Cutting Ratings Reliance, CDS Probe, FDIC Suit: Compliance

Denmark, which holds the rotating European Union presidency, said it won backing from member states in the 27-member bloc to reduce the dominance of rating companies in financial markets.

The new rules will mean ratings better reflect credit risks and will cut reliance on ratings for both investors and as a part of financial regulation, according to a statement on the website of the Business Ministry in Copenhagen yesterday. The agreement will also make it easier for investors and issuers to demand compensation from ratings companies that have breached the rules, the ministry said.

In Denmark, banks have started firing Moody’s Investors Service, after winning assurances from some of the country’s biggest investors that the opinions of ratings companies hold limited value. Nykredit A/S, Denmark’s biggest mortgage lender and Europe’s largest issuer of covered bonds backed by home loans, terminated its contract with Moody’s last month, citing its “volatile” views. Danske Bank A/S Chief Executive Officer Eivind Kolding in an interview this month criticized Moody’s view on systemic support, less than a year after the bank’s mortgage arm fired the company.

The Danish EU presidency will now start talks with the European Parliament on the matter, the ministry said.

Compliance Policy

U.K. Working With U.S. on Bank Crisis Plans, BoE’s Gracie Says

U.K. regulators are working on bank crisis plans with U.S. counterparts, said Andrew Gracie, the director of the Bank of England’s special resolution unit.

The plans, which may include enforced losses for bondholders in the event of a banking crisis, “span many markets jurisdictions and currencies,” Gracie said in an e-mailed statement.

Mandatory losses for creditors of failing banks “may provide a viable strategy for the resolution of complex groups,” Gracie said.

The European Union is seeking to harmonize legal structures for resolving crisis-hit banks across its 27 jurisdictions. Michel Barnier, the EU’s financial services chief, has said that he will publish plans at “the beginning of June” to empower regulators to writedown unsecured senior creditors at failing banks

The Financial Times reported on the Gracie comments May 20.

Compliance Action

Swaps Clearinghouses Said Set for Systemic Designation

A panel of U.S. regulators plans to designate some swaps clearinghouses as systemically important as soon as today, putting them under heightened supervision, according to two people familiar with the officials’ work.

Clearinghouses are required to process most swaps in the $708 trillion over-the-counter derivatives market under provisions of the 2010 Dodd-Frank Act. The designation will be the Financial Stability Oversight Council’s first delineation of which companies aside from banks would threaten the financial system in the event of a failure. The panel is next scheduled to meet today.

The panel of regulators, known as FSOC, also is in the process of determining which non-bank financial companies are systemic. Treasury Secretary Timothy F. Geithner is the panel’s chairman. U.S. bank holding companies with assets of $50 billion or more are automatically deemed systemically important.

An administration official told reporters at a briefing that at today’s meeting FSOC will discuss designation of financial market utilities such as swaps clearinghouses, as well as the JPMorgan Chase & Co. trading loss of $2 billion and the proposed Volcker rule.

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Nasdaq CEO Blames Software for Delayed Facebook IPO Trading

Nasdaq OMX Group Inc., under scrutiny after shares of Facebook Inc. were plagued by delays and mishandled orders on its first day of trading, blamed “poor design” in the software it uses for driving auctions in initial public offerings.

Computer systems used to establish the opening price were overwhelmed by order cancellations and updates during the “biggest IPO cross in the history of mankind,” Nasdaq Chief Executive Officer Robert Greifeld, 54, said May 20 in a conference call with reporters. Nasdaq’s systems fell into a “loop” that prevented the second-largest U.S. stock venue operator from opening the shares on schedule following the $16 billion deal.

While the errors were resolved and Facebook completed its offering, the day was another setback for equity exchanges trying to erase the memory of the botched IPO in March by Bats Global Markets Inc., another bourse owner. Nasdaq’s issues contributed to disappointment among investors as Facebook’s stock closed up 0.6 percent after rising 18 percent earlier.

