HSBC, Libor, JPMorgan, Credit Cards, Peregrine: Compliance

HSBC Holdings Plc did business with firms linked to terrorism, failed to guard against money-laundering violations in Mexico and bypassed U.S. sanctions against Iran, according to U.S. Senate investigators.

HSBC affiliates worldwide gave terrorists, drug cartels and criminals a portal into the U.S. financial system, the Permanent Subcommittee on Investigations said in a 335-page report yesterday detailing a decade of lax controls. Lawmakers plan to question senior executives from the London-based bank, Europe’s largest, at a hearing in Washington today.

Senate investigators focused on New York-based HSBC Bank USA NA as a “nexus” for U.S. dollar services and transfers. Their report will be the basis of a hearing in which senators question senior executives including Irene Dorner, president and chief executive of HSBC North America Holdings Inc., and the U.S. regulators accused in the report of failing to act.

“We will acknowledge that, in the past, we have sometimes failed to meet the standards that regulators and customers expect,” Robert Sherman, an HSBC spokesman, said in an e-mailed statement. “We will apologize, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong.”

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Compliance Action

Peregrine’s Fraud Went Undetected in Two U.S. Government Reviews

The U.S. Commodity Futures Trading Commission reviewed operations at Peregrine Financial Group Inc. at least twice since 2006 without detecting the fraud that led to the collapse of the futures broker and a $200 million shortfall in client funds.

The Washington-based agency conducted examinations at Peregrine in 2007 and 2008, according to a list of CFTC reviews obtained through a public records request. The list, which includes reviews between 2006 and Nov. 9, 2011, does not detail what records or procedures examiners evaluated.

A third review was listed in 2011. A CFTC official said the 2011 exam was scheduled to oversee compliance with foreign exchange regulations but didn’t take place because of limited resources. The official spoke on condition of anonymity because the agency was still reviewing the matter.

Gary Gensler, CFTC chairman, is scheduled to testify today at the Senate Agriculture Committee, which has jurisdiction over the agency. Stephanie Allen, a CFTC spokeswoman, declined to comment on the reviews.

The CFTC sued Peregrine over the shortfall on July 10, less than a year after being scolded for poor oversight following the collapse of MF Global Holdings Ltd., which left an estimated $1.6 billion gap in customer funds.

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Libor Manipulation Losses Investigated by Five U.S. State

Attorneys general in at least five states are conducting investigations tied to alleged manipulation of the London interbank offered rate, adding to probes by U.S. and U.K. authorities.

The probes by New York, Connecticut, Massachusetts, Florida and Maryland are in different stages, according to the states. New York Attorney General Eric Schneiderman and George Jepsen in Connecticut are working together, and Massachusetts is talking with other states about possible coordination.

“The New York and Connecticut attorneys general have been looking into these issues for over six months, and will continue to follow the facts wherever they lead,” James Freedland, a spokesman for Schneiderman, said yesterday in an e-mail.

Barclays Plc, Britain’s second-biggest bank by assets, last month was fined 290 million pounds ($453 million) for submitting false rates for Libor, a benchmark interest rate for financial products valued at $360 trillion. Royal Bank of Scotland Group Plc, UBS AG, Lloyds Banking Group Plc and Deutsche Bank AG are among lenders facing inquiries over alleged rigging of Libor.

Barclays traders who allegedly manipulated rates from 2005 to 2007 may be charged by U.S. prosecutors before Labor Day, Sept. 3, according to a person familiar with the U.S. Justice Department’s investigation. The scandal led to the resignation of Robert Diamond as the bank’s chief executive officer.

New York and Connecticut are investigating whether the states incurred losses as the result of manipulation, according to Schneiderman’s office. Jaclyn Falkowski, a spokeswoman for Jepsen, said the states are investigating “with the goal of providing restitution to state agencies, municipalities, school districts and not-for-profit entities nationwide that may have been harmed by any illegal conduct.”

Massachusetts is looking into the effect on state investments and is working with state agencies and municipalities, said Brad Puffer, a spokesman for Attorney General Martha Coakley. Massachusetts is talking with other states about the possibility of working together. Puffer declined to name the states.

“We are currently investigating the serious allegations around the manipulation of the Libor and working diligently to determine what, if any, impact it may have on Massachusetts investments,” he said in an e-mailed statement.

Florida Attorney General Pam Bondi’s office is “reviewing the matter,” spokeswoman Jenn Meale said. The inquiry isn’t a formal investigation, she said. Maryland Attorney General Douglas Gansler is “looking into” the allegations, spokesman David Paulson said. Meale and Paulson declined to comment further.

