MF Global Memo, High-Frequency Abuse, Typo Case: Compliance

Jon S. Corzine, MF Global Holding Ltd.’s former chief executive officer, may face potential legal liability if investigators show he knew customer money might be used when he ordered $200 million transferred to a U.K. account as his brokerage neared collapse, former prosecutors said.

The ex-Goldman Sachs Group Inc. co-chairman gave “direct instructions” to move money from a U.S. account to meet an overdraft with JPMorgan Chase & Co. just days before MF Global’s bankruptcy, according to a memo by congressional investigators. Such accounts may have contained assets belonging to both customers and MF Global.

The U.S. Department of Justice and federal regulators are investigating the firm’s Oct. 31 collapse. Corzine, a Democrat from New Jersey who served in the U.S. Senate and as governor, told Congress last year he never directed customer funds be used improperly. Though showing he deliberately used customer money would be the key to a criminal case, former prosecutors said Corzine, who hasn’t been charged with any wrongdoing, could be deemed liable in civil cases for misuse of customer money simply for ordering the hole in JPMorgan’s account plugged, if it turns out customer funds were used.

Andrew Levander, a lawyer for Corzine, didn’t return a call or e-mail after normal business hours seeking comment on the probe. A congressional hearing on the issue is set for this week.

MF Global and its brokerage sought Chapter 11 bankruptcy protection in New York after a $6.3 billion bet on the bonds of some of Europe’s most indebted nations prompted regulator concerns and a credit-rating downgrade. Corzine, 65, quit MF Global Nov. 4. The bankruptcy trustee overseeing the liquidation of the company’s brokerage subsidiary has estimated a $1.6 billion shortfall between customer claims and assets available.

Edith O’Brien, a treasurer for New York-based MF Global, said in an e-mail quoted in the Congressional memo that the $200 million transfer was “Per JC’s direct instructions,” according to a copy of the memo obtained by Bloomberg News.

The e-mail, dated Oct. 28, was sent three days before the company collapsed, according to the document. The account may have contained both client and company funds, the memo states.

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Compliance Policy

Commodity Brokers Get Shelter From EU’s Shift to Exchanges

Commodity brokers, facing a loss of business from a shift of derivatives trading onto exchanges, are seeking a reprieve under European proposals letting them maintain control of less transparent niche markets.

Energy derivatives that don’t trade continuously, such as swaps and options in Dated Brent crude and carbon permits, should be treated differently than other asset classes such as equities, Alex McDonald, chief executive of the London Energy Brokers’ Association, said in an interview last month. Rules being considered by European lawmakers will help determine which contracts are traded through Organized Trading Facilities, or OTFs, where brokers wouldn’t need to disclose bids and offers.

The global credit freeze and record oil prices of 2008 prompted regulators around the world to shift more trade onto exchanges such as ICE Futures Europe in London and Nord Pool ASA in Oslo, increasing transparency. The rules for OTFs would allow brokers including GFI Group Inc. to retain trades that might have moved to the more-regulated markets. The exchanges oppose this, saying they’ll be shut out of the $2.6 trillion non-exchange commodity derivatives business.

As the rules stand, derivatives contracts, including those for energy, will be divided across three categories and traded on different platforms depending on how active, or liquid they are, according to proposed amendments to the EU’s Markets in Financial Instruments Directive, or MiFID.

Contracts may also be traded through two other types of venue: exchanges and so-called multilateral trading facilities, or MTFs, where pre-trade disclosure is required.

EU legislators have yet to detail the rules.

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Traders May Face Nordic-Style EU Fees for Canceled Orders

High-frequency traders and other investors may face punitive fees when they create market volatility by placing excessive numbers of canceled orders under European Union plans to clamp down on market abuse.

The possible fees would be modeled on a standard introduced last year on Nasdaq OMX Group Inc. exchanges in Nordic countries, said Arlene McCarthy, a member of the European Parliament, who’s seeking to add the measure to a draft law by EU Financial Services Commissioner Michel Barnier.

McCarthy, who’s in charge of preparing parliament’s negotiating position on Barnier’s market-abuse proposals, said in an interview that abuses should be curbed by using a fee structure.

High-frequency traders came under increased regulatory scrutiny following the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points. While such trades didn’t trigger the plunge, they did intensify the resulting “liquidity crisis,” the International Organization of Securities Commissions said in a report last year.