The U.S. Securities and Exchange Commission said it will review the trading. Jonathan Thaw, a spokesman for Menlo Park, California-based Facebook, declined to comment.

Nasdaq will use an “accommodation pool” to pay back investors that should have received executions in the opening auction, based on the decisions of a third-party reviewer, Greifeld said. It may total $13 million, he said.

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Nasdaq OMX Group Inc. said it will no longer accept modifications to orders during the final stages of initial public offering auctions, according to an e-mailed statement.

King’s Crisis Response to Face Scrutiny After U.K. Lawmaker Push

Bank of England Governor Mervyn King’s response to the financial crisis will be scrutinized after lawmakers pushed for an inquiry as the central bank prepares to take over financial regulation.

The Court, the Bank of England’s governing body, ordered a review of some central bank actions, including its conduct after the collapse of Lehman Brothers Holdings Inc. The investigation will cover the Emergency Liquidity Assistance program in 2008 and 2009, the framework for providing liquidity to banks, and the Monetary Policy Committee’s forecasting capability, the Court in London said yesterday.

The move follows a push by a cross-party committee of lawmakers for an examination of the central bank’s performance as Parliament debates a bill to give it new powers. The panel’s inquiry into accountability at the central bank included calls for lawmakers to have veto power over the appointment or dismissal of the governor. Chancellor of the Exchequer George Osborne, who will appoint King’s successor when he retires in June 2013, rejected the recommendation.

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Credit-Default Swaps Antitrust Probe Into Markit Said to Widen

A U.S. Justice Department antitrust investigation into data provider Markit Group Ltd. is expanding to include other companies in the credit-default swap market, according to three people familiar with the matter.

Investigators are asking market participants about firms that are owned by Wall Street’s largest banks and whether that presents conflicts of interest, said the people, who spoke on condition of anonymity. The Justice Department is also asking about Tradeweb LLC and The Clearing Corp., which was bought by Atlanta-based Intercontinental Exchange Inc., or ICE, in 2009.

The Justice Department probe of potentially anticompetitive practices at Markit began in 2009.

“We continue to cooperate and assist the Department of Justice in its review of the credit derivatives and related markets,” Alex Paidas, a spokesman for London-based Markit Group, said in an e-mailed statement. Clayton McGratty, a Tradeweb spokesman, declined to comment. Lee Underwood, an ICE spokesman, didn’t return a call seeking comment.

Markit provides derivative and bond data to its customers. Its owners include JPMorgan Chase & Co., Bank of America Corp., Royal Bank of Scotland Group Plc and Goldman Sachs Group Inc.

The recent Justice Department questions focused on Markit’s influence in providing services to the credit-swaps market, according to two people interviewed by investigators.

Bloomberg LP, the parent company of Bloomberg News, competes with Tradeweb, Markit and Thomson Reuters in providing some services.

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Chipotle May Be Fined After SEC Worker Probe, Miller Tabak Says

Chipotle Mexican Grill Inc. may incur legal fees or fines related to a U.S. Securities and Exchange Commission probe regarding work authorizations, said Stephen Anderson, an analyst at Miller Tabak & Co.

Chipotle last week received a subpoena “requesting that we provide information regarding our compliance with employee work authorization requirements, our related public statements and other disclosures, and related information,” the Denver-based company said in a May 18 SEC filing.

The SEC hasn’t informed Chipotle as to the focus of its investigation, Chris Arnold, a company spokesman, said in an e-mail. John Nester, an SEC spokesman, declined to comment.

While the immigration investigation began in Minnesota in 2010, it has since spread to stores in Virginia and Washington, D.C. Last year, Chipotle said it was working with the U.S. Attorney’s office in Washington, in addition to U.S. Immigration and Customs Enforcement, to provide certain documents as part of a review.

The 1,260-store burrito chain fired about 450 Minnesota workers who couldn’t confirm the validity of their work documents, according to a filing. The additional labor expenses hurt 2011 profit by about 8 cents a share, Anderson said.

