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Mortgage Accord, UBS, Gupta, Insider Trading: Compliance

Updated on

Feb. 8 (Bloomberg) -- California, New York, Nevada, Florida and Massachusetts are among states that haven’t signed a settlement with banks over foreclosure abuses, according to state officials and two people familiar with the talks.

The holdouts include some with the highest rates of foreclosures. More than 6 percent of Nevada housing units had at least one foreclosure filing in 2011, the nation’s highest rate, according to RealtyTrac. California was third-highest with more than 3 percent, said the firm, which tracks foreclosures.

California Attorney General Kamala Harris and New York Attorney General Eric Schneiderman, who have been among the most outspoken in pushing for changes to the accord, were among those who hadn’t joined as of Monday’s deadline. More than 40 states signed on, said Iowa Attorney General Tom Miller, who is helping to lead talks with the banks.

All 50 states announced almost 16 months ago they were investigating bank foreclosure practices following disclosures that faulty documents were being used to seize homes. Officials from states and federal agencies, including the Justice Department, have since negotiated terms of a proposed settlement with five banks that is said to be worth as much as $25 billion.

Massachusetts Attorney General Martha Coakley and Florida Attorney General Pam Bondi haven’t joined as of yesterday, said the two people, who declined to be identified because the matter isn’t public. Delaware and Nevada also hadn’t agreed to the settlement as of yesterday, according to their offices.

Bondi “remains engaged in the settlement discussions in order to ensure that Floridians receive their fair share in any agreement and that bank mortgage servicers are held accountable,” Jenn Meale, a spokeswoman for Bondi, said in an e-mailed statement.

Miller said federal and state officials continue to discuss the proposed deal and its terms with the banks.

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Compliance Action

UBS Says Swiss Regulator Granted Immunity in Libor Investigation

UBS AG said it was given immunity from a second antitrust regulator as part of an investigation into whether the London Interbank Offered Rate, or Libor, was manipulated.

The bank has conditional immunity from the Swiss Competition Commission regarding submissions for Yen Libor, Euroyen Tokyo Interbank Offered Rate, or Tibor, and Swiss franc Libor rates, the bank said in a regulatory filing yesterday. UBS was granted similar immunity by the U.S. Department of Justice in regards to Yen Libor and Euroyen Tibor because it is cooperating with the probe, the Zurich-based bank said last year.

UBS won’t be prosecuted, fined, or face other sanctions from the Swiss regulator if it continues to cooperate, it said. The regulator said last week that it was investigating 12 banks, including UBS and Credit Suisse Group AG, over how the benchmark for about $350 trillion of financial products is set.

The U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission, the Justice Department, Japan’s Financial Supervisory Agency and the U.K. Financial Services Authority are investigating whether there were attempts to manipulate Libor rates. European Union antitrust regulators are also examining Libor rates.

Libor is derived from a survey of banks conducted each day on behalf of the British Bankers’ Association in London.

Former Goldman Sachs Director Gupta Trial Delayed to May 21

The April trial of Rajat Gupta, the former Goldman Sachs Group Inc. director accused of giving inside information to fund manager Raj Rajaratnam, was delayed six weeks so his lawyers could prepare a defense on new charges Gupta passed tips about earnings of Goldman Sachs in 2007 and Procter & Gamble Co. in 2009.

In a hearing in Manhattan federal court yesterday, Gupta, 63, pleaded not guilty to criminal counts in a superseding indictment filed last week. The latest charges broaden the prosecutors’ description of the insider-trading scheme, saying it began in March 2007, not in 2008, as the U.S. alleged when Gupta was charged in October.

U.S. District Judge Jed Rakoff moved the trial to May 21 from April 9 after Gary Naftalis, an attorney for Gupta, asked for a delay.

Gupta was previously charged with five counts of securities fraud and one count of conspiracy to commit securities fraud. Prosecutors added a securities fraud charge based on a March 12, 2007, conference call, where people discussed Goldman Sachs’s pending earnings announcement.

“The superseding indictment, does, as a practical matter, give the defendant more to address than they previously contemplated,” Rakoff said in granting the trial’s delay.

Naftalis declined to comment on yesterday’s hearing.