Strategies used by high-frequency traders can lead to a “very high” number of canceled orders, IOSCO said. Such high cancellation rates have been linked with possible “abusive and manipulative practices,” including so-called layering, in which traders place large orders they have no intention of allowing to go through.

McCarthy’s proposal is that traders face fees if they exceed a pre-agreed ratio of canceled orders against transactions completed.

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U.K. Banks Must Test Retail Structured Products for Fairness

Firms must stress-test structured financial products to make sure they are fair before selling them to retail customers, the U.K. Financial Services Authority said.

Banks should probe their structured products for design flaws and compare returns for customers against other investment types, Britain’s financial watchdog said in a report on its website March 23. Products should be designed “that meet the target audience’s needs, rather than merely contributing towards the firm’s bottom line.”

The FSA has increased pressure on banks to be transparent in their dealings with retail customers. Barclays Plc was fined 7.7 million pounds ($12.2 million) in January last year for failing to disclose risks in two funds it sold to thousands of retirees.

Structured products are fixed-term investments that have a return rate derived from a separate measure, such as a financial index or basket of shares.

Compliance Action

ECB Amends Rule on Bank Bonds Guaranteed by Program States

The European Central Bank said euro-area national central banks are no longer obliged to accept as collateral bank bonds guaranteed by member states receiving aid from the European Union and International Monetary Fund.

Banks in the three bailed-out countries -- Greece, Portugal and Ireland -- that have difficulty pledging adequate collateral for ECB loans can use bonds they have issued as long as they are guaranteed by their governments. While the ECB’s decision, taken on March 21 and activated March 23, means other euro-area central banks don’t have to accept those bonds as collateral, the banks typically seek the loans via their own central banks.

The ECB has loosened its collateral criteria and loaned banks more than 1 trillion euros ($1.3 trillion) for three years to fight off a credit crunch, prompting Bundesbank President Jens Weidmann to write a letter to ECB President Mario Draghi warning about the risks the central bank is taking. Weidmann has also called on policy makers to start planning for the eventual withdrawal of the emergency lending measures.

In the amendment published March 23, the ECB said central banks are also not obliged to accept bank bonds guaranteed by a member state “whose credit assessment does not comply with the Eurosystem’s benchmark for establishing its minimum requirement for high credit standards.”

Coutts Fined $13.9 Million by FSA on Money Laundering Failures

Coutts & Co., a private bank owned by Royal Bank of Scotland Plc, was fined 8.75 million pounds ($13.9 million) by the U.K. financial watchdog for failing to put in place effective money-laundering controls.

The lapses at the bank were “serious, systemic and were allowed to persist for almost three years,” the Financial Services Authority said in a statement on its website.

Previously, Coutts was fined 6.3 million pounds by the FSA in November for not warning clients about the risks of investing in a bond fund overseen by American International Group Inc.

The FSA visited Coutts in October 2010 as part of a wider review of banks’ anti-money laundering measures. The bank was found to have inadequate controls in around three quarters of the “high risk customer files” reviewed by the supervisor.

“We remain committed to ensuring that our systems and controls are robust and counter the risk of financial crime in all the markets in which we operate,” Rory Tapner, chief executive officer at RBS’s wealth division, said in an e-mailed statement on the FSA penalty.

BayernLB Deal Negotiations Continue, German Savings Banks Say

Bavaria’s savings banks said that talks are continuing on a deal to restructure Bayerische Landesbank, Germany’s second-biggest state-owned lender, in return for European Union approval of its bailout.

German savings banks have backtracked on an agreement over their level of contributions to a restructuring plan that would have included the sale of BayernLB’s LBS Bayern mortgage lending unit, a person familiar with the matter said March 24.

Their withdrawal might endanger a deal with EU Competition Commissioner Joaquin Almunia, who told the Sueddeutsche Zeitung earlier this month that EU officials were close to an agreement with the bank’s owners, which include the German state of Bavaria, on the terms for EU approval of BayernLB’s bailout.

Prudential More Likely to Leave U.K. After E-mail, Oriel Says

Prudential Plc may be more likely to quit London after showing its frustration with the Financial Services Authority in an e-mail leaked to a British newspaper, according to Oriel Securities Ltd.

