Federated Rule, Davos Roundup, SEC Watchdog: Compliance

Federated Investors Inc., the third-largest manager of U.S. money-market mutual funds, is planning legal action to block rule changes being contemplated by the U.S. Securities and Exchange Commission that the company said could destroy the $2.7 trillion cash-management industry.

Federated will the proposed rule change by both a regulatory and legal means, Christopher Donahue, chief executive officer of Pittsburgh-based Federated, said Jan. 27 in a conference call with analysts.

Money-fund providers and regulators have been wrestling for three years over how to make the funds safer without destroying the appeal of the investment product, which is used by corporations and millions of households. The SEC is expected to make two proposals before the end of March.

The first plan, which the industry has long warned would lead investors to abandon money funds, would eliminate their stable $1 share price. The second would combine capital buffers and a 30-day holdback of a portion of all redemptions. Donahue said Jan. 27 that Federated would fight either of the two rules.

Donahue said he would take legal action under the Administrative Procedures Act, claiming the SEC had not done sufficient analysis of the rules’ impact. John Nester, a spokesman for the SEC, declined to comment.

Donahue added that legal action could also delay the implementation of any new rule.

The redemption restriction being planned by the SEC, according to Donahue, would require funds to hold back 3 percent of any client withdrawal for 30 days.

Special Section: World Economic Forum

Incredible Shrinking Bankers at Davos Humbler Amid Austerity

Leaders of the world’s biggest banks touted the virtues of austerity at the World Economic Forum in Davos -- for themselves, not just for over-indebted governments.

Many arrived in the Swiss Alps following a year marked by weak revenue, declining stock prices and cuts in jobs and compensation. The finance and banking industries remain the “least trusted” for the second consecutive year, according to a 20-country survey released earlier this week by public relations firm Edelman.

Financial companies, mainly in Western Europe and the U.S., have announced more than 238,000 job cuts since last year’s meeting in Davos, according to data compiled by Bloomberg. Bank of America Corp., Deutsche Bank AG, and HSBC Holdings Plc are among banks selling businesses and slimming down as they adapt to capital requirements approved by the Basel Committee on Banking Supervision, new national regulations and a slowdown in economic growth in Europe.

Deutsche Bank, the biggest German lender, is considering a sale of its asset-management unit as it raises capital to adapt to Basel rules. The Frankfurt-based lender is reducing costs globally and said in October it will cut 500 jobs from its corporate banking and securities unit by March 31.

A year ago, bankers in Davos were trying to persuade regulators to relax new regulations, arguing that banks that held less capital and were subject to fewer restrictions would be an aid to economic growth. Those arguments weren’t successful, said Barclays Plc CEO Robert Diamond in an interview before a private meeting of finance executives Jan. 26. Barclays announced 422 U.K. job cuts earlier this month.

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Trichet, Roubini, Sands, Turner Discuss Big Banks

Former European Central Bank President Jean-Claude Trichet, New York University professor Nouriel Roubini, U.K. Financial Services Authority Chairman Adair Turner, Standard Chartered Plc Chief Executive Officer Peter Sands, former Mexican central bank Governor Guillermo Ortiz, Luxembourg Finance Minister Luc Frieden, participated in a panel discussion about the banking industry.

Among the topics discussed by the panel were banking regulations, whether the banking system is “fragile” and the industry is “fragmented.”

Bloomberg’s Maryam Nemazee moderated the panel at the World Economic Forum’s annual meeting in Davos, Switzerland.

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Clayton Dubilier CEO Says He’d Accept Carried-Interest Change

Clayton Dubilier & Rice LLC Chief Executive Officer Donald Gogel said he’d accept changes to the carried-interest tax rate that enhances compensation for private-equity partners.

The controversy over U.S. presidential candidate and former buyout executive Mitt Romney’s tax rate may lead to changes to the U.S. tax code, including the carried-interest rate, Gogel said in an interview with Bloomberg Television’s Erik Schatzker at the World Economic Forum in Davos, Switzerland.