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

Four Accused of Running Insiders’ ‘Criminal Club’ Indicted

Four men arrested last month for allegedly participating in a “criminal club” of inside traders that reaped almost $62 million from Dell Inc. shares were indicted by a federal grand jury in Manhattan.

One trade earned a $53 million illegal windfall for Level Global Investors LP co-founder Anthony Chiasson and his fund, Manhattan U.S. Attorney Preet Bharara alleged. The ring, which involved five hedge funds and investment firms, is the largest identified by the U.S. to date tied to a single stock, federal authorities said.

Chiasson; Todd Newman, a portfolio manager formerly at Diamondback Capital Management LLC; Jon Horvath, a hedge fund analyst in New York; and Danny Kuo, a fund manager for Whittier Trust Co. in South Pasadena, California, were all named yesterday in an indictment filed in federal court in New York. They were charged in total with one count of conspiracy to commit securities fraud and nine counts of securities fraud.

After a federal grand jury returned the indictment, the case was assigned to U.S. District Judge Richard Sullivan.

Illegal profits earned from the scheme were almost of the same “magnitude of fraud we proved in the Galleon Group insider trading scheme,” Bharara said.

A five-year insider-trading probe by Bharara’s office and the Federal Bureau of Investigation in New York called “Perfect Hedge” has resulted in charges against 63 people, said Janice Fedarcyk, head of the FBI’s New York office.

The criminal case is U.S. v. Newman, 12-cr-121, U.S. District Court, Southern District of New York (Manhattan). The civil case is Securities and Exchange Commission v. Adondakis, 12-409, U.S. District Court, Southern District of New York (Manhattan).

U.S. WTO Case Against China ‘Major Reason’ for Citibank Nod

A World Trade Organization probe into the legality of Chinese rules on foreign companies issuing credit cards is a “major reason” Citigroup Inc. was given permission to do so, said Stuart Eizenstat, former deputy Treasury secretary under President Bill Clinton.

New York-based Citigroup announced on Monday that it will become the second foreign bank, and the first western one, allowed to issue its own credit card in China. The news came about 10 months after the WTO said it would investigate a U.S. complaint about Chinese curbs on credit-card payment processing.

China requires foreign banks to “co-brand” with Chinese operators to issue credit cards in yuan and to execute payments through China UnionPay Data Co. The U.S. says the rules contravene a pledge the world’s most populous nation made when it joined the Geneva-based WTO in 2001 to open its debit and credit-card markets to foreign processors by the end of 2006.

“I have no doubt that the WTO case is a major reason why China has issued this license,” Eizenstat, a partner with the Covington & Burling law firm in Washington who was also President Jimmy Carter’s chief domestic policy adviser, said in an e-mailed response to questions. “By this action, they are trying to take the ‘sting’ out of any adverse ruling.”

Nkenge Harmon, a spokeswoman at the U.S. Trade Representative’s office in Washington, said yesterday that China’s decision on Citibank “has no bearing on the U.S. WTO claims.”

Stephen Thomas, a Citibank spokesman in Shanghai, said the company “is in a preparatory phase having received regulatory approval and will reveal more details about our China cards business in due course.” He declined to comment when asked about the processing of transactions or say what conditions Citibank accepted to be permitted to issue credit cards.

Credit cards are becoming more popular among China’s 1.3 billion people as rising incomes stoke consumer spending. Chinese banks issued 268 million credit cards as of Sept. 30, up 20 percent from a year earlier, according to the central bank.

Compliance Policy

Fund Industry Rejects SEC’s Proposed Money Market Rule Changes

The mutual-fund industry rejected plans for new rules governing money-market funds, escalating a three-year confrontation with regulators over how to make the investments safer.

Two proposals being worked on by the SEC’s staff “are neither constructive nor likely to make financial markets more resilient,” Paul Schott Stevens, president and chief executive officer of the Investment Company Institute, said yesterday in a statement posted on the group’s website.

The statement marks a shift to a more confrontational approach in a debate that has lasted for more than three years. The trade group said previously it might accept one of the plans the SEC’s staff is likely to propose before the end of March. With new details of the plans emerging last month, the ICI is now on record opposing both.

The SEC’s first proposal would call for money funds to abandon their traditional $1 share price, adopting a so-called floating net-asset value. Industry executives have fought the idea since it was floated in January 2009 by a think tank headed by former Federal Reserve Chairman Paul Volcker.