Barry O’Dwyer, the insurer’s U.K. deputy chief executive officer, said regulation in its home market was often driven by “the personal prejudices of key individuals,” in an e-mail to staff published in the Sunday Telegraph yesterday. Some of the FSA’s planned rules for insurers are “ludicrous,” he wrote.

Prudential, which gets 75 percent of its revenue from Asia and the U.S., threatened to relocate its domicile outside the U.K. this year, saying the European Union’s solvency rules may hurt its international businesses. Chief Executive Officer Tidjane Thiam gained support from Prime Minister David Cameron and Mayor Boris Johnson, who said they would lobby regulators to change the rules.

O’Dwyer sent the “light-hearted” message as part of his weekly correspondence with employees, Prudential, Britain’s biggest insurer by market value, said in an e-mailed statement.

“Clearly, in this case his attempt to inject humor into his communication was misjudged,” Prudential said. “We work constructively and positively with government ministers and regulators on a wide range of issues to safeguard the interests of our seven million U.K. customers.”

Joseph Eyre, a spokesman for the FSA, declined to comment.


JPMorgan Wins Case Against Trader Over Decimal Point Dispute

JPMorgan Chase & Co. doesn’t have to pay a trader 580,000 pounds ($921,500) after a missing decimal point in an employment contract led him to believe he would be paid 10 times what was actually offered, a London court ruled.

Kai Herbert, a Switzerland-based currency trader, sued JPMorgan for lost earnings claiming he signed a contract to relocate to Johannesburg for a 24 million rand ($3.1 million) salary. JPMorgan said there was a typographical error and the figure should have been 2.4 million rand.

Herbert resigned from UBS AG in June 2010 following the offer from JPMorgan to relocate to Johannesburg. Herbert didn’t report for work after discovering the discrepancy and JPMorgan rescinded the employment offer in December 2010.

He has been unemployed since, other than eight months at Credit Suisse Group AG, where he was fired in a round of layoffs in November. Banks globally have cut about 196,000 jobs since the start of 2011, according to data compiled by Bloomberg.

The bank said Herbert could have mitigated his lost earnings by taking the position at the New York-based bank.

Kate Haywood, a spokeswoman at JPMorgan, declined to comment. Herbert’s lawyer, Dale Langley, declined to comment as did JPMorgan lawyer Stefan Martin.

The case is Herbert v. JPMorgan, High Court of Justice Queen’s Bench Division, HQ11X02595.

Ex-Citigroup ‘Ponzi’ Banker’s Lifetime Hong Kong Ban Overturned

Former Citigroup Inc. employee Ramesh Sadhwani, accused of running a Ponzi scheme while at the bank, had a lifetime ban from Hong Kong’s securities industry overturned on judicial review.

Alan Wright, a chairman of the city’s Securities and Futures Appeal Tribunal and a High Court judge, substituted a 10-year ban on Sadhwani, according to a ruling posted on the Website of the appeals body March 22.

Hong Kong’s Securities and Futures Commission sought the lifetime ban after Sadhwani was terminated by Citigroup in 2009 for misrepresenting guaranteed returns on investments and breaching internal bank policies, according to the ruling.

A 10-year ban is “appropriate,” Wright wrote.


Chilton Says CFTC May Act on Futures Rules by Summer

Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission, talked about the investigation into bankrupt commodities broker MF Global Inc. and prospects for regulations that would place tighter restrictions on firms’ use of investor funds.

Chilton spoke with Scarlet Fu on Bloomberg Television’s “InBusiness With Margaret Brennan.”

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Schmitz Says State Will Have to Fund Bafin, Handelsblatt Reports

Andreas Schmitz, president of the Bdb Association of German Banks, said the federal government must fund financial supervisor Bafin itself if it wants bank representatives to leave the watchdog’s board, Handelsblatt reported, citing an interview.

Comings and Goings

CFTC Deputy Economist Moser Leaving for American University

Jim Moser, the deputy chief economist at the U.S. Commodity Futures Trading Commission, this month will leave the agency, which is in charge of writing new rules for the global swaps market under the Dodd-Frank Act.

Moser, who analyzed Dodd-Frank rules restricting speculation in oil and other commodities, as well as the costs and benefits of regulations, will join American University in Washington to direct the master’s in finance program, he said in a telephone interview March 23.

Moser, who was acting chief economist in 2010, was previously a research officer at the Federal Reserve Bank of Chicago and a senior director at the Chicago Mercantile Exchange, according to the CFTC.

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