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Ohio Files Motion to Lead JPMorgan ‘Whale’ Fraud Suit

Ohio Attorney General Mike DeWine filed a motion seeking to lead a proposed class-action lawsuit against JPMorgan Chase & Co. involving the activities of a U.K. trader known as the “London Whale.”

Ohio pension funds lost more than $27.5 million due to the alleged fraud, DeWine’s office said July 13 in a statement. Spokesman Dan Tierney, speaking in a telephone interview, said the state is seeking lead plaintiff status in the case because of “the size of the losses.”

JPMorgan Chase Chief Executive Officer Jamie Dimon said its chief investment office has had $5.8 billion in losses on the trades so far, and that figure may climb by $1.7 billion in a worst-case scenario.

JPMorgan spokesman Joe Evangelisti declined to comment when reached via e-mail by Bloomberg News.

Ohio is seeking to lead a class action initiated by Louisiana, Tierney said, one of four class actions that have been filed.

Public pension funds in Oregon and Arkansas as well as a Swedish national pension fund are seeking to join the Louisiana lawsuit, according to the Ohio statement.

The case is Louisiana Municipal Police Employees Retirement System v. JPMorgan Chase & Co., 12-cv-4729, U.S. District Court, Southern District of New York (Manhattan).

Ryanair Sues to Block U.K. Antitrust Probe of Aer Lingus Stake

Ryanair Holdings Plc, Europe’s biggest discount airline, asked a U.K. appeals court to block an antitrust regulator’s “unlawful” investigation of its 30 percent stake in Irish competitor Aer Lingus Group Plc.

Ryanair, which started a bid last month to buy the rest of Aer Lingus for 694 million euros ($851 million), sued to block the U.K. Competition Commission from investigating the minority stake it acquired six years ago. The airline said it would overlap with any parallel merger review by the European Union, according to a document describing the case posted yesterday on the website of the Competition Appeal Tribunal in London.

The probe by the British watchdog is “oppressive and prejudicial to the proper conduct of both investigations” and “is contrary to the public interest,” lawyers for Ryanair told the court, according to the document.

Ryanair has been fighting with regulators over the stake since it acquired the Aer Lingus shares in 2006 as part of an earlier takeover bid that was ultimately blocked by the European Union on competition grounds. The two airlines, both based in Dublin, carry more than 80 percent of the 370,000 passengers that travel between the U.K. and Ireland each month, regulators have said.

The Competition Commission, which said last month it would decide by Nov. 29 on Ryanair’s stake, put the investigation on hold until the court rules on the matter, Rory Taylor, a spokesman for the agency in London, said yesterday in a phone interview.

“There’s nothing in the law that says what exactly should happen in this situation,” Taylor said. “We’d be looking at the minority share and Europe will be looking at the takeover of the whole company.”

Ryanair is also seeking a court order allowing it to withhold information the Competition Commission requested for the probe, according to the document. Another hearing in the case was scheduled for July 27.

Ex-Schwab Executive Daifotis to Pay $325,000 in SEC Accord

Ex-Charles Schwab Corp. fund manager Kimon Daifotis agreed to pay $325,000 to settle a U.S. Securities and Exchange Commission lawsuit alleging he misled investors about the company’s YieldPlus mutual fund.

Daifotis, who led the fund’s investments, knew or should have known that the fund’s regulatory filings masked violations of its concentration policy, the SEC said in a 2011 complaint filed in federal court in San Francisco. Daifotis didn’t admit or deny wrongdoing, according to a court filing yesterday.

Daifotis agreed to pay a $75,000 fine and $250,000 in disgorgement, according to the filing, in addition to a three year bar from the securities industry. Schwab, based in San Francisco, last year agreed to pay $119 million to resolve an SEC lawsuit over the YieldPlus Fund.

The fund fell to $1.8 billion in assets in 2008 from a peak of $13.5 billion in 2007 after deviating from its stated policy by investing more than 25 percent of fund assets in private-issuer, mortgage-backed securities, according to the SEC.

“In light of the time-limited nature of the bar, Mr. Daifotis looks forward to exploring the possibility of returning to the securities business at the appropriate time,” said Covington & Burling partner David Bayless, lead counsel for Daifotis. Daifotis “is pleased to put this matter behind him,” Bayless said.

The case is SEC v. Daifotis, 11-137, U.S. District Court, Northern District of California (San Francisco).

Compliance Policy

Visa Among Payment Firms to Win Partial WTO Ruling on China

Visa Inc., MasterCard Inc. and American Express Co. were among companies to win partial support from World Trade Organization judges in a U.S. claim that China unfairly restrains the payment processors.

