Wells Fargo, Libor Defense, Tax Legislation: Compliance

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Wells Fargo & Co., the largest U.S. mortgage lender, will pay $125 million and set up a $50 million assistance fund to settle U.S. allegations that it discriminated against minority borrowers.

The bank will also stop using outside brokers to create mortgages, according to a statement yesterday from Wells Fargo. The accord settles U.S. accusations in court filings that the bank put creditworthy Hispanic and African-American borrowers into more expensive subprime loans from 2004 to 2007, and that mortgage brokers through 2009 added charges that caused minority borrowers to pay higher fees, costs and interest than similar white borrowers.

The San Francisco-based bank, which controls about a third of the market for all new home loans, denied it engaged in illegal discrimination and said it agreed to settle solely to avoid litigation, according to a proposed consent order. The company reported a $15.9 billion profit last year.

“Wells Fargo asserts that throughout the period of time at issue in this proceeding and to the present, it has treated all customers fairly and without regard to impermissible factors such as race and national origin,” the bank said in the consent order, which must be approved by a federal judge.

In a separate statement, Wells Fargo said it will stop funding loans through independent mortgage brokers and after today won’t accept new applications from them. The lender will still process and close existing applications, and the decision to stop dealing with brokers, known as wholesale lending, was made “on its own volition,” according to the statement.

The settlement with Wells Fargo is the second-largest fair-lending accord reached by the Justice Department after a record $335 million settlement with Bank of America Corp. announced in December. Countrywide, acquired by Bank of America in 2008, assessed higher fees and interest rates on more than 200,000 black and Hispanic borrowers, the Justice Department said at the time.

The case is U.S. v. Wells Fargo Bank NA, 12-cv-01150, U.S. District Court, District of Columbia (Washington).

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In the Courts

Vodafone, France Telecom May Claim Tax Back After EU Court Win

Vodafone Group Ltd. and France Telecom SA should be able to reclaim “a lot of money” from Spain after the European Union’s top court said a Spanish mobile-phone related tax they were forced to pay is illegal.

A fee imposed by local authorities in Spain on companies for the right to use infrastructure such as mobile-phone masts on municipal property is illegal, the EU Court of Justice ruled. Vodafone’s and France Telecom’s Spanish units argued the tax was unlawful and only the owners of the masts should have to pay.

“For the companies it was important to win this case because a lot of money is at stake,” said Jose Luis Buendia, a lawyer at Garrigues in Brussels, who was among those representing Vodafone Spain in the case.

Mobile-network operators, including Vodafone and France Telecom, that use the facilities of other companies to provide their services in Spain have sued the municipalities that impose the tax. With more mobile phones than people in Europe, the region’s operators are increasingly relying on sharing and combining networks to lower the costs of expansion and offer faster data downloads.

“EU law prohibits” countries in the 27-nation region “from imposing that fee on operators who, without owning that infrastructure, use it to provide mobile-telephony services,” the Luxembourg-based court said in a statement.

There are more than 1,390 laws imposing such taxes in Spain, according to court documents.

Vodafone and France Telecom representatives didn’t immediately return calls seeking comment on the ruling. Spanish Industry Ministry officials didn’t immediately return calls and e-mails seeking comment.

While the companies argued that under EU law such a tax can’t be imposed on companies that just use mobile-related infrastructure on public land, the Spanish government said the tax is lawful because the companies occupy public property.

The cases are: C-55/11, C-57/11, C-58/11, Vodafone Espana, France Telecom Espana.

RBS Asks Court to Block $1 Million Bonus to Ex-Risk Chief

Royal Bank of Scotland Group Plc asked a London court to approve a decision to block a 700,000-pound ($1 million) bonus awarded to its former head of corporate risk solutions before his dismissal.

Gary Cottle, who headed risk solutions in the investment banking division, lost his job when the unit was restructured in 2011 and refused to accept an alternative post, RBS said in court documents.

The bank said it is entitled to withhold the final payment of a 1.9 million-pound deferred bonus granted in 2009 because Cottle acted “unreasonably” in turning down the role, according to the May filing.

“If I had been offered a suitable role I would still be there,” Cottle said by phone.

Legal disputes in London over bonus payments have shed light on the culture of compensation in financial services, which some say contributed to the near collapse of the banking industry. More than 100 bankers won a court ruling in May against Commerzbank AG to force payment of individual bonuses worth as much as $2.6 million.

European regulators toughened bonus rules in 2011 to discourage the type of risk-taking that led to the 2008 financial crisis. The guidelines limit cash payouts to about one-quarter of the total to ensure incentives are linked to long-term performance, with the rest paid in deferred securities.

The case is The Royal Bank of Scotland Group Plc v. Mr. Gary Cottle, High Court of Justice, Queen’s Bench Division, HQ12X01948.

Deutsche Bank, RBS Face Top Libor Legal Tab, Morgan Stanley Says

Royal Bank of Scotland Group Plc and Deutsche Bank AG may have the highest litigation costs of 16 banks that face potential fines and lawsuits for rigging benchmark interest rates, Morgan Stanley analysts estimate.