The second plan would require funds to build a capital cushion designed to absorb potential losses and hold back at least 3 percent of client redemptions for 30 days.

The ICI, whose members include Fidelity Investments in Boston and New York-based BlackRock Inc., had engaged in talks with the SEC over versions of a capital cushion plan.

The SEC enacted new rules in 2010 in an attempt to prevent future runs and government bailouts. Those changes included liquidity requirements, shorter maturity limits and enhanced disclosure mandates.

As a second step, SEC Chairman Mary Schapiro “is advocating structural reforms to money-market funds to address their susceptibility to runs and provide a buffer against losses,” John Nester, an agency spokesman, said yesterday in an e-mailed statement.

LightSquared Asks FCC to Set Technical Standards for GPS Devices

Philip Falcone’s LightSquared Inc. asked U.S. regulators to develop technical standards for the global-positioning system receivers at the crux of a battle over the venture’s proposed nationwide wireless service.

GPS devices pick up signals from “other people’s licensed spectrum” causing interference concerns that could be eliminated by setting an industry standard, Jeffrey Carlisle, executive vice president, said in a news conference yesterday. The company filed a petition with the Federal Communications Commission, Carlisle said.

LightSquared has sought final FCC clearance for its network since late 2010 against opposition from GPS makers and users who say the service would disrupt navigation gear in cars, tractors and planes. The Reston, Virginia-based company says GPS makers should have planned to accommodate LightSquared’s use of airwaves near those occupied by navigation devices.

The FCC said in an order released April 6 that existing users of airwaves share responsibility for protecting against interference. The agency may consider establishing standards setting receivers’ “ability to reject interference from signals outside their allocated spectrum,” the agency said in the order.

Tammy Sun, a spokeswoman for the FCC, declined to comment yesterday.

‘Perfect World’ Eludes Regulators in Aligning Global Swaps Rules

The potential for U.S. and foreign regulations to reach across national borders and create overlapping or conflicting rules is gaining urgency as global authorities seek to complete rules this year to prevent a repeat of the 2008 credit crisis.

The U.S. is facing increasing criticism from Canadian, British and European Union regulators over the possibility that the Volcker rule ban on proprietary trading would restrict foreign sovereign debt markets while exempting U.S. government debt. At the Commodity Futures Trading Commission, meanwhile, regulators are facing pressure from JPMorgan Chase & Co., Barclays Capital and foreign regulators to limit the international reach of Dodd-Frank Act derivatives regulations.

“There is a perfect world somewhere where there is totally consistent financial-services regulation from one end of the globe to the other, but we’re a long way from that,” Representative Jim Himes, a Connecticut Democrat and co-author of legislation defining the reach of Dodd-Frank derivatives measures, said in a telephone interview. “At the end of the day, if our regulation is more stringent, there will be a natural competitive disadvantage.”

The House Financial Services Committee today is holding a hearing on the international reach of the 2010 Dodd-Frank Act. JPMorgan Associate General Counsel Don Thompson said in remarks prepared for the hearing that the rule would have a “severe” impact if it affects the bank’s foreign subsidiaries without reaching overseas rivals.

“Although this varies from quarter to quarter, we often derive as much as of our revenues from our global operations as from those in the United States,” Thompson said.

U.S. and foreign regulators, who say they are working to coordinate rules, haven’t reached consensus and in some cases haven’t yet proposed policies to seek public comment before adopting final measures. The Volcker rule begins to take effect in July, while U.S. regulators are already more than eight months past Dodd-Frank’s deadline for new derivatives rules.

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JPMorgan Reaches Tentative Settlement in AFTRA Pension Suit

JPMorgan Chase & Co. and the American Federation of Television and Radio Artists Retirement Fund reached an “agreement in principal” to settle a suit claiming losses from the bank’s securities lending program.

The settlement is to be announced on the plaintiffs’ website, according to a statement provided yesterday by Stephanie Cirkovich, a spokeswoman for the federal court in Manhattan, where the AFTRA fund filed its suit.

“The parties are drafting a formal settlement agreement, to be submitted to the court for approval within approximately three weeks,” according to the statement. “The settlement terms will remain confidential until the agreement is submitted to the court. The settlement is subject to the court’s approval and to certain other conditions.”