WTO judges in Geneva yesterday agreed with the U.S. that China unfairly discriminates against foreign suppliers of electronic-payment services by imposing requirements on them that aren’t applied to domestic companies. They rejected the U.S. argument that China UnionPay Data Co., the world’s fastest-growing bank-card network, monopolizes the handling of domestic-currency payment-card transactions.

The U.S. protested to the WTO about the limits on payment processing, saying China favors Shanghai-based UnionPay and forbids foreign companies from issuing their own bank cards denominated in its currency, building networks to support such cards or handling interbank point-of-sale transactions.

“We are hopeful that this ruling will pave the way for international payment companies to participate in the domestic payments marketplace in China,” said Will Valentine, a spokesman for San Francisco-based Visa, the world’s biggest bank-card network. “In the meantime, our existing business in China is healthy.”

MasterCard, the No. 2 network, forecast in September 2010 that China will overtake the U.S. as the largest market for credit cards by 2020, with about 900 million cards in circulation. Total cards probably will increase 11 percent a year as transaction value climbs 14 percent annually until 2025, the Purchase, New York-based company said at the time.

“MasterCard has long been of the view that open payment systems promote growth by reducing the need for cash payments, fostering innovation and reducing system risk,” Jim Issokson, a spokesman for the company, said in an e-mailed statement.

Leslie Sutton, a spokeswoman for Riverwoods, Illinois-based Discover Financial Services, which has an agreement with UnionPay to process the Chinese firm’s card transactions in the U.S., declined to comment. Sarah Meron, a spokeswoman for New York-based American Express, didn’t return an e-mailed request for comment.

In the Courts

Schering-Plough’s K-Dur Antitrust Ruling Reversed by Court

Merck & Co.’s Schering-Plough unit must face a challenge to its agreement with competitors to keep generic versions of its drug K-Dur off the market, an appeals court ruled, reversing a lower-court antitrust decision.

Wholesalers and pharmacies sued Schering-Plough beginning in 2001 over allegedly unlawful agreements to delay the entry into the market of generic versions of K-Dur, a treatment for low blood levels of potassium. Consumers incurred extra costs of more than $100 million because of the deals, according to the plaintiffs.

A lower court ruled in favor of the company in 2010. The federal appeals court in Philadelphia overturned that decision yesterday and asked the lower court to reconsider its ruling.

“We are disappointed with today’s ruling,” Ron Rogers, a spokesman for Whitehouse Station, New Jersey-based Merck, said in an e-mailed statement. “We are reviewing the decision and will consider all our options.”

Merck bought Schering-Plough in 2009.

Federal appeals panels in New York, Atlanta and Washington have upheld such agreements as long as they don’t delay generic drugs beyond the expiration of the underlying patents. The U.S. Federal Trade Commission has campaigned to block the deals, which are sometimes reached on the eve of patent trials, saying they cost consumers about $3.5 billion a year in higher prescription drug prices.

“We cannot agree with those courts that apply the scope of the patent test,” the Philadelphia panel said in its opinion. “In our view, that test improperly restricts the application of antitrust law.”

“The Third Circuit Court of Appeals seems to have gotten it just right: These sweetheart deals are presumptively anticompetitive,” said FTC Chairman Jon Leibowitz in a statement. “It’s time for the pharmaceutical companies to return to the side of consumers.”

The case is In re K-Dur Antitrust Litigation, 10-2077, 10-2078, 10-2079, U.S. Court of Appeals for the Third Circuit (Philadelphia).

Citigroup’s Stoker Misled Investors, SEC Argues at Trial’s Start

The former director of Citigroup Inc.’s collateralized debt obligation structuring group misled investors in the deal at the center of the bank’s proposed $285 million settlement with the Securities and Exchange Commission, an agency lawyer told jurors.

The SEC claims that Brian Stoker negligently violated securities law in putting together the assets underlying a $1 billion collateralized debt obligation, or CDO, called “Class V Funding III.”

“Brian Stoker made untrue statements and material misstatements to investors,” Jeffrey Infelise, an SEC lawyer, told the jury yesterday at the start of Stoker’s civil trial in Manhattan federal court.

The SEC claims Citigroup structured and sold the CDO in 2007 without telling investors that it helped pick about half the underlying assets and was betting they would decline in value by taking a $500 million short position. The SEC seeks an order requiring Stoker to disgorge profits from the deal and pay a fine.

Stoker’s lawyer, John Keker, urged jurors to look beyond any dislike they may have for Citigroup or for trading in synthetic CDOs, which he called “high-stakes, high-level gambling.”

U.S. District Judge Jed Rakoff, who is overseeing the Stoker trial, last year rejected Citigroup’s $285 million settlement with the SEC in which the bank wasn’t required to admit any liability. That ruling is on appeal.

Rakoff last week denied Stoker’s request to dismiss the SEC’s claims, ruling that there is enough evidence for a jury to find him liable.

