Swaps, CFTC, Peregrine, Vitamin Price-Fixing: Compliance

The U.S. Commodity Futures Trading Commission voted to define when trades are considered swaps under the Dodd-Frank Act, a step that triggers more than a dozen rules under the 2010 financial-regulation overhaul.

The agency’s commissioners voted 4-1 yesterday to approve a 600-page measure governing when interest-rate, credit, commodity and other trades involving companies including JPMorgan Chase & Co., Barclays Plc and Cargill Inc. should face rules to limit risk in the $648 trillion global market.

The Securities and Exchange Commission unanimously approved the rule in a private vote on July 6, the agency said in a statement Monday.

“This is significant to the American public because now we will bring transparency to these markets,” CFTC Chairman Gary Gensler said in a Bloomberg Television interview after the meeting. “We will have dealers registering. We will lower the risk to the American public. Congress said further define a term. We further defined it. Two months from now a lot of Dodd-Frank comes into being.”

The two agencies, working under a Dodd-Frank mandate that they craft oversight to prevent a repeat of the 2008 credit crisis, missed the July 2011 deadline to complete rules. The swap definition will trigger almost 20 Dodd-Frank measures for reporting, clearing, trading and record-keeping that may take effect as early as September.

The swap definition contains a series of exemptions for insurance and retail transactions. Life insurance, and property and casualty insurance are exempt. Interest-rate caps on consumer mortgages and home heating oil agreements are also left out.

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Compliance Action

Peregrine Pursues Liquidation After CFTC Sues Over Shortfall

Peregrine Financial Group Inc. filed to liquidate in bankruptcy after the U.S. Commodity Futures Trading Commission sued the brokerage alleging a $200 million “shortfall” in client funds.

Peregrine listed assets of more than $500 million and debt of more than $100 million in a Chapter 7 petition filed yesterday in U.S. Bankruptcy Court in Chicago.

Separately, U.S. District Judge Rebecca Pallmeyer issued an order freezing Peregrine’s assets at the CFTC’s request, saying it appeared there was “good cause” to believe the firm and its founder, Russell Wasendorf Sr., violated the federal Commodity Exchange Act.

The Commodity Futures Trading Commission filed a complaint against Peregrine in federal court in Chicago yesterday after an industry self-regulator cited a $200 million shortfall in customer segregated funds. The National Futures Association said the brokerage’s chairman may have falsified bank records after only $5 million was found in an account that was reported to have $225 million on or about June 29.

Peregrine is under investigation over the allegedly missing funds after Russell Wasendorf Jr., the firm’s chairman and chief executive officer, unsuccessfully attempted suicide. And the CFTC is facing renewed scrutiny since the failure of Peregrine comes nine months after MF Global Holdings Ltd. collapsed.

Republicans who scolded the CFTC over its handling of MF Global cited similarities to the New York brokerage’s failure.

“I would have expected regulators to be particularly attentive to situations like the one at PFG in the wake of the MF Global collapse, so I’m disappointed this wasn’t discovered earlier,” Representative Randy Neugebauer, a Texas Republican who is leading an investigation of MF Global’s $1.6-billion customer-fund shortfall, said in an e-mail.

For more on the Peregrine bankruptcy, click here. For more on congressional reaction, click here.

Orthofix to Pay $5.2 Million to Settle SEC Suit Claiming Bribery

Orthofix International NV, a medical-device maker, agreed to pay $5.2 million to settle a U.S. Securities and Exchange Commission lawsuit claiming its Mexican unit, Promeca SA, bribed Mexican officials in return for sales contracts with government hospitals, the SEC said in an e-mailed statement.

Orthofix also entered into a deferred prosecution agreement with the U.S. Justice Department over charges of violating the Federal Corrupt Practices Act and will separately pay a fine of $2.22 million.

The SEC’s complaint alleges that Promeca made the bribes from “at least” 2003 to 2007 and referred to them internally as “chocolates.”

In a filing with the SEC yesterday, Orthofix said the company had undertaken a “self-initiated and self-reported internal investigation” of its subsidiary after the bribes were discovered.

Mark Quick, director of investor relations and business development for Orthofix, didn’t return a call seeking comment on the settlement.

Doctors to Pay $1.9 Million to Settle SEC Insider-Trading Claims

Five doctors will pay $1.9 million to resolve U.S. regulators’ claims they used inside information to profit from the sale of American Physicians Capital Inc., a holding company for a medical professional liability insurer.

Apparao Mukkamala, who was the chairman of ACAP’s board at the time, told four fellow physicians of the anticipated sale of the East Lansing, Michigan-based holding company, the U.S. Securities and Exchange Commission said yesterday in a complaint filed in federal court. The five doctors bought almost $2.2 million of ACAP stock from April 2010 to July 2010.

