Shareholder Arbitrations, Mutual Funds, Finra: Compliance

Carlyle Group LP’s plan to protect itself from class-action lawsuits may set a precedent that undermines shareholder rights and encourages more companies to follow suit, lawyers, investors and government officials said.

The buyout firm this month amended a regulatory filing to require future shareholders to resolve claims against it through arbitration. The U.S. Securities and Exchange Commission, which blocked an initial public offering with a less-restrictive arbitration clause more than 20 years ago, must decide whether to allow Washington-based Carlyle’s offering to proceed.

Preventing the share sale could lead to a showdown between the agency and the Supreme Court, which has issued a series of pro-arbitration decisions in recent years. Allowing the IPO would rile congressional Democrats and pave the way for other buyout firms, hedge-fund managers and traditional corporations to go public with similar restrictions.

Florence Harmon, a spokeswoman for the SEC in Washington, declined to comment, as did Chris Ullman, a Carlyle spokesman.

Arbitrations differ from court proceedings in several ways: they are generally confidential, permit less discovery by plaintiffs and have fewer avenues for appeal.

The SEC has held that companies can’t go public with a clause in their governing documents that limits the ability of shareholders to seek remedies under federal securities law. The blocked a stock sale more than two decades ago that included a mandatory arbitration clause, according to Carl Schneider, a former securities attorney who represented the thrift. Mary Schapiro, chairman of the SEC, served as one of the agency’s five commissioners at the time.

Since then, securities class-action suits have become a big industry in the U.S., with 3,415 filings in federal court between Jan. 1, 1996, and the end of 2011, according to San Francisco-based Cornerstone Research. Settlements totaled $52.7 billion from 2001 and 2010, Cornerstone estimates, including $6.2 billion in the case of WorldCom Inc.

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Compliance Policy

Osborne Says U.K. Treasury Will Take Charge of Future Bailouts

Chancellor of the Exchequer George Osborne proposed laws to give the British Treasury sole power over when to bail out banks, sweeping aside opposition from the central bank as he seeks to end confusion over who should take charge during a crisis.

He made the remarks in a speech today to the World Economic Forum in Davos, Switzerland.

The Financial Services Bill, laid before Parliament in London today, will give the chancellor power to order liquidity support for an institution, unwind its operations and all other aid for the financial system that requires taxpayers’ money. The central bank wanted those powers to be exempt from the bill, lawmakers said this month.

Bank of England Governor Mervyn King resisted pressure from the Treasury to extend liquidity to banks from 2008, arguing that the bank shouldn’t bear potential losses from the support. Osborne said he hopes the measures will end the “paralysis and confusion” that began when Northern Rock Plc ran into funding difficulties in 2007 and continued through to the nationalization of Royal Bank of Scotland Group Plc.

The bill is scheduled to be approved by legislators in late 2012. It will pave the way for the central bank’s Financial Policy Committee to take action to address risks.

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Obama Plans to Propose Corporate Tax System Overhaul Next Month

President Barack Obama will propose an overhaul of the U.S. corporate tax system in February, his economic advisers said.

The proposal will be released at about the same time as the administration’s fiscal 2013 budget plan, which is scheduled to be sent to Congress on Feb. 13. The administration isn’t releasing details of the comprehensive proposal, such as whether it will include a target for the top corporate tax rate.

Obama has said the corporate rate should be lowered from the current maximum of 35 percent in a way that doesn’t add to the federal budget deficit. An overhaul plan probably will encounter opposition in Congress, where Republicans have said a rewrite of corporate tax rules should be paired with changes in the tax system for individuals.

One of the biggest obstacles to a corporate tax overhaul is how to pay for it. Obama might seek to raise revenue for lowering the corporate rate by reviving calls to end tax breaks for oil and gas companies or corporate jets. Republicans have blocked such moves in Congress.

Any effort to revise corporate tax laws stands to divide the business community as well. Retail companies, whose assets are mostly inside the U.S., are more focused on lowering the corporate rate. Multinational companies with headquarters in the U.S. are interested in shifting to a territorial tax system, in which only domestically generated income would be taxed.

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Japan May Tighten Mutual-Fund Rules to Protect Investors

Japan’s Financial Services Agency is considering tighter regulations governing mutual funds to protect private investors.

The regulator is conducting a review aimed at ensuring funds operate in a transparent manner and in line with global standards, according to a document distributed today at a meeting of an advisory panel to the agency in Tokyo.

