HSBC, Libor Manipulation, Microsoft, JPMorgan: Compliance

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HSBC Holdings Plc’s head of group compliance, David Bagley, told a Senate hearing he will step down amid charges the bank gave terrorists, drug cartels and criminals access to the U.S. financial system by failing to guard against money laundering.

Bagley was among at least six HSBC executives who testified before the Senate’s Permanent Subcommittee on Investigations yesterday after the panel released a 335-page report describing a decade of compliance failures by Europe’s biggest bank. London-based HSBC enabled drug lords to launder money in Mexico, did business with firms linked to terrorism and concealed transactions that bypassed U.S. sanctions against Iran, Senate investigators said in the report.

Irene Dorner, president and chief executive officer of HSBC North America Holdings Inc., was also among executives who appeared before the committee.

Senate investigators focused on New York-based HSBC Bank USA NA as a “nexus” for U.S. dollar services and transfers. Senator Thomas Coburn of Oklahoma, the subcommittee’s senior Republican, pointed out that HSBC isn’t alone and that “similar problems exist at other banks.”

Senior executives from HSBC, credited with providing millions of pages of documents for the investigation, expressed contrition and promised changes in response to the findings after Levin said the bank’s failings should provide sufficient cause for U.S. regulators to consider revoking its charter.

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Compliance Action

Seven Banks Under U.K. Libor Investigation as FSA Criticized

The U.K. financial regulator said it’s investigating seven lenders over attempts to manipulate interbank offered rates as lawmakers criticized it for not opening the probe earlier.

The regulator didn’t pay attention to warning signs or react fast enough to reports of problems with Libor rates, lawmaker George Mudie told Financial Services Authority Chairman Adair Turner.

The FSA investigation, which led to a record $453 million fine last month against Barclays Plc by U.K. and U.S. authorities, wasn’t opened until 2010, despite press reports and submissions from bank employees that the London interbank offered rate was being manipulated as early as 2007.

The FSA is now investigating seven banks on suspicion of submitting false interest rates, and regulators in other countries are looking into additional lenders, Tracey McDermott, the regulator’s acting head of enforcement, told the panel, without identifying any of the firms. The FSA is seeking to levy more civil fines, she said.

Royal Bank of Scotland Group Plc, UBS AG, Lloyds Banking Group Plc and Deutsche Bank AG are among the lenders regulators in Europe, Asia and the U.S. are investigating.

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Bernanke Says Banks Underreporting Libor ‘Very Troubling’

Federal Reserve Chairman Ben S. Bernanke said the underreporting of London interbank offered rates is “unacceptable behavior” and the U.S. central bank offered a “substantial response” to address the problem.

The disclosures are “not only very troubling in themselves but they have the effect of undermining public confidence in financial markets,” Bernanke said during testimony yesterday to the Senate Banking Committee in Washington.

The Fed didn’t have information to suggest that banks were manipulating rates “for profit,” only that some were “possibly submitting low rates to avoid appearing weak” during the financial crisis, Bernanke said. The Fed doesn’t know that U.S. banks are innocent of rate-rigging, and the Federal Reserve Bank of New York is still looking into the situation, he said.

The U.S. central bank is drawing more scrutiny from lawmakers critical of its record as a bank regulator after the New York Fed released documents showing it was aware that Barclays Plc underreported borrowing costs in 2008. Barclays was fined a record 290 million pounds ($452 million) last month and the scandal cost Chief Executive Officer Robert Diamond his job.

The New York Fed knew “some banks” were potentially understating submissions for Libor as early as 2007, according to a statement posted on its website last week. A Barclays employee told a New York Fed staff member in April 2008 that the U.K.’s second-largest lender was underreporting its rate to avoid a “stigma,” the Fed district bank said.

Libor is calculated from a daily survey carried out for the British Bankers’ Association, in which the world’s biggest lenders are asked the rate they’re charging to borrow over a variety of short-term maturities in currencies including dollars, euros and yen. Banks have been accused of low-balling submissions for the benchmark during the financial crisis.