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Compliance Policy

EU to Seek Deal on Clearing Law for Over-the-Counter Derivatives

European Union lawmakers and officials will meet this week to thrash out a deal on clearing rules for over-the-counter derivatives, paving the way for implementation before a Dec. 31 deadline.

Talks planned for tomorrow in Brussels will focus on “the big question” of what powers regulators should have to override national decisions authorizing clearinghouses, said Sharon Bowles, a U.K. lawmaker who chairs the parliament’s financial regulation committee. Denmark, which holds the EU’s rotating presidency, will lead the negotiations with members of the European Parliament and Michel Barnier, the EU’s financial services chief.

Europe is working to toughen rules on trading of OTC derivatives in line with a 2009 agreement among the Group of 20 nations. The Financial Stability Board warned last year that the EU may miss a deadline for implementing measures by the end of 2012 that include requiring trades in standard types of derivatives to be centrally cleared and logged in databases.

This week’s meeting may also tackle a planned exemption for derivatives trades between different units of the same bank, Bowles said. Denmark wants to ensure that the exemption would apply if one of the units is based outside Europe, Preben Aamann, a spokesman for the Danish presidency, said by e-mail.

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Compliance Action

Ex-UBS Trader Adoboli Pleads Not Guilty to $2.3 Billion Loss

Kweku Adoboli, the former UBS AG trader who is accused of causing the largest loss from unauthorized trading in British history, pleaded not guilty to fraud and false accounting in London today.

Adoboli, 31, has been in custody since Sept. 15 when UBS asked London police to arrest him for causing a $2.3 billion loss. He told bank officials that he falsified counterparties in transactions after they questioned several trades. He was charged Sept. 16.

The case led to the departures of Chief Executive Officer Oswald Gruebel and the co-heads of the Swiss bank’s global equities business. UBS has said it suspended some front office staff pending further discipline. British and Swiss finance regulators are investigating the system and control failures at UBS that allowed the unauthorized trades to go undetected.

Adoboli was given an extra month to enter a plea in December after hiring new lawyers at Bark & Co. in London. His new lawyer, Paul Garlick, told the court Dec. 20 that Adoboli hadn’t received “satisfactory legal advice.”

Adoboli said through his previous lawyers at a September hearing that he was “sorry beyond words” for “his disastrous miscalculations.”

Adoboli worked for the investment bank’s Delta One desk, which handles trades for clients -- or risks the bank’s own money -- typically speculating on, or hedging the performance of, a basket of securities. UBS has said no client positions were affected.

Adoboli, who was remanded into custody today, is being held at Wandsworth prison in southwest London. His lawyers haven’t asked a court to release him on bail.

Iran Oil Curbs Extend to 95% of Tankers in EU Insurance Rules

European Union sanctions on Iranian oil will extend to about 95 percent of tankers because they are insured under rules governed by European law.

The International Group of P&I Clubs insures all but 5 percent of the global tanker fleet and its 13 member clubs follow European rules to participate in the claim-sharing pool, said Andrew Bardot, the London-based secretary and executive officer. Carrying Iranian oil would invalidate the ships’ cover against risks including spills and collisions, he said.

While the embargo on Iranian oil only covers the EU’s 27 member states, the extent of the region’s role in insuring ships will curb trade globally. Iran is the second-biggest member of the Organization of Petroleum Exporting Countries, and sends oil to China, Europe, Japan, India and South Korea. EU foreign ministers agreed to the ban on Jan. 23, seeking to increase pressure on Iran over its nuclear program, which the nation says is for civilian and medical purposes.

Vessels carrying oil from the nation will have to use “questionable” insurance, said Simon Schnorr, the London-based marine client director at Aon Risk Solutions, a unit of the world’s largest insurance broker.

The EU sanctions will still apply to shipping companies with no European link because of their insurance policies, according to Intertanko, the largest trade group representing tanker owners.

