Deutsche Boerse-NYSE, Gupta, Muni Bonds: Compliance

European Union regulators vetoed a plan by Deutsche Boerse AG and NYSE Euronext to create the world’s biggest exchange after concluding that the merger would hurt competition.

The deal would have led to a “near-monopoly” in European exchange-traded derivatives, the European Commission said in an e-mailed statement today. “Any efficiencies would not be substantial enough to outweigh the harm to customers caused by the merger.”

Deutsche Boerse agreed to acquire its New York rival in a deal valued at $9.5 billion when it was announced last February. Since then, the value has plummeted to about $7.3 billion as Deutsche Boerse’s shares fell. The companies appealed directly to commission President Jose Barroso last month to try to salvage their merger, arguing that a ban would harm European exchanges and drive business to other parts of the world.

“The EU Commission’s decision is based on an unrealistically narrow definition of the market that does no justice to the global nature of competition in the market for derivatives. We therefore regard the decision as wrong,” Deutsche Boerse said in an e-mailed statement.

The rejection of the merger is the commission’s fourth since 2004, when it overhauled its rules for reviewing deals.

Antitrust concerns have thwarted other exchange tie-ups around the world. Nasdaq OMX Group Inc. and IntercontinentalExchange Inc. abandoned an unsolicited bid for NYSE Euronext after the U.S. Justice Department threatened to sue. Singapore Exchange Ltd.’s $8.8 billion bid for ASX Ltd. collapsed after Australian Treasurer Wayne Swan said the deal wasn’t in the national interest.

Deutsche Boerse’s acquisition of NYSE Euronext would have put more than 90 percent of Europe’s exchange-traded derivatives market and about 30 percent of stock trading in the hands of one company. Deutsche Boerse’s Eurex is the region’s biggest derivatives exchange, while NYSE’s Liffe is the second-largest.

NYSE Euronext and Deutsche Boerse had offered to sell overlapping businesses and give rivals access to post-trade services as they struggled to convince regulators that the merger wouldn’t stifle competition in derivatives and clearing. The commission told the companies in December that the concessions didn’t go far enough, two people familiar with the discussions said.

Today, both exchanges said they will focus on their standalone strategies and are negotiating to terminate their merger. NYSE said it will resume a $550 million stock repurchase program after it reports earnings on Feb. 10 and after the agreement is formally terminated. Deutsche Boerse reports earnings Feb. 13.

Compliance Action

Ex-Credit Suisse Workers Said to Face Charges Over CDO Pricing

Ex-Credit Suisse Group AG workers will be charged with intentionally mismarking prices of collateralized debt obligations and other securities, a person familiar with the matter said.

The U.S. Securities and Exchange Commission was also involved in the probe, said the person, who didn’t want to be named because the investigation isn’t public. Fewer than five people will be charged and Credit Suisse won’t be prosecuted, the person said.

Jerika Richardson, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined to comment yesterday on whether any charges would be filed. John Nester, an SEC spokesman, and Victoria Harmon, a Credit Suisse spokeswoman, also declined to comment.

On Feb. 19, 2008, Switzerland’s second-largest bank made a surprise announcement that it would take writedowns on asset-backed securities after finding “mismarkings” by a group of traders. The Zurich-based bank said a month later it would write down $2.65 billion after an internal review found the pricing errors on residential mortgage-backed bonds and collateralized debt obligations were made intentionally “by a small number” of traders who were then fired or suspended.

At the time the pricing errors were found, the Swiss bank hadn’t disclosed the names of the traders responsible.

The planned filing of charges against the former employees was reported earlier by Reuters.

U.S. Expands Charges Against Gupta in Superseding Indictment

Rajat Gupta, the former Goldman Sachs Group Inc. director accused of giving inside information to fund manager Raj Rajaratnam, faces new allegations he passed tips about earnings of Goldman Sachs in 2007 and Procter & Gamble Co. in 2009.

In a superseding indictment filed yesterday in federal court in Manhattan, the U.S. broadened its description of the insider-trading scheme, saying it began in March 2007 not in 2008 as alleged in October. Prosecutors also said Gupta tipped Galleon Group LLC co-founder Rajaratnam about Goldman Sachs’s first quarter 2007 earnings and, while at Galleon’s offices, listened to a Goldman Sachs board meeting where earnings were disclosed.

