., which provided forensic accounting, asset tracing, electronic evidence-processing and support services during the same period, according to Bloomberg’s review.

Unlike Stanford, repayment processes have moved forward for claimants in the Bernard L. Madoff fraud case and the bankruptcy of MF Global Holdings Ltd., the parent of commodities broker MF Global Inc.

The SEC case is Securities and Exchange Commission v. Stanford International Bank Ltd., 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas). The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston). The receivership jurisdiction case is In re Stanford International Bank Ltd., 3:09-cv-00721, U.S. District Court, Northern District of Texas (Dallas).

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U.K. Judge Tells Merrill, UBS to Seek Lombardy Swaps Settlement

Bank of America Corp.’s Merrill Lynch unit and UBS AG must try to reach an out-of-court resolution to their dispute with the Italian Region of Lombardy over interest-rate transactions, a London judge ruled.

Judge Nigel Teare granted an order for alternative dispute resolution at a hearing Jan. 20.

Merrill and UBS sued Lombardy in the U.K. in 2010 to uphold derivatives contracts sold to the region. Lombardy, the northern Italian region where Milan is located, accused the banks of fraud and hidden fees, according to court papers.

Italian local governments including Tuscany, Lazio, Piedmont and Florence have challenged investment banks in the courts over derivatives contracts which turned out to cost more than expected.

UBS lawyer Sonia Tolaney said at Friday’s hearing the Zurich-based bank had restarted informal negotiations with Lombardy in December. Richard Handyside, an attorney for New York-based Merrill, said the bank wasn’t currently in talks with the region.

The Merrill case is Merrill Lynch International Bank Ltd. v. The Region of Lombardy, 10-828, High Court of Justice, Queen’s Bench Division, Commercial Court.

CFTC Position Limits Rule Lawsuit Dismissed by Appeals Court

Two Wall Street groups’ challenge to a U.S. Commodity Futures Trading Commission rule on position limits must first be considered in a trial court, a federal appeals court ruled.

In dismissing the case, a three-judge panel of the U.S. Court of Appeals in Washington on Jan. 20 said it doesn’t have jurisdiction to consider the case because the Commodity Exchange Act and last year’s Dodd-Frank law “are silent” on whether the rule can be directly challenged to the appeals court.

The International Swaps and Derivatives Association Inc. and Securities Industry and Financial Markets Association filed an emergency request Jan. 9 urging the appeals court to put the rule on hold while the court considers their legal challenge. The groups asked the court to issue a ruling by Jan. 27.

By dismissing the case, the judges also rejected that request.

The groups, in one of the financial industry’s highest-profile efforts to weaken last year’s Dodd-Frank law, filed lawsuits challenging the rule in two federal courts in Washington last month. The district court lawsuit had been put on hold while the appeals court considered the case.

They argue that the CFTC used a flawed analysis of Dodd-Frank when it decided to impose the restrictions. The associations also said the CFTC failed to properly weigh the rule’s costs and benefits.

Steven Adamske, a CFTC spokesman, declined to comment on the ruling.

The CFTC on Jan. 4 asked the appeals court to dismiss the challenge claiming it doesn’t have jurisdiction to consider the lawsuit.

Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association, said the association “will move forward quickly in the district court.”

Steve Kennedy, a spokesman for the International Swaps and Derivatives Association Inc., didn’t immediately respond to a phone message seeking comment after business hours on Jan. 20.

The two associations represent JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, among other banks and asset managers.

The case is International Swaps and Derivatives Association v. CFTC, 11-01491, U.S. Court of Appeals for the District of Columbia (Washington).

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