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Holder Announces Working Unit on Mortgage-Backed Bonds Fraud

A new U.S. government unit will investigate misconduct in the bundling of mortgage loans into securities that fueled the housing bubble and contributed to the financial crisis, Attorney General Eric Holder said.

In providing details about the new unit Jan. 27 at a news conference in Washington, Holder said that the Justice Department in the past few days has subpoenaed 11 financial institutions in related investigations.

Both civil and criminal capabilities will be used in pursuing the investigations, Holder said.

President Barack Obama announced the creation of the unit during his State of the Union speech on Jan. 24.

A coalition of labor unions, consumer advocates and political activists, including MoveOn.org, has been pressuring the administration to do more to probe banks’ home lending and the creation and sale of mortgage-backed securities.

The new unit will take control of existing civil and criminal investigations in an attempt to better coordinate efforts on mortgage fraud, according to the Justice Department. It will include officials from the Justice Department and the Securities and Exchange Commission as well as U.S. attorneys and state attorneys general.

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Omnicare Sued by FTC to Block Takeover of Rival PharMerica

The U.S. Federal Trade Commission sued Omnicare Inc. to block its $440.8 million takeover of rival drug-supply company PharMerica Corp., a deal that regulators said would hurt competition and increase drug prices.

Omnicare’s unsolicited bid for the Louisville, Kentucky, company would boost medicine prices for Medicare Part D health plans that are responsible for providing drug benefits for nursing home residents and other beneficiaries, the FTC said in a statement on Jan. 27.

The combined companies would be able to control as much as 60 percent of the market to distribute drugs to nursing homes, hospitals and hospices, said Jeff Jonas, an analyst with Gabelli & Co. in Rye, New York.

The deal offers an opportunity to save money through automation and scale, Covington, Kentucky-based Omnicare Chief Executive Officer John Figueroa said when it was announced in August. Omnicare is trying become more efficient amid U.S. cuts to health-care spending, he said.

The FTC in 2005 allowed Omnicare’s takeover of NeighborCare, saying that the company had many rivals in local areas and that the institutional pharmacy market was easy to enter.


Wachovia $75 Million Class-Action Settlement Approved by Judge

A federal judge gave preliminary approval to a $75 million cash settlement of a class-action lawsuit against Wachovia Corp. over mortgage loans.

U.S. District Judge Richard Sullivan approved the settlement on behalf of buyers of Wachovia stock from May 2006 to September 2008, according to a Jan. 27 filing in Manhattan. A hearing on the settlement is scheduled for June 1.

The plaintiffs, which include the pension funds of New York City public employees, sued in 2008, claiming that Wachovia, after acquiring mortgage lender Golden West Financial Corp. in 2006, began to focus on nontraditional mortgage loans, lowering standards for borrowing and marketing aggressively to build volume. The lawsuit claims the company made “false and misleading statements” to shareholders.

Those who acquired Wachovia stock through its purchase of Golden West are also entitled to the settlement, according to the filing.

Wachovia was acquired by Wells Fargo & Co. in 2009.

The case is In re Wachovia Equity Securities Litigation, 08-06171, U.S. District Court, Southern District of New York (Manhattan).

Goldman Sachs Sued by Stichting Pensioenfonds in New York

The Netherlands’ biggest retirement fund has sued Goldman Sachs Group Inc., accusing the investment bank of making false or misleading statements in selling residential mortgage-backed securities.

Stichting Pensioenfonds ABP sued New York-based Goldman Sachs in New York State Supreme Court on Jan. 27, saying that the bank knew that originators of the loans underlying the investments hadn’t followed underwriting standards.

Stichting also sued Deutsche Bank AG and JPMorgan Chase & Co. over sales of mortgage-backed securities in New York state court last year.

Stichting, the pension fund for Dutch public educational and government workers, has more than 250 billion euros ($332.8 billion) in assets under management, according to the complaint.

Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.