Gupta, 63, who also led McKinsey & Co. and was a Procter & Gamble Co. director, denies wrongdoing. He faces as long as 20 years in prison if convicted of any securities fraud charge and as long as five years if convicted of conspiracy, according to the office of Manhattan U.S. Attorney Preet Bharara. He also faces a fine of as much as $5 million, prosecutors said.

Rajaratnam, who was convicted by a jury last year, is serving an 11-year prison term.

Gupta’s lawyer, Gary Naftalis, didn’t immediately return a voice-mail message left at his office seeking comment on the revised indictment.

The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).

U.S. Sweep to Rein in Identity Theft Targets 105, IRS Says

A nationwide sweep to rein in identity theft and tax-refund fraud targeted 105 people in 23 states, leading to 939 criminal charges, including 58 arrests and 10 guilty pleas, according to the Internal Revenue Service.

The sweep took place last week and involved 150 visits to check-cashing facilities to ensure the businesses didn’t facilitate fraud and identity theft, the IRS said in a statement yesterday.

Identity theft in the past year has been on the rise with thieves stealing Social Security numbers, some stored in hospital and school databases, said Steven Miller, the IRS’s deputy commissioner for services and enforcement. The stolen numbers are used to file false tax returns for refunds, he said.

In the fiscal year that ended Sept. 30, the IRS stopped 260,000 fraudulent returns related to identity theft, protecting $1.4 billion in refunds, Miller said.

The U.S. initiated 187 investigations into identity theft in 2009 compared with 224 in 2010, according to the IRS.

JC Flowers Ex-U.K. Chief Won’t Be Investigated by London Police

London police chose not to investigate JC Flowers & Co.’s former U.K. chief executive officer after regulators fined him for faking invoices to take money from a company the private equity firm invested in.

The U.K. finance regulator yesterday fined Ravi Shankar Sinha 2.87 million pounds ($4.5 million) and banned him from working in finance in the country. Sinha defrauded a company in which New York-based JC Flowers invested 1.37 million pounds by submitting falsified invoices, lying to the company CEO and saying the firm had authorized him to charge advisory fees, the FSA said.

JC Flowers told the police that, given their reimbursement of the unidentified company’s losses, there was no victim that had suffered and there was no reason to prosecute when the Financial Services Authority was handling the matter, according to two people familiar with the matter who asked not to be identified because they weren’t authorized to speak. The private-equity firm had reported the incident to the FSA and cooperated with the civil investigation, the regulator said.

“Had the police chosen to launch a criminal investigation, then JC Flowers would have cooperated fully, and indeed would today cooperate with any investigation should the police decide to mount an inquiry,” Michael Harrison, an outside spokesman for the firm at Brunswick Group, said in a phone interview.

The City of London Police said in a statement that it received details of the case from the FSA and, after discussions with the affected company, decided not to prosecute Sinha. Because the police never opened a formal probe, JC Flowers didn’t obstruct an investigation, the people said.

FSA spokesman Joseph Eyre declined to comment.

Brothers Reaped $17 Million From Illegal Short Sales, SEC Says

The U.S. Securities and Exchange Commission accused two brothers of reaping more than $17 million from improper short sales of stocks without having borrowed the securities they were betting against.

Jeffrey Wolfson and Robert Wolfson made so-called naked short sales from July 2006 to July 2007 in stocks including Chipotle Mexican Grill Inc., Fairfax Financial Holdings Ltd. and NYSE Group, the SEC said in an order filed yesterday.

In a short sale, an investor borrows shares and sells them with the goal of profiting from a price decline by repurchasing at a lower price and repaying the loan. SEC rules require sellers to locate shares before selling them short, and require that the borrowed securities be returned by a specified date.

Michael Wise, an attorney for Jeffrey Wolfson, and Thomas McCabe, a lawyer for Robert Wolfson, declined to comment.

Three UBS Clients Accused of Hiding Offshore Money From IRS

Three ex-UBS AG clients, including two who ran venture capital firms, were indicted on charges of hiding millions of dollars in assets from U.S. tax authorities through the use of secret offshore accounts.