The case is U.S. Securities and Exchange Commission v. Stoker, 11-cv-7388, U.S. District Court, Southern District of New York (Manhattan).

Peregrine’s Wasendorf Sued for Mixing Firm and Client Funds

Russell Wasendorf Sr., the chief executive officer of bankrupt futures brokerage Peregrine Financial Group Inc. facing criminal charges, was sued by a customer claiming the CEO and his son illegally commingled firm and client money.

U.S. regulators sued the Cedar Falls, Iowa-based firm and Wasendorf Sr. in federal court in Chicago on July 10 alleging they misappropriated at least $200 million in client money.

Michael LaSalvia of Naperville, Illinois, in a complaint filed in the same courthouse July 13, seeks class-action, or group, status on behalf of anyone who had money on deposit with Peregrine from January 2010 to July 10, 2012.

Russell Wasendorf Jr., who served as Peregrine’s chief operating officer, and two other executives are named as co-defendants in the complaint, which seeks unspecified money damages for alleged violations of the U.S. Commodity Exchange Act.

Wasendorf Sr., 64, is charged criminally with making false statements to Commodity Futures Trading Commission regulators about how much client money the firm had on deposit. Jane Kelly, a federal public defender representing Wasendorf Sr. in the criminal case, declined to comment on the lawsuit.

The case is LaSalvia v. Wasendorf, 12-cv-05546, U.S. District Court, Northern District of Illinois (Chicago). The criminal case is U.S. v. Wasendorf, 12-mj-131, U.S. District Court, Northern District of Iowa (Cedar Rapids).

The bankruptcy case is In re Peregrine Financial Group Inc., 12-27488, U.S. Bankruptcy Court, Northern District of Illinois (Chicago). The regulatory case is U.S. Commodity Futures Trading Commission v. Peregrine Financial Group Inc., 12-cv-05383, U.S. District Court, Northern District of Illinois (Chicago).

Microsoft Wins Ruling Ending Novell Suit Over WordPerfect

Microsoft Corp. won the dismissal of Novell Inc.’s antitrust lawsuit over the WordPerfect computer program.

U.S. District Judge J. Frederick Motz granted Microsoft’s request to close the case in an order issued yesterday. A trial of the suit ended in a mistrial in December after jurors in Salt Lake City said they were unable to reach a unanimous verdict.

Novell “did not present evidence sufficient for a jury to find that Microsoft committed any acts that violated” federal antitrust laws “in maintaining its monopoly in the operating systems market,” Motz wrote in his ruling.

Novell sought as much as $1.3 billion in damages over allegations that Redmond, Washington-based Microsoft, while developing the Windows 95 operating system in 1994, blocked an element of the software to thwart Novell’s WordPerfect and Quattro Pro programs.

Jim Lundberg, vice president of the company’s legal department, said in an e-mailed statement that the company is disappointed in the ruling and “still believes in the strength of its claim and we do intend to pursue an appeal,”

Novell, which was bought by Seattle-based Attachmate Corp., claimed WordPerfect’s share of the word-processing market fell to less than 10 percent in 1996 from almost 50 percent in 1990.

WordPerfect’s value dropped from $1.2 billion in May 1994 to $170 million in 1996, when it was sold to Ottawa-based Corel Corp., Novell said. Novell settled separate antitrust claims against Microsoft for $536 million in 2004.

The case is Novell Inc. v. Microsoft Corp., 04-01045, U.S. District Court, District of Utah (Salt Lake City).

Interviews and Speeches

Google Antitrust Probe Should Be Settled, EU Regulator Says

The European Union’s antitrust chief said he’d rather settle an antitrust probe over claims Google Inc. discriminates against rivals than pursue an enforcement action against the world’s largest Web-search engine.

“In these fast-moving markets with new activities, new products and new services, I prefer to find remedies as soon as possible and this is easier,” EU Competition Commissioner Joaquin Almunia said yesterday in an interview, referring to a settlement.

Earlier this month, Google outlined a proposal to end the EU antitrust investigation. The probe is reviewing allegations that the company promotes its own specialist search-services, copies rivals’ travel and restaurant reviews, and has agreements with websites and software developers that stifle competition in the advertising industry.

Almunia said last month he would send Google an antitrust complaint if the proposed accord didn’t eliminate the issues identified by the EU. Such a complaint could lead to a fine or limits on conduct.

Regulators are seeking “to clarify some of the aspects of the answers we received from Google,” Almunia said. “We have not yet concluded our conversation, but I hope that in the near future we will finally decide” whether to settle the probe or send a statement of objections.

Al Verney, a spokesman for Google in Brussels, said the company was cooperating with the commission.

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