JPMorgan Hire, Citigroup Settles, SEC-Rothstein: Compliance

JPMorgan Chase & Co., the biggest U.S. bank, has hired former U.S. Securities and Exchange Commission enforcement chief William McLucas to help respond to regulatory probes of the firm’s $2 billion trading loss, according to two people with knowledge of the assignment.

The lender’s May 10 announcement of the “self-inflicted” loss spurred reviews by the SEC, Commodity Futures Trading Commission, Office of the Comptroller of the Currency and Federal Bureau of Investigation. JPMorgan has said the losses may increase. Kristin Lemkau, a company spokeswoman, didn’t have an immediate comment on the hiring. The people requested anonymity because the appointment hasn’t been made public.

McLucas, 61, a Washington-based partner at law firm Wilmer Cutler Pickering Hale & Dorr LLP, led the SEC’s enforcement division from 1989 to 1998. He didn’t reply to a phone call and e-mail seeking comment.

Compliance Policy

DTCC Plans Study on Faster Settlement for U.S. Securities

The Depository Trust & Clearing Corp. is commissioning a study on whether the U.S. securities industry should cut the time it takes to process transactions, a shift that may reduce risk and compel brokers and asset managers to spend more on further updating their systems.

The New York-based company that handles and guarantees trades in U.S. stocks, corporate bonds and municipal securities hired the Boston Consulting Group Inc. to assess the costs and benefits of settling trades in fewer than three days, the current standard, Elena Staloff, a vice president at DTCC, said in a phone interview. A shorter cycle would mean firms could post less capital to the clearing fund run by DTCC subsidiary National Securities Clearing Corp. to cover a defaulting broker’s obligations and pay less to meet the organization’s liquidity needs to handle a problem, she said.

A 2000 industry report about completing transactions in a day said the one-time cost of moving to a so-called T+1 settlement would be $8 billion for the securities industry and could be implemented within four years. The savings would be $2.7 billion annually, the study found.

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More Executives Choosing to Fight the SEC in Post-Crisis Suits

The U.S. Securities and Exchange Commission, long known for settling enforcement actions without having to prove its case in court, is struggling to cope with a surge in the number of executives and companies willing to go to trial to defend themselves.

The SEC’s office in Washington is actively litigating about 90 cases, up more than 50 percent in the past year, Matthew Martens, the SEC’s chief litigation counsel, said in an interview. At the same time, Martens’s trial unit staff has stayed relatively flat at about 36. Martens, who recently added three more lawyers to his group and is looking to hire more, said it’s critical that his unit present a credible threat.

The wave of litigation has two main sources: more complex cases stemming from the 2008 financial crisis and a related increase in lawsuits filed against individual executives.

The collapse of the housing market and resulting financial turmoil involved complex securities for which there was little legal precedent. In addition, the agency has brought more financial crisis lawsuits against executives -- more than 50 so far -- and individuals are often inclined to fight claims that could damage or end their careers.

Prolonged courtroom battles could sap resources from the SEC, which has said funding gaps have already diminished its ability to regulate securities markets.

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Compliance Action

Citigroup to Pay $3.5 Million Over Faulty Subprime RMBS Data

Citigroup Inc., the third-biggest U.S. bank, agreed to pay $3.5 million to resolve regulatory claims that it gave investors inaccurate data for subprime mortgage-backed securities as the housing market collapsed.

The bank posted incorrect information for three residential mortgage-backed securities, or RMBS, from January 2006 through October 2007, and it remained on Citigroup’s website until this month, the Financial Industry Regulatory Authority said yesterday in a statement. The firm failed to correct the data even after the errors were brought to its attention, said Finra, the brokerage industry’s self-regulator.

Chief Executive Officer Vikram Pandit is dealing with mounting costs from Citigroup’s conduct in the U.S. mortgage market. The lender agreed to pay $158.3 million in February after regulators alleged the firm had falsely declared some loans fit for a federal insurance program. The bank must also pay $2.2 billion as part of a $25 billion, 49-state settlement between attorneys general and the biggest mortgage lenders, after a nationwide probe into foreclosure practices.