IRS Should End Commodity Mutual-Fund Runaround, Levin Says

U.S. tax authorities should stop a private rulemaking process that has encouraged speculation in oil and agricultural markets by letting mutual funds exceed limits on commodity investments, Senator Carl Levin said.

The Internal Revenue Service’s so-called private letter rulings, which let funds use foreign corporations and other strategies to escape the tax implications of boosting commodity holdings above 10 percent of income, are a “blatant end-run around the legal restrictions,” Levin said yesterday at a hearing held by the Senate Permanent Subcommittee on Investigations.

The IRS has issued more than 70 such rulings since 2006, according to Levin, the Michigan Democrat who leads the panel, and Senator Tom Coburn of Oklahoma, the committee’s top Republican. Levin said the IRS should permanently ban the practice and revoke the existing rulings, which he said allow U.S. firms to use shell corporations and “financially engineered notes” to make commodity investments.

The IRS in June temporarily suspended new private rulings pending a review of its policies. The IRS has an “open mind on this issue” and may publish new guidelines, IRS Commissioner Douglas H. Shulman told lawmakers at the hearing.

Under current tax code, mutual funds don’t pay corporate income tax so long as they comply with limits on investment type that say commodities can’t represent more than 10 percent of income. Private rule-making by the IRS can allow funds to invest more of their assets in commodities and exceed the 10 percent limit, according to Levin. He has pushed for greater limits on speculation in commodities markets, including through so-called position limits that would be imposed by the Commodity Futures Trading Commission.

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Sarkozy Transaction Tax May Weaken French Position, Jouyet Says

France’s top financial regulator said a tax on financial transactions advocated by President Nicolas Sarkozy would weaken the country’s position in the asset-management industry.

The tax “could penalize our asset management industry” by pushing professionals and transactions elsewhere if France acts alone, Jean-Pierre Jouyet, president of the Autorite des Marches Financiers, said in Paris yesterday.

The European Commission has proposed a tax covering a wide range of trading that could raise 57 billion euros ($74 billion) a year. Financial institutions would pay in their home countries, regardless of where transactions take place. U.K. officials have led opposition to the tax, which they say would be ineffective unless adopted globally.

Sarkozy has pushed to implement the levy unilaterally, while French officials have cautioned that such action could cause difficulties. Francois Hollande, the Socialist candidate seeking to unseat Sarkozy, also supports the transaction tax.

Compliance Action

Greenlight Capital, JP Morgan Cazenove Employees Fined by FSA

A former compliance officer at Greenlight Capital Inc. and a trading desk director at JPMorgan Chase & Co.’s Cazenove unit were fined in the U.K. over Greenlight’s sale of Punch Taverns Plc shares in 2009.

Alexander Ten-Holter, the hedge fund’s former compliance officer, was fined 130,000 pounds ($204,000) for failing to “make reasonable enquiries” before selling the firm’s holding in Punch Taverns, the Financial Services Authority said in a statement. Caspar Agnew, a trader at JP Morgan Cazenove, was fined 65,000 pounds by the regulator for failing to identify and report a “suspicious order.”

David Einhorn and Greenlight Capital were already fined 7.2 million pounds by the U.K.’s FSA, which included the regulator’s second-largest fine for an individual. Andrew Osborne, a former corporate broker at Bank of America Corp.’s Merrill Lynch, also faces a fine of 350,000 pounds in the investigation, a person familiar with the matter said yesterday.

Kate Haywood, a spokeswoman for JPMorgan in London, declined to comment today. A New York spokesman for Greenlight Capital didn’t immediately return an e-mail or phone call seeking comment. Agnew and Ten-Holter didn’t respond to e-mail messages seeking comment.

“I didn’t believe in 2009, and I don’t believe now, that there was anything wrong with our conduct,” Einhorn said Jan. 25 after the FSA fine.

Finra Warns of Increasing Reports of Funds Stolen by Hackers

The Financial Industry Regulatory Authority said it has received an increasing number of reports involving investor funds being stolen by hackers.

The hackers first gain access to the investor’s e-mail account and then e-mail instructions to the firm to transfer money out of the brokerage account, Finra said yesterday in a statement.

“Investors who suspect that their e-mail account has been hacked should immediately notify their brokerage firm and other financial institutions, and anyone who suspects they have been defrauded should file a complaint with Finra,” said Gerri Walsh, Finra’s Vice President for Investor Education.