The group reaped more than $623,000 in profits when ACAP shares rose 28 percent to $40.63 after closely held Doctors Co. agreed to pay $41.50 a share to acquire the firm on July 8, 2010, according to the SEC.

“These physicians made numerous purchases of ACAP shares that were detected as highly unusual when compared to their past trading patterns,” Robert J. Burson, senior associate regional director of the SEC’s Chicago office, said in the agency’s statement. “Board chairmen and other insiders should never choose greed over duty when possessing confidential information about the companies they serve.”

The doctors agreed to settle the SEC’s claims without admitting or denying wrongdoing.

“We’re pleased to have reached a resolution,” said Mukkamala’s attorney, Lori McAllister of Dykema Gossett PLLC in Lansing, Michigan. The attorneys for the other defendants either didn’t return calls seeking comment or declined to comment.

In the Courts

Chinese Vitamin C Makers’ Price-Fixing Trial Set for Nov. 5

China Pharmaceutical Group Ltd. and several other Chinese makers of vitamin C will face a Nov. 5 trial in the U.S. for alleged price-fixing, a federal judge said.

U.S. District Judge Brian M. Cogan in Brooklyn, New York, yesterday set the date in a case brought by purchasers of vitamin C. In January, the judge allowed the buyers to proceed with their case as a group against the vitamin makers.

Other companies sued in the case include Weisheng Pharmaceutical Co., North China Pharmaceutical Co., Hebei Welcome Pharmaceutical Co. and Northeast Pharmaceutical Group Co.

The vitamin companies have argued that the Chinese government forced them to fix prices. The judge rejected that contention in a September ruling.

“The Chinese law relied upon by defendants did not compel their illegal conduct,” he wrote.

Aland (Jiangsu) Nutraceutical Co., another Chinese firm named in the lawsuit, settled with plaintiffs in May for $10.5 million, according to court filings.

Lawyers for the Chinese firms, including Charles Critchlow of Baker & McKenzie LLP, Richard Goldstein of Orrick Herrington & Sutcliffe LLP and Daniel Mason of Zelle Hofmann Voelbel & Mason LLP, didn’t immediately respond to requests for comment on the trial date.

The case is In Re Vitamin C Antitrust Litigation, 1:06-md-01738, in the U.S. District Court for the Eastern District of New York.

Greenpeace, Audubon Sue to Block Shell Alaska Oil-Spill Plan

Royal Dutch Shell Plc should be barred from drilling in the Beaufort and Chukchi seas because its oil-spill plans are inadequate, Greenpeace Inc. and other environmental groups said in a lawsuit.

Greenpeace, the National Audubon Society and other groups sued the U.S. Interior Department, which approved Shell’s spill-response plans earlier this year, saying the agency violated the Clean Water Act by failing to ensure the plans can address a “worst-case oil spill.”

The approvals for Shell’s response plans should be thrown out, and offshore oil and gas activity blocked, until the Interior Department complies with the law, the groups said in a complaint filed yesterday in federal court in Alaska. The filing couldn’t be confirmed in electronic court records.

Shell’s drilling off Alaska’s north coast will be delayed until August as the company waits for ice to clear and modifies a spill-response vessel to meet U.S. Coast Guard requirements, the company said in July.

Curtis Smith, a spokesman for Shell, said the company is confident the approved spill plans “will withstand legal review.”

Adam Fetcher, an Interior Department spokesman, declined to comment on the lawsuit.

The case is Alaska Wilderness League v. Salazar, U.S. District Court, District of Alaska.

Hearings and Reports

Diamond Says He Didn’t Mislead Lawmakers on Relations With FSA

Robert Diamond, who quit as head of Barclays Plc last week after allegations that interest rates had been rigged, denied he misled Parliament on relations with regulators and said he’d be willing to discuss the matter again.

Diamond, the former chief executive officer of Barclays, was accused yesterday during a hearing of Parliament’s Treasury Committee of misleading U.K. lawmakers after a letter from the Financial Services Authority emerged. The letter contradicted his July 4 testimony that regulators were “happy” with the bank, and Chairman Marcus Agius told the panel yesterday the bank’s interactions with the FSA were “strained.”

Any suggestion that Diamond was less than candid “would be totally unfair and unfounded,” the ex-CEO said in a letter to Treasury Committee Chairman Andrew Tyrie. “The comments made at today’s hearing have had a terribly unfair impact upon my reputation.” Diamond wasn’t present during the session.