RMBS issuers are required to disclose historical performance data for securities similar to those they are offering. That information is critical for investors to assess whether future returns may be disrupted by mortgage holders failing to make loan payments, Finra said in its statement.

The brokerage lacked procedures to verify the pricing of the securities and didn’t sufficiently document steps taken to assess whether the traders’ prices were reasonable, Finra said. The unit also failed to keep proper records following margin calls that prompted revisions in the prices, according to the Washington-based regulator.

Citigroup settled the claims without admitting or denying wrongdoing, Finra said.

“We are pleased to put this matter behind us,” Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, said in a statement.

Fidelity’s Stairs Gets Securities Dealing Ban in Hong Kong

Former Fidelity Management & Research Co. portfolio manager George Stairs was banned from dealing securities in Hong Kong for two years for selling Chaoda Modern Agriculture Holdings Ltd. shares using inside information.

The Hong Kong Market Misconduct Tribunal, which announced the ban today, didn’t penalize Stairs for the losses he avoided because the insider trading was executed on behalf of his funds.

Stairs had argued that he didn’t agree to restrict himself from trading in exchange for material non-public information, and that he thought the information was already public knowledge.

The three-member Hong Kong tribunal, led by High Court Judge Michael Lunn, ruled on April 26 that Stairs received non-public information in June 2009 about a share placement and sold down his Chaoda holdings before the placement was announced, according to Hong Kong’s government. He netted HK$1.98 million ($255,000) for his funds by selling Chaoda shares ahead of the announcement. No wrongdoing was found on the part of Fidelity and the firm isn’t liable to any disgorgement orders from Hong Kong authorities.

Vincent Loporchio, a Boston-based spokesman for Fidelity, said on May 20 the company respectfully disagrees with the Hong Kong tribunal’s conclusions regarding Stairs.

“He did not knowingly trade on non-public price sensitive information,” Loporchio said in an e-mail at the time. “Fidelity conducted a thorough internal review of this matter consistent with its strong protocols.”

Stairs remains an employee and is no longer managing assets on behalf of funds or clients, Loporchio said.

Google Meets French Regulator on Review of Privacy Policy Change

Google Inc. will meet with France’s data-protection authority today to discuss an inquiry into whether revised privacy policies for users of the world’s largest Web-search provider violate European rules.

The National Commission for Computing and Civil Liberties, known by its French acronym as CNIL, asked to discuss Google’s responses to questions it sent in March covering topics from the Android operating system to how information is collected with cookies, a spokeswoman for the Paris-based agency said.

CNIL is acting on behalf of other European regulators who sought the review after Google announced changes to its privacy rules. The Mountain View, California-based company defied two CNIL requests to halt changes while it determined whether European standards were met. Google implemented it as planned on March 1.

The change “is an important part of our layered approach to providing users with clear and comprehensive information about how we use data, and it is supplemented by additional privacy information to our users,” Google said in an e-mailed statement before today’s meeting. “We are confident that our privacy notices respect the requirements of European data protection laws.”

Google and CNIL declined to comment on what would be discussed at today’s meeting or on possible outcomes.

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U.K. Regulator Takes Another Look at Swap Sales to SMEs, FT Says

The U.K.’s Financial Service Authority is making a second review of sales of interest-rate swaps to small and mid-size businesses, after an earlier probe found few problems, the Financial Times said, citing a letter published by FSA Chairman Adair Turner.

After reviewing a “small number of complaints” from small businesses about interest-rate swaps in 2010 and 2011, and concluding that there were no “widespread underlying problems,” the FSA is doing more now to examine how the products are designed and sold, Turner said, according to the newspaper.

The action follows a request from Parliament’s Treasury Select Committee for further investigation, the FT said, citing committee Chairman Andrew Tyrie.


Yahoo Executive, Fund Manager Plead Guilty to Insider Trading

A former Yahoo! Inc. executive and a former mutual fund manager at a unit of Ameriprise Financial Inc. pleaded guilty to insider trading and resolved civil complaints by federal securities regulators, the U.S. said.