Morgan Stanley, based in New York and the sixth-biggest U.S. bank, isn’t on the panel of firms that sets Libor rates.

Legal expenses stemming from probes into manipulation of the London interbank offer rate, or Libor, could range from $59 million for Lloyds Banking Group Plc to as much as $1.04 billion for Deutsche Bank and $1.06 billion for Edinburgh-based RBS, according to estimates published yesterday by Morgan Stanley’s Betsy Graseck in New York and Huw van Steenis in London. The costs probably would apply in 2013 and 2014, they wrote.

Barclays Plc, the second-biggest U.K. bank, agreed last month to pay 290 million pounds ($447 million) in regulatory fines for rigging Libor, spurring resignations of the chairman, the chief executive officer and its chief operating officer. The fines raised speculation about penalties that may be imposed on other banks involved and the cost of lawsuits that follow.

Former Barclays CEO Robert Diamond is being counseled by Dechert LLP.

“Dechert has been representing Mr. Diamond on this matter from the onset of the Libor investigation in 2010,” Beth Huffman, a spokeswoman for the firm, said in a telephone interview. He is represented by firm Chairman Andrew Levander and Cheryl Krause, a partner in the Philadelphia office, Huffman said.

Levander also represents J. Ezra Merkin, who ran so-called feeder funds involved in Bernard Madoff’s Ponzi scheme; Jon Corzine, the former head of MF Global Holdings Ltd.; and John Thain, the former head of Merrill Lynch, who is now chairman and chief executive officer of CIT Group Inc., Huffman said.

Norton Rose in London is counseling Diamond as well, Legal Week reported. Sarah Webster and Gavin Collins of Norton Rose didn’t respond to e-mails seeking comment.

Compliance Policy

U.S. Senate Doesn’t Advance Competing Small-Business Tax Plans

The U.S. Senate, stalled by partisan divides over tax policy, didn’t advance rival Democratic and Republican proposals to provide tax breaks to small companies.

Senators voted 73-24 yesterday to reject a Republican plan to give businesses a 20 percent tax cut. They also voted 53-44 for a Democratic plan to offer tax breaks for hiring and capital investment. To overcome procedural hurdles, the Democratic plan needed 60 votes to advance.

Senator Charles Schumer, a New York Democrat, said opposition to his party’s plan shows that Republicans are willing to damage the economy to help their chances in the November election.

“We are talking about a tax cut for small businesses here,” Schumer said. “That’s mother’s milk to Republicans.”

The votes previewed the debate over income tax cuts scheduled to expire at the end of the year. Senators plan to vote in the next few weeks on competing income-tax plans, and Republicans said yesterday’s debate ignored the uncertainty caused by the threat of higher taxes in 2013.

“If we are serious about providing true tax relief that will help small businesses grow, we can sit here and debate whether a Band-Aid will be the cure to our ailing economy,” said Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee. “Or we can begin the debate over how to prevent historic tax increases from hammering our small businesses and farms.”

The Republican proposal is H.R. 9. The Democratic proposal is S. 2237.

Compliance Action

Bank of Commonwealth Ex-CEO, Officials Charged With Fraud

The former chief executive officer of Virginia’s Bank of the Commonwealth was among six people indicted for an alleged fraud conspiracy involving a coverup of the bank’s financial condition from 2008 to 2011.

Edward Woodard, 69, who ran the bank for more than three decades, was charged in a 25-count indictment unsealed yesterday in federal court in Norfolk, Virginia. Three other former bank executives and two borrowers were also charged.

“Bank insiders were unwilling to fully acknowledge the deterioration in the bank’s loan portfolio,” according to the indictment. “They were concerned that the bank’s declining health would negatively impact investor and customer confidence, and that capital erosion would affect the bank’s ability to accept and renew brokered deposits.”

The executives concealed shortfalls by overdrawing demand-deposit accounts to make loan payments and extending new loans or additional principal on existing loans to cover payment deficiencies, the U.S. charged in the 51-page indictment.

Prosecutors are seeking $71 million in criminal forfeiture.

Woodard is charged with conspiracy to commit bank fraud, bank fraud, false entry in a bank record, unlawful participation in a loan, false statements to a financial institution and misapplication of bank funds. Each charge carries a maximum penalty of 30 years in prison.

From 2008 until it closed in 2011, the Norfolk-based bank lost almost $115 million. The bank’s failure will cost the U.S., through the Federal Deposit Insurance Corp., more than $260 million, according to the indictment.

Peter Carr, a spokesman for U.S. Attorney Neil MacBride in Alexandria, Virginia, declined to comment on the indictment.

Andrew Sacks, a lawyer for Woodard, said his client will plead not guilty to the charges, which he called “absolutely unfounded.”

The case is U.S. v. Woodard, 12-cr-00105, U.S. District Court, Eastern District of Virginia (Norfolk).

Progress Energy’s former CEO to Testify on Leadership Switch

Former Progress Energy Inc. Chief Executive Officer Bill Johnson will testify to North Carolina regulators about Duke Energy Corp.’s decision to replace him hours after the companies combined to create the largest U.S. utility owner.