The fund sued in 2009, claiming it lost money that New York-based JPMorgan invested for it in medium-term notes issued by Sigma Finance Corp., a structured investment vehicle that collapsed in 2008.

The case is Board of Trustees of the AFTRA Retirement Fund v. JPMorgan Chase Bank NA, 09-cv-686, U.S. District Court, Southern District of New York (Manhattan).

Hong Kong Regulator Says It Should Be Able to Redress Investors

Hong Kong’s securities regulator, whose attempt to ban New York-based hedge fund Tiger Asia Management LLC last year from trading was blocked by a court, said it should have the right to redress investors.

“If private individuals can seek civil remedies, why does the SFC have to wait?” Benjamin Yu, a lawyer representing the Securities and Futures Commission, told Hong Kong’s Court of Appeal yesterday.

The regulator is trying to overturn a court ruling that it lacks the power to unwind Tiger Asia’s transactions in the market and ban the hedge fund and employees from trading in Hong Kong before proving insider trading allegations in a tribunal or criminal court.

The SFC alleges the hedge fund traded on inside information from bankers arranging placements of China Construction Bank Corp. and Bank of China Ltd. shares in 2008 and 2009, pocketing HK$38.5 million ($4.9 million). Tiger Asia, which has no employees and physical presence in Hong Kong, denied the allegations in an Oct. 12, 2010 letter to investors.

The legal battle, which both the SFC and Tiger Asia’s founder Bill Hwang have pledged to take to Hong Kong’s top court, will determine whether the agency can sue independently for relief without working through government departments to bring a criminal case or civil inquiry. Tiger Asia’s lawyers argue the regulator can’t use a provision for freezing assets to bring its own lawsuit against them.

“It was never intended that the SFC should have an unchecked ability to seek a contravention of market misconduct,” Charles Sussex, representing Tiger Asia and its officers, argued before the court yesterday.

The regulator has also invoked the same law in cases against Hontex International Holdings Co., as well as former executives of China Forestry Holdings Ltd. and Gome Electrical Appliance Holding Ltd.

The case is Securities and Futures Commission and Tiger Asia Management LLC, Sung Kook Hwang Bill, Raymond Park, William Tomita, CACV178/2011 in the Hong Kong Court of Appeal.

Wall Street Groups Seek to Delay CFTC Rule Limiting Speculation

Two Wall Street groups sought to have a federal judge delay a U.S. Commodity Futures Trading Commission rule that limits speculation, saying the regulation is already imposing “significant, irreversible costs.”

The International Swaps and Derivatives Association Inc. and Securities Industry and Financial Markets Association filed the request yesterday with U.S. District Judge Robert Wilkins in Washington, urging him to put the rule on hold while he considers their legal challenge.

“Compliance efforts will include restructuring of corporate relationships and divestment -- irreversible changes in ownership,” Eugene Scalia, a lawyer for the groups, said in the filing. “These costs are being incurred now and will continue to rise absent a preliminary injunction, and they will be impossible to recoup if the rule is invalidated -- as it likely will be.”

The groups, in one of the financial industry’s highest-profile efforts to weaken 2010’s Dodd-Frank law, filed lawsuits in two federal courts in Washington in December challenging the rule setting caps on the number of contracts a trader can have.

The groups made an almost identical request to delay the rule with the U.S. Appeals Court in Washington, which dismissed the case after ruling it must first be considered by the district court.

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. U.S. Commodity Futures Trading Commission, 11-02146, U.S. District Court, District of Columbia (Washington).

Deutsche Bank Won’t Face Mortgage-Bond Fraud Suits, Judge Rules

Deutsche Bank AG won dismissal of two lawsuits in which investors in residential mortgage-backed securities accused the bank of selling them securitized loans it internally disparaged as “crap.”

U.S. District Judge Jed Rakoff in Manhattan, in an order filed yesterday, dismissed two separate lawsuits by Brussels-based Dexia SA and Teachers Insurance and Annuity Association of America. The investors “in certain key respects” failed to provide sufficient particular facts to support their fraud allegations, the judge said.

Rakoff said he would issue a more specific written opinion at a later date. The investors could amend their claims in so far as these relied on loans sponsored by Deutsche Bank Structured Products, the judge said.

Gerald Silk, a lawyer representing the investors in both cases, didn’t immediately return a call after regular business hours yesterday seeking comment on the ruling.