Michael Duvally, a spokesman for Goldman Sachs, declined to comment on the lawsuit in a telephone interview.

The case is Stichting Pensioenfonds ABP v. Goldman Sachs Group Inc., 650264/2012, New York State Supreme Court, New York County (Manhattan).

Schwab Suit Against Merrill Wins Judge’s Tentative Go-Ahead

Bank of America Corp.’s Merrill Lynch unit, Wells Fargo Co. and UBS AG must face a lawsuit by Charles Schwab Corp. alleging they misled the company about the risks of millions of dollars of mortgage-backed securities it bought from them, a California judge ruled tentatively.

Judge Richard Kramer in San Francisco said on Jan. 27 he intends to let claims over 46 of the 50 securitizations at issue proceed. The four claims he rejected involved securities from Countrywide Financial Corp., the mortgage lender acquired in 2008 by Charlotte, North Carolina-based Bank of America.

Schwab, an independent San Francisco-based brokerage, alleged in a 2010 lawsuit that the securities dealers lied or didn’t disclose information about loans underlying the bonds they sold, including the loan-to-value ratios of mortgages and the number of properties that weren’t primary residences, according to the complaint.

Christiaan Brakman, a spokesman for Zurich-based UBS, and Bill Halldin, a Bank of America spokesman, declined to comment on the Jan. 27 ruling. Tom Goyda, a spokesman for San Francisco-based Wells Fargo, didn’t respond to a request for comment.

The case is one of several pending in state courts around the country by investors seeking repayment for mortgage-backed securities. The Federal Home Loan Banks of Seattle, San Francisco, Pittsburgh, Chicago and Indianapolis, as well as companies including Schwab and Allstate Insurance Co., have sued investment banks under state investor-protection laws.

The case is Charles Schwab v. Merrill Lynch, Pierce, Fenner & Smith, 10-501151, California Superior Court (San Francisco).

Comings and Goings

Christy Romero Chosen by Obama as TARP Inspector General

Christy Romero, deputy special inspector general for the Troubled Asset Relief Program, was chosen by President Barack Obama to move into the top position.

Romero would replace Neil Barofsky, who was appointed special inspector general for TARP by President George W. Bush in 2008 and left in March 2011. Romero came to the special inspector’s office in 2009 from the Securities and Exchange Commission, where she was a counsel to chairmen Mary Schapiro and Christopher Cox.

Obama intends to nominate Romero, the White House said in a statement on Jan. 27.

SEC’s Schapiro Said to Face Pushback Over Choosing Next Watchdog

U.S. Securities and Exchange Commission Chairman Mary Schapiro may have to revise her plan for hiring the agency’s next internal watchdog after at least three commissioners demanded greater say in the process, according to two people familiar with the matter.

Schapiro recently told commissioners that she had selected panels of senior SEC staff to rate, interview and suggest final candidates to succeed H. David Kotz, according to the people, who asked not to be named because the plans weren’t public.

Kotz, whose four-year tenure as inspector general ended Jan. 27, was accused by SEC employees and alumni of pursuing investigations that often lacked evidence of wrongdoing and unfairly damaged some workers’ reputations. Kotz also came under scrutiny for giving a lengthy interview to the host of a paid radio show who posted it on his website and uses it in marketing financial services.

The flap over Kotz’s tenure has made commissioners and staff more sensitive to how the agency oversees the inspector general’s office, the people said. While the watchdog previously reported to the chairman, the 2010 Dodd-Frank Act gave the responsibility to the full five-member commission.

Citing that change, three of the commissioners told Schapiro they should have an equal say over which staff will rate and interview candidates for the job, according to the people. The commissioners have also called for new procedures and policies to clarify who the new watchdog would report to and what kind oversight the commission would have.

Noelle Maloney, who has served under Kotz as his deputy, will be acting inspector general until a replacement is named, said SEC spokesman John Nester, who declined immediate comment on the hiring process.

Ellen Rosen in New York at erosen14@bloomberg.net

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