Robert W. Kwok, Yahoo’s senior director of business management, gave illegal tips to Reema D. Shah, a portfolio manager at the Ameriprise unit, RiverSource Investments LLC, about Yahoo’s quarterly earnings and potential transactions with outside companies, Preet Bharara, U.S. Attorney for Manhattan, said in an e-mailed statement.

Kwok, 36, of Danville, California, and Shah, 40, of Menlo Park, California, both pleaded guilty to conspiracy to commit securities fraud, according to the statement. Kwok’s sentencing is scheduled for Sept. 18 and Shah’s is set for May 24, Bharara said.

Neither Kwok nor Shah could be reached at their home phone numbers for comment. Laura Birger, a lawyer representing Kwok, and Ted Cassman, an attorney for Shah, didn’t immediately return calls seeking comment on the pleas.

The cases are U.S. v. Shah and U.S. Securities and Exchange Commission v. Shah, U.S. District Court, Southern District of New York (Manhattan).

SEC Sues Two Florida Men Over Claims They Fueled Rothstein Fraud

The U.S. Securities and Exchange Commission sued two Florida men over claims they fraudulently raised more than $157 million to fuel a Ponzi scheme that collapsed in October 2009.

George Levin and Frank Preve used money from 173 investors to purchase phony legal settlements from Florida attorney Scott Rothstein, who is serving a 50-year prison sentence for running the fraud, the SEC said yesterday in a statement. Levin and Preve misrepresented to investors that they had procedures in place to protect the funds, the SEC said.

At least eight people have pleaded guilty to helping Rothstein, who admitted in 2010 that he persuaded wealthy investors to buy stakes in what he said were payouts from settlements of sexual-harassment and workplace-discrimination cases. The cases were fabricated, using forged documents and fictitious plaintiffs and defendants, the SEC said.

In a joint statement, attorneys for Levin and Preve said their clients were “two of the biggest victims” of Rothstein’s fraud.

“Mr. Levin and Mr. Preve have testified at length on multiple occasions before the SEC and have provided many thousands of pages of documents to the SEC to assist it in its investigation,” according to the statement. “Their extensive cooperation, and the detailed written submissions of counsel for Mr. Levin and Mr. Preve, showed that Mr. Levin and Mr. Preve were not involved in the Ponzi scheme and were deceived and defrauded by Mr. Rothstein.”

The SEC is seeking disgorgement of ill-gotten gains and unspecified financial penalties. The agency’s investigation is continuing, according to the statement.

The case is U.S. Securities and Exchange Commission v. Levin, 12-cv-21917, U.S. District Court, Southern District of Florida (Miami).

Special Section: Facebook IPO

Facebook Investor Sues Nasdaq Over ‘Mishandled’ Stock Offering

A Facebook Inc. investor said in a lawsuit that Nasdaq OMX Group Inc. “badly mishandled” Facebook’s initial public offering, delaying trading and failing to cancel orders when requested by customers.

Phillip Goldberg, a Maryland investor, said in a complaint filed yesterday in Manhattan federal court that he tried to both order and cancel requests for Facebook shares through an online Charles Schwab Corp. account the morning after the May 17 IPO. He is seeking to represent a class of investors who lost money because their buy, sell or cancellation orders for Facebook stock weren’t properly processed, according to the filing.

“Orders placed by investors seeking to purchase Facebook shares during the first trading day often took hours to execute,” Goldberg said in the complaint. “In the meantime, the investors seeking to purchase those shares had no idea if their trades had executed, and, accordingly, had no idea if they owned Facebook shares at all.”

Goldberg, who claims Nasdaq acted negligently, is seeking unspecified damages.

Robert Madden, a spokesman for Nasdaq, didn’t return a call yesterday seeking comment on the suit. Ashley Zandy, a spokeswoman for Facebook, the world’s biggest social network, declined to comment on the suit.

Also yesterday, Facebook settled a lawsuit “in principle” over claims that it used information supplied by users to advertise products without their consent. Terms of the agreement weren’t disclosed in a filing in federal court in San Jose, California.

Facebook was accused in the complaint of appropriating the names, photographs and identities of users for advertising endorsements as part of a “misleading advertising scheme,” according to the complaint.