The cases are Dexia v. Deutsche Bank, 11-05672, and Teachers Insurance and Annuity Association of America v. Deutsche Bank, 11-06141, U.S. District Court, Southern District of New York (Manhattan.)

Speeches and Interviews

Finra Examines CDs Tied to Derivatives as Sales Surge to Record

The Financial Industry Regulatory Authority is examining sales of certificates of deposit tied to derivatives after banks sold a record number of the investments last year.

The industry-backed regulator wants to make sure the so-called structured CDs, where principal is protected by the Federal Deposit Insurance Corp., are properly understood by investors given their increasing complexity and lengthening maturities, said Maria Rabinovich, a lawyer in Finra’s risk division. Rabinovich, who spoke Monday after a session on structured product law and regulation at Morrison & Foerster LLP’s office in New York, declined to comment further.

The watchdog issued an alert on “complex products” in January, without referring to the CDs. The notice avoided defining what constitutes such products, while outlining a few examples, such as those where information is not readily available about the assets they’re tied to, and so-called “steepeners,” which typically bet on the shape of the Treasury yield curve.

Demand for derivative-linked certificates of deposit has risen as the Federal Reserve holds interest rates below 0.25 percent for the third straight year. Yields on five-year, fixed-rate CDs have declined to 1.55 percent, the lowest level since at least June 1998, according to data from

Comings and Goings

Rajaratnam Judge Holwell Leaves Bench to Start Own Law Firm

The judge who sentenced Raj Rajaratnam to 11 years in prison for insider trading after a trial in which he often closed proceedings and sealed files used a public relations firm to announce his resignation.

Richard Holwell, 65, revealed his departure yesterday in a press release advertising the creation of his new Manhattan law firm, Holwell Shuster & Goldberg. The announcement was circulated by Hellerman Baretz Communications LLC.

In response to a question last week on reports he planned to leave the judiciary, Holwell said he told a spokeswoman for the U.S. District Court in Manhattan that it’s not his practice “to talk about my future plans.”

“I gave the chief judge a heads-up a week or two ago,” Holwell said yesterday in an interview, referring to U.S. District Judge Loretta Preska. “I didn’t think it was appropriate to ask the court to issue a press release,” Holwell said. “I thought I should be the guy to do it.”

Mary Beth Pratt, a Philadelphia-based law firm consultant, said a judge issuing his own press release is an unusual move that is nevertheless within the bounds of ethics rules.

“It’s standard operating procedure for lawyers today,” Pratt said in an interview. “What makes this different is that he’s a judge on such a major case setting up his own shop.”

The announcement comes a day after Holwell published his last ruling in the Rajaratnam case, a 39-page opinion giving the reasons for how he calculated the applicable federal sentencing guidelines. The hedge fund manager’s sentence was the longest in U.S. history for insider trading.

On the same day Holwell announced his departure, Weil, Gotshal & Manges LLP said that another figure from the Rajaratnam case, Christopher Garcia, will join the firm as a partner. As chief of the Securities and Commodities Fraud Task Force in the Manhattan U.S. Attorney’s office, Garcia supervised the prosecution of Rajaratnam and others charged in the government’s investigation of insider trading at hedge funds.

Former CFTC Commissioner Dunn Joins Patton Boggs Law Firm

Michael V. Dunn, former member of the U.S. Commodity Futures Trading Commission, has joined Patton Boggs LLP, a Washington law and lobbying firm.

Dunn is a senior policy adviser at Patton Boggs, the firm announced yesterday. He was a CFTC commissioner for about seven years before stepping down on Oct. 24. The CFTC, the main U.S. derivatives regulator, is leading efforts to complete Dodd-Frank Act rules by 2013.

Patton Boggs represents the Depository Trust and Clearing Corp., which collects data on derivatives transactions, and the Wholesale Markets Brokers’ Association, Americas, an association of derivatives trading venues, among other clients, according to U.S. Senate records.

Dodd-Frank, the financial-rule overhaul enacted in 2010, is intended to reduce risk and boost transparency in the swaps market after largely unregulated trades helped fuel the 2008 credit crisis.

To contact the reporter on this story: Ellen Rosen in New York at

To contact the editor responsible for this report: Michael Hytha at

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