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Four Charged in De Beira Goldfields Stock-Manipulation Case

Four men face charges of manipulating De Beira Goldfields Inc.’s stock price to make 38 million euros ($48.5 million) in profits, German prosecutors said yesterday.

The men recommended the stock in publications 62 times between May and June 2006 without disclosing that they also owned it, Claudia Krauth, a spokeswoman for prosecutors in Stuttgart said in an e-mailed statement. Within four weeks, the price rose from 1.40 euros to 18.50 euros and the men sold their stakes, she said. The suspects weren’t identified.

German prosecutors have been cracking down on fraud with so-called penny stocks.

Krauth said the plot for pushing up the price of the De Beira Goldfields stock came from a 32-year-old Austria-based public relations manager and a 33-year-old Canadian accomplice; they enlisted two other people to help them. Austria has so far denied a request to extradite the public-relations manager, Krauth said.

De Beira Goldfields changed its name to Panex Resources Inc. in September 2010.


FDIC Sues on Mortgage-Backed Securities Sold to Failed Banks

The Federal Deposit Insurance Corp. sued a group of banks including JPMorgan Chase & Co., Citigroup Inc., Bank of America Securities and Deutsche Bank AG in two actions over mortgage-backed securities.

The FDIC, acting as receiver for two failed banks, filed the suits in New York federal court yesterday seeking $77 million the banks allegedly lost on securities backed by residential mortgages.

The FDIC filed an $11 million claim as receiver for Strategic Capital Bank, a Champaign, Illinois, commercial bank that was closed by regulators in 2009. It filed a separate $66 million claim on behalf of Strategic Capital and Citizens National Bank.

The defendants misled investors in the registration statements for the securities, according to the FDIC.

The cases are Federal Deposit Insurance Corp. v. Bear Stearns Asset Backed Securities I LLC, 12-cv-4000; Federal Deposit Insurance Corp. v. JPMorgan Securities LLC, 12-cv-4001, U.S. District Court, Southern District of New York (Manhattan).

Ex-Baker & McKenzie Lawyer Pleads Guilty in Client Theft

Martin Weisberg, a former partner at law firm Baker & McKenzie LLP, pleaded guilty to stealing from a client’s account and taking part in a $55 million securities fraud scheme.

Weisberg, 61, entered his plea to money laundering and conspiracy charges yesterday in federal court in Brooklyn, New York. He was indicted in 2008 on wire fraud and money laundering charges for taking money from an escrow account established on behalf of a corporate client.

Weisberg, who resigned from Baker in October 2007, was accused of placing $30 million in an interest-bearing account and wiring out about $1.3 million without the client’s knowledge, according to U.S. prosecutors.

The theft-related charges were filed after Weisberg was charged with conspiracy in 2007 over his role in a stock fraud.

The government said that Weisberg conspired with Xybernaut Corp. and Ramp Corp. executives in a conspiracy involving short-selling. Weisberg faces maximum sentences of 10 years on the money-laundering count and five years on the conspiracy charge.

The case is U.S. v. Saltsman, 07-cr-641, U.S. District Court, Eastern District of New York (Brooklyn).

Rubicon Hedge Fund Sues Ex-Traders at ‘War’ to Control Firm

Rubicon Fund Management LLP said two former traders tried to overthrow the hedge fund’s management after its founder was badly injured in a horse-riding accident, according to a U.K. lawsuit.

Rubicon is seeking as much as 105 million pounds ($166 million) from Timothy Attias and Santiago Alarco, who had been interim co-chief investment officers before leaving to set up their own company in 2011. Their conduct and subsequent departure led investors to take more than $1 billion out of Rubicon’s master fund, the company said.

Attias and Alarco temporarily took control of Rubicon’s master fund after Rubicon founder and Chief Executive Officer Paul Brewer fell from a horse in August 2009, the company’s lawyer Paul Downes said yesterday on the first day of trial in London. Attias was “incandescent with rage” when he realized Brewer would return to work instead of selling his stake to the pair, as they had discussed.