Raiffeisen Says It Half Way to EBA Capital Goal, Targets 9.4%

Raiffeisen Bank International AG and its parent, Raiffeisen Zentralbank Oesterreich AG, have created about half the capital needed for RZB to meet the European Banking Authority’s capital rules.

The banks have completed measures that are equivalent to increasing capital by 1.4 billion euros ($1.8 billion), and target another 1.6 billion euros by the EBA’s deadline of June 30, RZB said in a Jan. 25 presentation on its website. RZB will have core reserves of 9.4 percent by that date, beating the EBA’s 9 percent threshold, according to the plan.

RZB created about 450 million euros by transforming capital disqualified by the EBA into types the regulator recognizes as loss-absorbing, according to the document.


Morgan Stanley Sued Over $1.2 Billion in Mortgage Securities

Morgan Stanley was sued over about $1.2 billion worth of residential mortgage-backed securities by Bayerische Landesbank and Dexia SA in New York state court.

Bayerische Landesbank, based in Munich and the second-biggest German state-owned lender, asserts claims on almost $486 million in residential mortgage-backed securities purchased in 22 offerings in 2006 and 2007.

Both banks say in their complaints that the loans underlying the securities were riskier than promised and that Morgan Stanley “knew or recklessly disregarded” that the loans didn’t conform to underwriting standards.

Mark Lake, a spokesman for New York-based Morgan Stanley, declined to comment on the lawsuits, which were both filed yesterday in New York State Supreme Court in Manhattan, because the company hadn’t received them yet.

Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into a recession and collapse of the housing market. The crisis swept up lenders and investment banks as the market for the securities evaporated.

The cases are Bayerische Landesbank, New York branch v. Morgan Stanley, 650230/2012; and Dexia SA/NV v. Morgan Stanley, 650231/2012, New York State Supreme Court (Manhattan).

Stanford Invented Offshore Bank’s U.K. Insurer, Prosecutor Says

R. Allen Stanford failed to tell a financial adviser he hired for his first offshore bank that the insurer he selected for the institution was a company he created, a federal prosecutor told a jury.

Assistant U.S. Attorney William Stellmach made that claim Jan. 25 while questioning the adviser, Michelle Chambliess, on the first day of testimony at the federal courthouse in Houston, where Stanford is on trial charged with investment fraud.

Chambliess said she was one of Stanford’s first hires in 1987, at Guardian International Investment Services, a U.S.- based sibling of Stanford’s Montserrat-based Guardian International Bank Ltd. Guardian was the precursor to Stanford International Bank Ltd., the Antiguan entity at the heart of Stanford’s alleged $7 billion fraud.

Stanford told her he’d obtained insurance for the bank from a carrier called British Insurance Fund Ltd., which appeared to be an independent U.K.-based company and did not tell her it was a shell company she said, in response to a question from Stellmach.

Stanford, 61, is charged with wire fraud and mail fraud. He told the jury Jan. 24 he isn’t guilty.

Chambliess also told the court she learned that Stanford and some of his businesses borrowed money from the bank from a disclosure in Stanford’s 1996 annual report.

The case is U.S. v. Stanford, 09-cr-342, U.S. District Court, Southern District of Texas (Houston).

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Dresdner Banker Says Commerzbank Bonus Didn’t Equal His ‘Worth’

A former manager at Commerzbank AG’s Dresdner Bank unit told a London court he was suing the German lender because it hasn’t paid him the bonus his performance deserved -- $394,000.

Desmond McNamara, who headed up risk management for Dresdner’s capital-markets division, is one of 104 London-based bankers who have sued claiming Commerzbank failed to honor a bonus pledge Dresdner made before it was taken over in 2009.

Commerzbank completed a takeover of Dresdner in January 2009 then cut bonuses by 90 percent or more, according to court filings from the former Dresdner bankers.

The bank, based in Frankfurt, said in an e-mailed statement it will “argue that no binding contractual commitment was made, that bonus amounts communicated were provisional and that it was reasonable and rational to reduce the bonuses” after a 6.3 billion-euro loss at Dresdner’s investment banking business.

The cases include: Mr. Fahmi Anar & Others v. Dresdner Kleinwort Limited, Commerzbank AG, High Court of Justice, Queen’s Bench Division, HQ09X05230 and Richard Attrill & 71 others v. Dresdner Kleinwort Limited, Commerzbank AG, HQ09X04007.

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