Diamond resigned July 3 after the London-based lender was fined a record 290 million pounds ($450 million) for attempting to rig interest rates used as a benchmark for global lending. A day later, Diamond told Tyrie’s committee that the FSA had been “specifically pleased” with the “tone at the top,” and he didn’t disclose the FSA’s criticisms of transactions that aimed to show the bank’s accounts in a more positive light.

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Duke Had Doubts in May About Progress CEO’s Ability to Lead

Duke Energy Corp.’s board began expressing concerns about Progress Energy Inc. Chief Executive Officer Bill Johnson’s ability to lead the combined company in May.

The board viewed Johnson as “autocratic” and had concerns about a “lack of transparency,” Duke Chairman and CEO James Rogers told the North Carolina Utilities Commission at a hearing in Raleigh yesterday.

Rogers is the only scheduled witness at the hearing investigating Duke’s decision to oust Johnson as head of the combined company. One day after the $17.8 billion deal closed on July 2, Johnson resigned and was replaced by Rogers, who was slated to become executive chairman under terms of the merger agreement.

The executive-suite shuffle caused Charlotte, North Carolina-based Duke’s shares to decline 6.4 percent since July 2 and put the company on Standard & Poor’s negative credit watch. Four former Progress board members said they would have voted against the takeover had they known that Rogers would remain in charge.

Wade M. Smith, an attorney for Johnson with the law firm of Tharrington Smith LLP in Raleigh, didn’t immediately respond to voice-mails and e-mail seeking comment.

Rogers said the company didn’t inform state regulators of the concerns about Johnson because it was a “preliminary view.” The North Carolina agency approved the takeover on June 29.

Rogers told the board members on June 23 that he was willing to stay on as CEO if a decision was made to replace Johnson. No final decision was made until July 2, he said.

HSBC to Apologize at Hearing on Money Laundering, Memo Shows

HSBC Holdings Plc will apologize at a July 17 U.S. Senate hearing for anti-money laundering controls that weren’t effective enough, according to an internal memo obtained by Bloomberg News.

“We failed to spot and deal with unacceptable behavior,” Chief Executive Officer Stuart Gulliver said in the note sent to employees yesterday, referring to the period between 2004 and 2010. “It is right that we be held accountable and that we take responsibility for fixing what went wrong.”

Europe’s largest bank will be questioned by U.S. lawmakers about two weeks after a record fine was levied against Barclays Plc for rigging interest rates and its ex-CEO Robert Diamond was grilled in the U.K. HSBC, which has doubled spending on compliance since 2010 to curtail illicit money transfers, may also face a “hefty fine,” Mizuho Securities Asia Ltd. said.

Gareth Hewett, a Hong Kong-based spokesman for the lender, declined to comment on the contents of the memo. The bank has been “fully cooperating” with the Senate Permanent Subcommittee on Investigations and with U.S. regulators on the issue, he said.

Financial Services Workers Report Awareness of Wrongdoing

Almost one-third of Britain’s financial-services workers are aware of illegal behavior at their companies, and many fear reporting it, a survey by the securities litigation law firm Labaton Sucharow LLP found.

Of 500 senior professionals questioned last month, 30 percent in the U.K. and 22 percent in the U.S. said they had witnessed or had “first-hand” knowledge of wrongdoing, the law firm said yesterday in a statement. Almost 4-in-10 believe their competitors break the law to get ahead, the firm said.

The study focused on corporate ethics, the regulatory landscape and individuals’ willingness to report illegal behavior, the New York-based law firm said. It comes amid U.S. and U.K. probes into whether banks rigged the London interbank offered rate and follows a record 290 million-pound ($450 million) fine for Barclays Plc.

“It is shocking that four years after the global economic crisis began there continues to be a fundamental lack of integrity in the financial services industry,” Dominic Auld, a lawyer at Labaton Sucharow, said in the statement.

The survey shows that 30 percent of workers believe their compensation or bonus plans put pressure on them to compromise ethical standards or break the law, the firm said. An equal number said regulators and law enforcement agencies don’t effectively deter such behavior, the report said.

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Comings and Goings

New Counsel for SEC Compliance Inspections and Examinations

Paula Drake will become the new chief counsel and chief compliance and ethics officer in the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations. She begins August 6, according to the agency’s statement.

Drake will oversee a staff of eight lawyers and coordinate the efforts of attorney advisers in the SEC’s 11 regional offices.

OCIE conducts the SEC’s national examination program for investment advisers and investment companies, broker-dealers, self-regulatory organizations, clearing agencies, and transfer agents to fulfill its mission of promoting compliance, preventing fraud, monitoring risk and informing SEC policy.

Most recently, Drake was general counsel and chief operating officer at Oechsle International Advisors LLC, where she was involved in all aspects of the investment management business, including registering investment advisers and establishing risk and compliance programs.

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