Stephen M. Kerr and Michael Quiel, who separately ran venture capital firms, were charged in an indictment made public Monday in federal court in Phoenix. A former San Diego attorney, Christopher M. Rusch, was arrested Jan. 29 in Miami after being expelled from Panama at the request of the U.S. government.

Kerr, who ran CCN Worldwide Inc., had accounts worth more than $5.6 million in 2007 that he failed to report to the Internal Revenue Service, according to a Justice Department statement and the Dec. 8 indictment.

Quiel, who ran Legend Advisory Corp., had accounts valued at more than $2.6 million in 2007 that he also failed to report to the IRS, according to prosecutors and the indictment. He was arrested in the Phoenix area.

Rusch had signature authority over secret accounts held by Kerr and Quiel, and helped facilitate their transactions, prosecutors said. Rusch also had secret offshore accounts in the names of others at UBS and a Panamanian bank, prosecutors said.

Kerr, Quiel and Rusch were charged with conspiring to defraud the IRS. Kerr and Quiel were charged with filing false tax returns in 2007 and 2008 and with failing to file Reports of Foreign Bank and Financial Accounts for those years.

“I expect that my client is going to vigorously defend himself,” Michael Lipman, an attorney for Rusch with Duane Morris LLP, said in a telephone interview. “We expect to be exonerated at the appropriate time.”

The case is United States v. Kerr, 11-cr-02385, U.S. District Court, District of Arizona (Phoenix).

Compliance Policy

Citigroup Opposes Applying Dodd-Frank to Municipal-Bond Market

Citigroup Inc., the second-largest U.S. municipal-bond underwriter last year, says applying the Dodd-Frank law to the market for state and local debt would raise costs for borrowers.

Municipal securities dealers such as Citigroup make it easier for investors to trade in the $3.7 trillion municipal market, cutting state and local borrowing costs, Citigroup’s Howard Marsh, a managing director, said in the Jan. 27 filing with the Federal Deposit Insurance Corp., which is writing rules to implement the 2010 law. The Volcker Rule of Dodd-Frank, which limits banks in their ability to trade for their own accounts, would apply to some, but not all, types of municipal bonds.

Citigroup asked that all types of municipal securities, including tender-option bond programs, be exempt from the Volcker rule. Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, declined to comment on the filing, which was also sent to other regulatory agencies.

The Municipal Securities Rulemaking Board, an industry self-regulating organization that governs the muni market, asked regulators to exempt all such debt from the Volcker proposal on proprietary trading, the board said in a statement. Expanding the exemption will help prevent a “bifurcation” of the market, the board said in a letter sent to the U.S. Comptroller of the Currency, the Securities and Exchange Commission, the Federal Reserve and the FDIC.

EU Fails to Get Deal on Clearing Law for OTC Derivatives

European Union officials and lawmakers failed to broker a deal on rules to force trading of some over-the-counter derivatives through clearinghouses in a bid to safeguard financial markets, according to Chantal Hughes, a spokeswoman for the European Commission.

Officials will discuss the matter again next week, she said.


Full Tilt Units, Executives Win Civil RICO Suit Dismissal

Units of Full Tilt Poker and 10 executives won dismissal of civil claims filed under the federal Racketeer Influenced and Corrupt Organizations Act.

The lawsuit was filed in June by Full Tilt poker players seeking to recoup, as a group, about $150 million they claim they lost when the Ireland-based Internet poker site and others like it were shut by U.S. Attorney Preet Bharara in New York. Federal prosecutors accused the sites in criminal cases of violating laws barring online gambling.

The shutdown date, April 15, 2011, came to be known in the online gambling world as “Black Friday,” U.S. District Judge Leonard B. Sand said in his ruling Jan. 30 rejecting the players’ racketeering claims as “too attenuated” to proceed.

“It remains unclear whether the direct cause of the plaintiffs’ injuries was the decision by the U.S. Attorney’s office to temporarily shut down the Full Tilt poker website and seize the company’s assets,” Sand said, “or was instead as plaintiffs’ conversion allegations suggest, the subsequent decision by one or more of the defendants to halt player withdrawals.”

