SEC-Lehman Probe, Cross-Border Card Fees, Fed: Compliance

U.S. Securities and Exchange Commission investigators have concluded their probe of possible financial fraud at Lehman Brothers Holdings Inc. and determined that they probably won’t recommend any enforcement action against the firm or its former executives, according to an excerpt of an internal agency memo.

The agency has been grappling with the case for more than three years amid questions from lawmakers and investors as to whether Lehman misrepresented its financial health before filing the biggest bankruptcy in U.S. history in September 2008.

Under a heading reading “Activity in the Last Four Weeks,” the undated document reads, “The staff has concluded its investigation and determined that charges will likely not be recommended.”

SEC officials didn’t dispute the authenticity of the memo or its contents.

Senior officials have been reluctant to formally close the matter even though investigators found a lack of evidence of wrongdoing, according to people with direct knowledge of the matter. John Nester, an SEC spokesman, said the case remains under review.

“As the chairman said, it’s still under review and no final decision has been made,” Nester said in an e-mail, referring to an earlier statement by SEC Chairman Mary Schapiro.

Compliance Policy

Facebook IPO Scrutiny Forcing It to Grow Up Inside Washington

Congressional questions about Facebook Inc.’s initial public offering are forcing its nascent lobbying operation to play defense as it builds the political support companies need before coming under scrutiny.

U.S. House and Senate committee officials said May 23 their staffs are gathering information about the social networking company’s offering and that the topic may come up at congressional hearings.

Lead underwriter Morgan Stanley may face regulatory review over claims an analyst shared negative news about Facebook with institutional investors before the offering, Richard Ketchum, chairman and chief executive officer of the Financial Industry Regulatory Authority, said May 22.

Facebook, which first registered to lobby in 2009, is playing catch-up to other technology companies such as Google Inc. and Microsoft Corp. that have more established efforts in Washington.

Google Inc. spent $5 million in the first quarter of this year, and Microsoft Corp. spent $1.8 million during the same period. Facebook reported expenditures of $650,000 from January to March, more than double the $230,000 it spent during the same period a year earlier, Senate records show.

Its annual lobbying expenses expanded to $1.4 million in 2011 from $207,878 in 2009.

Facebook lobbied on more than 20 bills in the first quarter of this year, many of them focused on online privacy and cybersecurity, Senate records show. The company lobbied the House and Senate, the White House, the Federal Trade Commission, Commerce Department and other federal agencies.

Securities and Exchange Commission Chairwoman Mary Schapiro said her agency may review the offering.

Andrew Noyes, a Facebook spokesman in Washington, declined to comment on the congressional activity.

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George Says Directors Should Meet Fed Standards or Resign

Federal Reserve Bank of Kansas City President Esther George said that directors at the Fed’s regional banks who don’t meet the central bank’s standards for impartiality should step down.

“Bankers should serve,” George said in a statement released yesterday by the Kansas City Fed. “There are high standards that apply to Reserve Bank directors, and when an individual no longer meets these standards, the director resigns voluntarily to allow someone who does meet the criteria to serve.”

The directors at the 12 regional Fed banks are under renewed scrutiny following a $2 billion trading loss at JPMorgan Chase & Co. that revived concern that its regulator, the New York Fed, is too cozy with Wall Street. JPMorgan Chief Executive Officer Jamie Dimon is one of three bankers sitting on the board of the New York Fed.

Elizabeth Warren, a Democrat and U.S. Senate candidate from Massachusetts, has called for Dimon’s resignation, while Treasury Secretary Timothy F. Geithner said last week that having bankers on the board of the New York Fed creates a “perception” problem. Legislation was introduced in the Senate May 22 that would remove banking industry executives from the regional Fed banks’ boards of directors.

George defended the role of bankers on the Fed regional bank boards because they “provide critical, in-depth information about economic conditions in their communities.”

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Underwriters Paying to Pass Bond Issues Face Regulatory Scrutiny

Underwriters that fund bond-authorization campaigns and then collect fees from approved debt sales are among the unresolved pay-to-play issues in the $3.7 trillion municipal bond market that will come under rulemaker scrutiny.