Andrew Noyes, a spokesman for Menlo Park, California-based Facebook, declined to comment on the settlement. Jonathan Davis, a lawyer with the San Francisco-based Arns Law Firm representing the plaintiffs, didn’t immediately return a call seeking comment.

The investor case is Goldberg v. Nasdaq OMX Group Inc., 12-CV-04054, U.S. District Court, Southern District of New York (Manhattan).

Finra Chief Says Morgan Stanley May Face Probe Over Facebook IPO

Morgan Stanley could face regulatory scrutiny over claims that an analyst shared negative news about Facebook Inc. with institutional investors before that firm’s initial public offering last week, according to the head of the Financial Industry Regulatory Authority.

“If true, the allegations are a matter of regulatory concern” to the industry-funded brokerage watchdog and the U.S. Securities and Exchange Commission, Finra Chairman and Chief Executive Officer Richard Ketchum said today in an e-mail.

Ketchum commented in response to a news report that an analyst for Morgan Stanley, lead underwriter for the IPO, lowered a Facebook revenue forecast after the social-networking company said growth in mobile products could hurt its business. Such a move could come under scrutiny from regulators if the warning was only provided to institutional investors.

Finra’s chief didn’t say whether his Washington-based agency is investigating Morgan Stanley. John Nester, a spokesman for the SEC, declined to comment.

Facebook Tumble Means Morgan Stanley Gets Blame for Flop

After one of the most anticipated initial public offerings in history, Facebook Inc.’s 11 percent drop May 21 and further decline yesterday prompted investors to fault everything from Morgan Stanley’s role as lead underwriter, to the Nasdaq Stock Market.

Taking the most heat is Morgan Stanley, said Michael Mullaney, chief investment officer at Fiduciary Trust in Boston.

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Morgan Stanley, the lead underwriter, released a statement defending its handling of the May 17 IPO after the Massachusetts security division yesterday subpoenaed the investment bank over its communications with clients. The U.S. Securities and Exchange Commission and the brokerage industry’s watchdog both said they may review the offering, and a buyer of Facebook stock sued Nasdaq OMX Group Inc. over glitches in opening-day trading.

The anticipation that preceded history’s biggest technology IPO has been replaced by investor ire, including about whether the offer was priced too high.

Facebook increased the number of shares being sold in the IPO by 25 percent last week to 421.2 million and raised its asking price to a range of $34 to $38 from $28 to $35. The shares closed yesterday at $31 in the U.S.

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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 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.

Computer systems used to establish the opening price were overwhelmed by order cancellations and updates, Nasdaq Chief Executive Officer Robert Greifeld, 54, said in a conference call with reporters. Nasdaq’s systems fell into a “loop” that kept the second-largest U.S. stock venue operator from opening the shares on time 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 plunged as much as 14 percent May 21.

The U.S. Securities and Exchange Commission said it will review the trading.

“There is a lot of reason to have confidence in our markets and the integrity of how they operate, but there are issues we need to look at specifically with regard to Facebook,” SEC Chairwoman Mary Schapiro told reporters in Washington.

Jonathan Thaw, a spokesman for Menlo Park, California-based Facebook, declined to comment.

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Gensler, Schapiro Testify About Derivatives Oversight

Commodity Futures Trading Commission Chairman Gary Gensler and Securities and Exchange Commission Chairman Mary Schapiro testified before the Senate Banking Committee in Washington about issues related to derivative swaps and oversight of the derivatives market.

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 CFTC would require guarantees by clearinghouses under the Dodd-Frank Act, according to Gensler.

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Shelby Not Sure Dodd-Frank Would Prevent JPMorgan Loss

U.S. Senator Richard Shelby, an Alabama Republican, talked about the prospects for financial regulation following the $2 billion trading loss by JPMorgan Chase & Co.

Shelby, who spoke to Megan Hughes on Bloomberg Television’s “Bottom Line,” also discussed the outlook for testimony by Jamie Dimon, chief executive officer of JPMorgan, before the Senate Banking Committee next month.

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