Full Tilt, which was named as a defendant in the case, was not among the five affiliates, which included Full Tilt’s software developer and its site operator, that asked for dismissal of the racketeering claim.

Sand allowed the players’ conversion claim to move forward against three of the five Full Tilt units seeking dismissal and said the players could amend their claims against the other two entities.

The case is Segal v. Bitar, 11-cv-4521, U.S. District Court, Southern District of New York (Manhattan).

Ex-FrontPoint Manager Skowron Calls Morgan Stanley No Victim

Former FrontPoint Partners LLC fund manager Joseph F. “Chip” Skowron, sentenced to five years in prison for an insider-trading scheme, says that Morgan Stanley isn’t a victim of his crimes and doesn’t deserve restitution.

Skowron, 42, who began serving his term at the Federal Correctional Institution Schuylkill in Pennsylvania last month, said that Morgan Stanley shouldn’t collect any funds under the Mandatory Victims Restitution Act.

He pleaded guilty to getting illegal tips from a former adviser for Human Genome Sciences Inc. that trials of the company’s hepatitis C drug were being halted. FrontPoint sold its stock before the announcement was made public, avoiding $30 million in losses, the U.S. said.

Morgan Stanley, which acquired FrontPoint in 2006 and spun it off in February, has submitted the largest restitution request to the court, saying it should be paid $37.4 million after sustaining “very substantial damages” as a result of Skowron’s conduct.

Morgan Stanley said he collected his salary while “acting as the classic faithless servant, engaging in and concealing his crime.” The funds sought to include at least $32 million the New York-based bank holding company paid Skowron during the four-years he committed his crimes, it said.

Skowron’s lawyer, Joshua Epstein, disputed Morgan Stanley’s assertion Jan. 30 in a court filing.

“Morgan Stanley is not a victim,” he said, “because its purported losses were not directly and proximately caused by the conduct underlying the offense of conviction.”

U.S. District Judge Deborah Batts in New York, presiding over a U.S. Securities and Exchange Commission suit against Skowron, ordered him to pay $38.2 million, which includes disgorgement, interest and civil penalties. She signed the order on Nov. 16, the SEC said.

Another federal judge in Manhattan, Denise Cote, who is presiding over the criminal case, said in November that she would rule later on how much restitution Skowron must pay his victims.

Matt Burkhard, a spokesman for Morgan Stanley, declined to comment on the filing. Peter White, a lawyer for FrontPoint, didn’t return a call seeking comment.

The case is U.S. v. Skowron, 11-cr-699, U.S. District Court, Southern District of New York (Manhattan).

Lender Processing Seeks to Dismiss Nevada AG Complaint

Lender Processing Services Inc. asked a court to throw out a consumer fraud lawsuit by the Nevada attorney general that accuses the company of falsifying foreclosure documents.

The complaint by Nevada Attorney General Catherine Cortez Masto fails to allege any document executed by subsidiaries was incorrect or caused any borrower financial harm, Lender Processing Services said in a statement yesterday.

The state’s claims “are a collection of suppositions, legal conclusions and inflammatory labels,” the company said in a court filing. The document couldn’t be immediately verified in court records.

Lender Processing Services, based in Jacksonville, Florida, provides mortgage-processing services and says about half of all U.S. mortgages by dollar volume are serviced using its loan-servicing platform.

Nevada sued the company in December, claiming that it engaged in a pattern of “falsifying, forging and/or fraudulently executing” foreclosure documents, requiring employees to execute or notarize as many as 4,000 foreclosure-related documents a day, according to a statement from the attorney general. Lender Processing Services also demanded kickbacks from foreclosure firms, the office said.

The case is Nevada v. Lender Processing Services Inc., A-11-653289-B, District Court, Clark County, Nevada (Las Vegas).

DZ Bank Sues JPMorgan and HSBC Over Mortgage Securities

DZ Bank AG sued JPMorgan Chase & Co. and HSBC Holdings Plc, accusing the banks of making false and misleading statements in connection with the sale of residential mortgage-backed securities.