The Municipal Securities Rulemaking Board, after collecting data on dealer contributions to bond campaigns for two years, is starting to examine the need for restrictions based on such contributions, said Ernesto Lanza, deputy executive director and chief legal officer.

Hiring an underwriter based on whether it supports a campaign rather than its ability to market bonds can lead to issues from mispricing, which can hurt investors, to higher fees and borrowing costs for taxpayers. The rulemaking board’s focus is on ensuring investors are protected, Lanza said by telephone.

The MSRB has banned would-be underwriters from giving to most campaigns for elected officials who could influence the award of bond sales. Banks have been divided over whether they should be allowed to support drives in favor of referendums authorizing debt issues that they later underwrite. Some say it creates the appearance of undue influence, while others say it merely helps issuers win the votes and finance needed projects.

Making such contributions is more widespread among smaller underwriters, according to disclosure filings with the rulemaking board.

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Compliance Action

Ex-SEC Attorney Barred for Year Over Stanford Ethics Lapse

The U.S. Securities and Exchange Commission barred one of its former enforcement officials from practicing before the agency for one year over claims he violated federal conflict-of-interest rules.

Spencer Barasch, who participated in the SEC’s investigation of R. Allen Stanford’s $7 billion Ponzi scheme, performed private legal work for Stanford Group Co. about a year after leaving the agency even though the agency’s ethics office had told him he was prohibited from doing so, the SEC said in a statement yesterday. Barasch consented to the bar without admitting or denying the allegations.

Stanford was convicted March 6 of 13 criminal counts stemming from an investment fraud built on bogus certificates of deposit at his Antigua-based Stanford International Bank sold through his U.S. brokerage. The investigation became a black eye for the SEC after an inspector general report found the agency had been aware of a possible fraud for more than a decade.

Barasch was associate director in the SEC’s regional office in Fort Worth, Texas, from 1998 to 2005, according to the agency.

“In order to avoid the expense and uncertainty of protracted litigation, Spence and the government have entered into a settlement that fully and finally resolves this matter,” Paul Coggins, an attorney for Barasch at Locke Lord LLP, said in a statement.

Barasch, who now practices law at Andrews Kurth LLP in Houston, agreed earlier this year to pay a $50,000 civil fine to the Justice Department for violating ethics rules.

Deutsche Bank Fined by Nymex for Gas Position-Limit Violation

Deutsche Bank AG was fined $40,000 by the New York Mercantile Exchange for violating position limits in natural gas, Nymex said in a statement.

The bank held a position of 5,761.25 short contracts in July 2011 Henry Hub Natural Gas Look-Alike Last Day Financial Futures, 28 percent over the limit set by the exchange, according to Nymex. The bank then increased its position to 34 percent over the limit on June 24, 2011, the exchange said.

Amanda Williams, a spokeswoman for Deutsche Bank in New York, declined to comment on the fine.

Oslo Bourse Penalizes Unexecuted Orders From Automated Trading

Oslo’s stock exchange will introduce a fee designed to limit computer-generated orders after equity strategies based on mathematical models boosted the number of withdrawn trades and clouded market transparency.

The fee, which will be enforced starting Sept. 1, will apply to any order exceeding 70 for each executed trade and will mainly target “orders which are canceled or changed within a second, without contributing to improving pricing or volumes,” Oslo Boers ASA said in a statement yesterday. The exchange will charge 0.05 krone ($0.01) for every unexecuted order exceeding the 1:70 ratio.

Trading based on mathematical models, known as algorithmic and high-frequency trading, has come under scrutiny after a May 2010 crash that briefly erased $862 billion from the value of U.S. shares. Traders and other professional investors withdrew bids as the selloff worsened, according to a September 2010 report from the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Nasdaq OMX Group Inc., which manages 75 percent of all Nordic stock trading, presented a similar move in September 2011. The exchange, which runs the Copenhagen, Helsinki, Reykjavik and Stockholm bourses, introduced a 1:250 trade-to-order ratio fee to protect investors against what it called malfunctions in the market.

Morgan Stanley Said to Tell Brokers It Will Fix Facebook Orders

Morgan Stanley Smith Barney, the world’s biggest brokerage, told its financial advisers yesterday that it will adjust prices on a few thousand client trades of Facebook Inc., according to a person on the conference call.