The North Carolina Utilities Commission yesterday ordered Johnson and four Duke board members to appear at hearings on July 19 and 20. Johnson was replaced by Duke Chairman and CEO James Rogers hours after the takeover of Progress closed on July 2. The executives testified before the merger that Johnson would be CEO while Rogers served as executive chairman.

The hearings are an expansion of the agency’s inquiry, following July 10 testimony from Rogers. The commission asked former Progress directors E. Marie McKee and James Hyler Jr. to appear on July 19 with Johnson, who will be speaking publicly about his unexpected resignation for the first time. Duke directors Ann Maynard Gray and Michael Browning were ordered to appear July 20.

Four former directors of Raleigh, North Carolina-based Progress have said they would have opposed the merger had they known Rogers would remain in charge.

North Carolina’s attorney general is investigating whether Duke violated any laws with its boardroom maneuver. State law allows the commission to rescind, alter or amend its June 29 order approving the merger, said Sam Watson, the agency’s general counsel.

Rogers told commissioners the Duke board “lost confidence” in Johnson during the final weeks of the 18-month merger review. The two management teams clashed over a plan to address antitrust concerns in North and South Carolina and the fate of Progress’s shuttered Crystal River 3 nuclear plant, highlighting differences in corporate culture.

Wade Smith, Johnson’s attorney, said in an e-mail yesterday that Johnson will “gladly attend and answer all the questions the commission members have.”

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Euribor Should Be Overseen by EU Regulators, EBF Chief Says

European Union authorities should directly oversee the euro interbank lending rate following the interest-rate manipulation scandal in London, the head of the banking group that administers Euribor said.

The European Securities and Markets Authority should supervise how banks submit estimates of interest rates to borrow or lend to one other, Guido Ravoet, the chief executive officer of the European Banking Federation, said in an interview yesterday.

Confidence in the London interbank offered rate, or Libor, a benchmark for $360 trillion worth of financial products worldwide, has been dented by Barclays Plc’s admission that it submitted false rates. Robert Diamond, who resigned as London-based Barclays’s CEO after the bank was fined 290 million pounds ($447 million), told British lawmakers last week that other banks also lowballed Libor submissions.

Barclays’s submitters received at least 58 requests for how they should report the Euribor rate from September 2005 to May 2009, 20 of them from traders at other banks, the U.K. Financial Services Authority said last month. Short-term interest-rate contracts valued at 241 trillion euros ($293 trillion) are based on the three-month Euribor futures contract, making it the world’s fourth-largest interest-rate futures contract by volume, the FSA said.

Efforts by banking groups to oversee Euribor and Libor are “not enough,” because the rates have become widely used benchmarks, EU spokesman Stefaan De Rynck said yesterday. The European Commission is reviewing the governance of the rates and how they are calculated, De Rynck said.

EU antitrust regulators in October raided banks that offer financial derivatives linked to the Euribor rates, saying they were investigating possible collusion.

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EU Lawmakers Seek ‘Huge Package’ of High-Frequency Trading Rules

European Union lawmakers are targeting reaching a deal by September on a “huge package” of rules to regulate high-frequency trading as part of a broader effort to toughen a draft financial-markets law.

Markus Ferber, the legislator leading the effort in the European Parliament, said the assembly is determined to go beyond proposals made last year by EU Financial Services Commissioner Michel Barnier.

“The commission has proposed nothing, to be serious,” Ferber said in an interview with Bloomberg News. “They have said that something needs to be done, and that they will adopt technical standards to do it, but they don’t say in what direction they want to go. I think we can organize a huge package to regulate high-frequency trading.”

Legislators are weighing measures including stipulating minimum lengths of time that orders must be maintained, regulating minimum price movements of securities -- known as tick size -- and setting rules on fee structures, Ferber said.

High-frequency traders came under increased regulatory scrutiny after the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points. Companies active in such trading have warned that interfering with their strategies would raise investor costs and harm financial stability.

The European Commission, the 27-nation EU’s executive arm, made its proposals last year as part of revisions to financial-market rules known as Mifid.

Comings and Goings

SEC Seeks to Add Structured Note Expert to Enforcement Division

The U.S. Securities and Exchange Commission wants to hire an expert in structured products and derivatives for two years to help in “policing the industry,” the agency said in an e-mailed statement.

“We want to identify areas of risk, so that we can get ahead of the problems,” Ken Lench, head of the structured and new products unit, said in the statement. “We therefore want a candidate who knows what the trends are, what is hot, and what is new.”

In April, the SEC posted a letter on its website that was sent to banks, asking for added disclosure to their structured note prospectuses, including estimates of “fair value” at the time of sale. The agency also requested that issuers explain how they set up a secondary market for the notes, how they use the proceeds raised from sales and how important the business is to their funding needs.

The U.S. structured-note industry has come under scrutiny from regulators for the securities’ complexity and lack of transparency. Banks sold $45.9 billion of SEC-registered securities in 2011, down from a record $49.5 billion a year earlier, according to data compiled by Bloomberg.

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