DZ Bank, Germany’s largest cooperative lender, sued JPMorgan in New York State Supreme Court in Manhattan on Jan. 30, saying it bought about $85 million of the securities based on flawed offering materials. DZ Bank filed a similar suit yesterday against HSBC, Europe’s biggest bank, in the same court, over $122 million worth of the investments.

“Plaintiff did not know the true facts regarding defendants’ misrepresentations and omissions in the offering materials, and justifiably relied on those misrepresentations and omissions,” Frankfurt-based DZ Bank said in court documents.

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.

Tasha Pelio, a spokeswoman for New York-based JPMorgan, declined to comment on DZ Bank’s lawsuit. Neil Brazil, a spokesman for London-based HSBC, said the company doesn’t comment on pending litigation.

The JPMorgan case is Deutsche Zentral-Genossenschaftsbank AG v. JPMorgan Chase & Co, 650293/2012, New York State Supreme Court (Manhattan). The HSBC case is Deutsche Zentral-Genossenschaftsbank AG v. HSBC North America Holdings Inc., 650303/2012, New York State Supreme Court (Manhattan).

Second Trial in Foreign Bribe Sting Case Ends With Hung Jury

The second trial in the biggest U.S. prosecution of individuals accused of foreign bribery ended with acquittals and a hung jury.

U.S. District Judge Richard Leon in Washington yesterday declared a mistrial after jurors said they couldn’t agree on charges alleging three security industry executives planned to make payments to a federal agent posing as a representative of the west African country of Gabon.

The ruling came one day after the same jury acquitted two others in the case, including a former deputy assistant director of the U.S. Secret Service.

The three remaining defendants in the trial were John Mushriqui and his sister, Jeana Mushriqui, and Marc Morales. Each was charged with two to three counts of violating the Foreign Corrupt Practices Act, which has a maximum penalty of five years in prison. They pleaded not guilty.

Laura Sweeney, a Justice Department spokeswoman, said she couldn’t immediately comment on the ruling or whether prosecutors plan to retry Morales and the Mushriquis.

Lawyers for the three defendants didn’t immediately return e-mail messages seeking comment on the case.

The trial, which opened Sept. 28, was the second in a 22-defendant kickback conspiracy case stemming from a fake $15 million weapons deal. A trial of four others arrested in the sting ended in a mistrial in July after a jury failed to agree on a verdict.

The case is U.S. v. Goncalves, 09-cr-00335, U.S. District Court, District of Columbia (Washington).

Speeches, Testimony and Interviews

Gensler Says CFTC Will Finish Swap Rules in 2012

Commodity Futures Trading Commission Chairman Gary Gensler spoke about about his agency’s implementation of new rules on swaps and derivatives, along with William Cohan, author of “Money and Power: How Goldman Sachs Came to Rule the World” and a Bloomberg View columnist, at the John C. Bogle Legacy Forum hosted by Bloomberg Link in New York.

To hear the remarks, click here.

CFTC Should Have Power to Resolve Futures Brokers, O’Malia Says

The U.S. Commodity Futures Trading Commission should have its own authority to put futures brokers into insolvency as part of additional powers following the collapse of MF Global Holdings Ltd., Commissioner Scott O’Malia said yesterday.

Congress should grant the powers to the CFTC, the main U.S. derivatives regulator, O’Malia, one of two Republicans on the five-member commission, said at a New York Law School conference. O’Malia said he doesn’t support the concept of setting up an additional insurance fund to resolve failed firms.

The agency’s recent rulemakings to improve customer protection in derivatives markets aren’t comprehensive efforts to understand what went wrong at MF Global, O’Malia said.

“I’m puzzled by the commission’s attempts to regain public confidence through new regulation. I am particularly puzzled because the commission’s most recent rulemakings don’t even address MF Global,” he said in the speech. “I am not aware of any evidence that the MF Global shortfall was related to investments of customer funds.”

The agency on Dec. 5 unanimously approved restrictions on how customers’ funds can be invested by brokers in a measure dubbed the “MF Rule.” On Jan. 11, the CFTC voted 4-1, with O’Malia in support, to complete regulations for the segregation of customers’ funds in swaps markets.