The company also told brokers that limit orders to sell shares for at least $43 each after the social network’s initial public offering won’t be filled because of low volume at that price range on May 18, said the person, who requested anonymity because the call was private. Morgan Stanley Smith Barney told brokers May 23 it was reviewing pricing and execution of orders, according to a memo obtained by Bloomberg.

Nasdaq Stock Market trade confirmations were delayed and some orders may have been mishandled by the exchange. The IPO was marred on the first trading day when Nasdaq OMX Group Inc. was overwhelmed by order cancellations and updates that delayed trading in Facebook shares. The U.S. Securities and Exchange Commission said it will conduct a review.

Facebook’s underwriters had gains of about $100 million through their work to stabilize the share price since the IPO, a person familiar with the matter said May 23. Morgan Stanley will use some of the gains to reimburse clients who lost money because of glitches in trade execution, the person said.


MasterCard Loses Court Challenge Over Cross-Border Card Fees

MasterCard Inc. lost a court challenge seeking to overturn a European Union decision that the company’s cross-border card fees violated antitrust rules.

The EU’s General Court yesterday backed the European Commission’s decision that MasterCard unfairly inflated the transaction fees paid by retailers for processing payments.

MasterCard’s “approach tends to overestimate the costs borne by the issuing banks and, moreover, inadequately to assess the advantages which merchants derive from that form of payment,” the Luxembourg-based tribunal said in the ruling.

The second-biggest card network, supported by banks including HSBC Holdings Plc and Royal Bank of Scotland Group Plc, argued the so-called multilateral interchange fees were crucial for sharing the costs of debit and credit card payments. The case tested whether such levies are unfair to retailers and customers and could be a road-map for national regulators to pursue their own complaints.

Without the fees, “merchants would be able to exert greater competitive pressure on the amount of costs they are charged for the use of payment cards,” the court said.

MasterCard said it will appeal the ruling to the EU’s highest court. Yesterday’s decision “will ultimately make payments more expensive for consumers” by upsetting a system that shares costs between banks, retailers and shoppers, the Purchase, New York-based company said in an e-mailed statement.

The case is: T-111/08, MasterCard and others v. European Commission.

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Farzad, Brown Weigh Facebook IPO and Regulatory Reforms

Amid allegations of selective disclosure of information and technical problems on the Nasdaq Stock Market, Facebook Inc.’s initial public offering has led to a flurry of litigation.

According to Roben Farzad and Josh Brown, the missteps are unlikely to lead to any meaningful regulatory reform given how much less frequent IPOs are today, as well as other factors. Farzad is a senior writer at Bloomberg Businessweek and Brown is a financial adviser at Fusion Analytics.

They talked with Bloomberg Law’s Lee Pacchia.

For the video, click here.

Levitt Says Nasdaq, Bankers ‘Tainted’ by Facebook IPO

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission and senior adviser to Goldman Sachs Group Inc., says “there are lots of people to point the finger at” in the initial public offering of Facebook Inc. Levitt talks with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here, and for more, click here.

JPMorgan Needs ‘Independent Assessment,’ Johnson Says

Simon Johnson, a professor at the Massachusetts Institute of Technology and a former economist at the International Monetary Fund, talked about JPMorgan Chase & Co.’s $2 billion trading loss and the need for an independent investigation into the firm’s practices.

Johnson spoke with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “InsideTrack.”

For the video, click here.

BOE’s Clark Says Bank Rules Front-Loaded More Than Intended

Bank of England interim Financial Policy Committee member Alastair Clark said policy makers may have ended up “front-loading” new rules more than planned in an environment that remains threatening.

“In our international regulatory initiatives, we may inadvertently have ended up front-loading the regulatory response more than was intended,” Clark said in a speech in London yesterday. “Even though, for example, extended timetables were set for the implementation of Basel III, once the end point was announced market pressures have tended to foreshorten the effective period of adjustment.”

Clark said that doesn’t alter the direction taken by regulators, as “there are clearly still significant vulnerabilities in the international banking system and the environment remains very threatening.”

Global regulators’ tougher capital requirements, known as Basel III, could see the world’s biggest banks raise about $566 billion of common equity to meet rules by 2019, analysts at Fitch Ratings said on May 17.

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