Attias and Alarco founded SATA Asset Management Ltd. and SATA Partners LLP in 2011.

They are accused of soliciting Rubicon’s clients, leading the fund’s largest investor to withdraw its money.

Attias and the other defendants are scheduled to begin their defense on May 23. Alan Watts, a lawyer representing Attias and Alarco, didn’t immediately respond to an e-mail asking for comment.

The case is: Rubicon Fund Management LLP v. Timothy Levy Attias, High Court of Justice, Chancery Division, HC11C02751.

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CFTC’s Chilton Discusses Delayed Facebook Nasdaq Trades

Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission, talked about delays in Facebook Inc.’s first day of trading and the impact of high-frequency transactions on stock exchanges.

Nasdaq OMX Group Inc., under scrutiny after shares of Facebook were hit by delays and mishandled orders on its first day, blamed “poor design” in the software it uses for driving auctions in initial public offerings. Chilton spoke with Cory Johnson on Bloomberg Television’s “Bloomberg West.”

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Angelides Says Banks Don’t Belong in Risky Derivatives

Phil Angelides, former chairman of the Financial Crisis Inquiry Commission, talked about JPMorgan Chase & Co.’s $2 billion trading loss and the outlook for further financial regulation.

Angelides spoke with Trish Regan on Bloomberg Television’s “InBusiness.”

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Gensler to Seek Comment on Guarantees for Derivative Swaps

The types of derivative swaps said to have led to a loss of at least $2 billion at JPMorgan Chase & Co. may be the first for which the U.S. Commodity Futures Trading Commission would require guarantees by clearinghouses under the Dodd-Frank Act, according to the CFTC chairman.

The commission, the main U.S. derivatives regulator, would seek comments this summer on the requirement for swaps of interest rates and credit-default indexes, said its chairman, Gary Gensler, in testimony prepared for a Senate Banking Committee hearing today, scheduled to oversee implementation of the 2010 Dodd-Frank financial-regulation overhaul.

“Standard swaps between financial firms will move into central clearing, which will significantly lower the risks of the highly interconnected financial system,” Gensler said in the testimony. Securities and Exchange Commission chairman Mary Schapiro is also scheduled to testify at the hearing.

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Separately, in a speech in Washington, Gensler addressed the topic of regulation in foreign jurisdictions.

Derivatives losses of at least $2 billion at JPMorgan Chase & Co. show the need for extending Dodd-Frank Act swap regulations to overseas trades, said Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission.

“We’ve had another stark reminder of how trades overseas can quickly reverberate with losses coming back to the United States,” Gensler said yesterday in a speech at a Financial Industry Regulatory Authority conference in Washington. “The bank here in the U.S. is absorbing these losses” on trades conducted at JPMorgan in London, he said.

JPMorgan, Goldman Sachs Group Inc. and other U.S. banks have said Dodd-Frank rules designed to bolster oversight of the derivatives market will hurt their ability to compete with foreign-based rivals if the rules are applied to overseas offices. The debate over the reach of Dodd-Frank overseas is among the most controversial elements of the 2010 financial-overhaul.

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Comings and Goings

Jaczko Quits as NRC Chief Amid Allegations of Staff Bullying

U.S. Nuclear Regulatory Commission Chairman Gregory Jaczko said he is resigning, as lawmakers, colleagues and an independent watchdog criticize what they said is a bullying style and mistreatment of female employees.

“I have decided this is the appropriate time to continue my efforts to ensure public safety in a different forum,” Jaczko said yesterday in a statement. “My responsibility and commitment to safety will continue to be my paramount priority after I leave the commission and until my successor is confirmed.”

Jaczko, 41, whose term expires in June 2013, has been faulted for his management by other commissioners and in a report by the agency inspector general last year. President Barack Obama intends to nominate a successor soon, Clark Stevens, a White House spokesman, said yesterday in an e-mail.

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