Republicans Focus on Costs of U.S. Consumer Bureau Rules

Republican lawmakers yesterday escalated their criticism of the U.S. Consumer Financial Protection Bureau over estimates that its first rule would require almost 7.7 million employee hours of work to comply.

Senator Richard Shelby, the top Republican on the Senate Banking Committee, took aim at a rule published Jan. 20 on remittances, charging it is inconsistent with the agency’s stated goal of lowering costs for consumers.

“The bureau’s remittance transfers rule, however, suggests that lowering costs is not high on its priorities,” Shelby, from Alabama, said at a hearing with Richard Cordray, the bureau’s director.

Cordray countered that the new rule would cost 25 cents per hundred dollars of remittances, which are cash transfers across international boundaries.

“It’s a small price to pay that there have never been any consumer protections for people who send money overseas,” Cordray said. “These people deserve consumer protections.”

The consumer bureau has attempted to allay concerns about costs, particularly the regulatory burden on smaller community banks and credit unions. At a hearing in Congress last week, Cordray said the bureau was seeking public input on changes to the remittance rule to ease the impact on smaller firms.

To hear the testimony, click here.

EU Would Benefit From Australia’s Flexible CO2 Cap, Lobby Says

The European Union carbon market, where prices have plunged by half in the past year, should consider installing a more flexible cap such as that proposed in Australia, said the Carbon Market Institute.

Prices in the EU program, the world’s biggest greenhouse gas market by traded volume, dropped as the region’s sovereign-debt crisis exacerbated an oversupply through this year and beyond. The cap for 2020 was set in 2008. Under the Australian market, the annual supply of allowances will be set five years in advance.

Stagnant economic production and demand has prompted criticism that the EU’s cap isn’t protecting the climate as much as it should, said Mike Tournier, executive director of the Carbon Market Institute, a Melbourne-based lobby group that promotes emissions trading. “There are obviously market and environmental benefits of having a mechanism to review the cap and lower that over a period of time,” Tournier said Jan. 30 in a London interview.

The costs of tightening the EU’s carbon-reduction target are less than previously estimated, an analysis by the European Commission, the bloc’s regulatory arm, showed Jan. 30. A 30 percent goal would involve cutting greenhouse gases by 25 percent in the bloc, and using imported emissions-reduction credits to account for the remaining 5 percent.

Comings and Goings

Avon Executive Charles Cramb Departs Amid Bribery Probe

Avon Products Inc. said Charles Cramb, vice chairman of its developed market group, left the world’s biggest door-to-door cosmetics seller amid the company’s internal investigation into bribery.

Cramb, who had previously been chief financial officer, departed in a “personnel action” taken Jan. 29, Avon said in a regulatory filing on Jan. 30. No “final determinations” have been made in the investigation, nor have Cramb’s separation terms been decided, the New York-based company said.

The company is investigating potential violations of the Foreign Corrupt Practices Act, which outlaws bribing foreign officials. Avon also said in October that the U.S. Securities and Exchange Commission is probing the company’s foreign operations and its dealings with analysts.

Cramb is the most senior executive so far to leave in connection with the internal probe, which began in 2008 with an investigation into allegations of improper travel, entertainment and other expenses at Avon’s Chinese operations.

Subsequently, the company fired four executives including S.K. Kao, the general manager, and Jimmy Beh, finance chief of the China unit. Avon later said it was expanding the probe to other developing countries.

Last month, Avon announced that Chief Executive Officer Andrea Jung was stepping down. Jung, 53, who had run Avon since 1999, will remain chairman and work with the board to recruit a replacement, the company said Dec. 13. Jung recommended splitting the CEO and chairman roles “to better address the company’s scale and opportunities,” Jennifer Vargas, a spokeswoman for Avon, said in an interview in December.

Vargas declined to comment beyond the filing. Cramb didn’t immediately respond to a voice-mail message left for him at home.

(Adds Deutsche Boerse-NYSE merger as first item, updates Gupta, and adds Credit Suisse and UBS in Compliance Action and DZ Bank and Foreign Bribery Case in Courts. Corrects gender of HSBC spokesman in fifth paragraph of DZ Bank item under Courts.)
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