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Ex-UBS France Employee Charged in Tax Inquiry After Raids

A judge leading a tax-fraud investigation concerning UBS AG’s French unit has charged a second person with aiding in illicit marketing and money laundering.

Judge Guillaume Daieff charged the person, a former UBS employee in Lille, France, on July 12, Agnes Thibault-Lecuivre, a spokeswoman for the Paris prosecutors’ office, said yesterday.

UBS is “fully cooperating with the French authorities,” according to an e-mailed statement by the Zurich-based bank.

French tax investigators have searched UBS offices in Bordeaux, Strasbourg and Lyon as part of the inquiry, seizing hard drives, documents and questioning employees. The bank hasn’t been accused of any wrongdoing in the matter, Thibault-Lecuivre said.

The case began in April after a preliminary inquiry into a complaint by France’s national bank regulator over marketing practices.

UBS avoided prosecution in the U.S. in 2009 by paying $780 million, admitting it helped thousands of Americans evade taxes and turning over the names of 250 American clients to authorities. UBS later revealed another 4,450 accounts held by clients in the country.

Agence France-Presse initially reported the charge against the former employee yesterday.

Microsoft Faces EU Antitrust Probe Over Browser Choice

Microsoft Corp. risks European Union penalties for failing to comply with a settlement to give users a choice of web browsers, more than two years after it tried to end a decade-long clash with antitrust regulators.

EU Competition Commission Joaquin Almunia said Microsoft may have misled regulators by failing to display a browser choice screen to users of the Windows operating system since February 2011. The world’s largest software company blamed a technical error for not showing the screen to some users and offered to extend its commitment until March 2016.

Microsoft has already been fined 1.68 billion euros ($2.06 billion) in EU antitrust probes, including an 899 million-euro penalty for failing to obey an order to share data with competitors. The Redmond, Washington-based company agreed to offer access to rival browsers as a part of a 2009 settlement to repair its relationship with the bloc’s regulators. It told regulators last December that it was complying with its commitments.

“I trusted that the company’s reports were accurate,” EU Competition Commissioner Joaquin Almunia said in an e-mailed statement. “If, following our investigation, the infringement was confirmed, Microsoft should expect sanctions.”

Microsoft said it only learned this month that it didn’t offer its browser choice software to some 28 million computers running Windows 7 Service Pack 1, or 10 percent of the computers that should have received it. It blamed a technical error and said it has already started distributing a fix.

“We deeply regret that this error occurred and we apologize for it,” Microsoft said in a statement. “We understand that the commission may decide to impose other sanctions.”

Medicaid Drug-Reselling Fraud Crackdown Targets 48 People

The U.S. charged 48 people with taking part in a “massive” Medicaid fraud scheme to divert and traffic hundreds of millions of dollars in prescription drugs around the country.

More than a dozen people were arrested yesterday in New York by agents of the Federal Bureau of Investigation, said Peter Donald, a spokesman for the FBI’s New York office.

An indictment unsealed yesterday in federal court in New York charges 42 people with obtaining free or low-cost drugs to treat HIV, schizophrenia and asthma through Medicaid and re-selling them. Six more people were charged in a separate criminal complaint. Medicaid is the federal-state program to help cover the health-care costs of people with low incomes.

“The defendants and their co-conspirators profit by exploiting the difference between the cost to the patient of obtaining bottles of prescription drugs through Medicaid --which typically is zero -- and the hundreds of dollars per bottle that pharmacies pay to purchase those drugs,” prosecutors in the office of Manhattan U.S. Attorney Preet Bharara said in the felony indictment.

To reap maximum profits, the scheme targeted the most expensive drugs, including HIV medications such as Atripla, which costs $1,635 a bottle, and Trizivir, which costs $1,347 a bottle. The Medicaid recipients sold the drugs to corrupt distribution companies, which acted as wholesale distributors, thereby concealing the origin of the medications.

The cases are U.S. v. Viera, 11-CR-1072; U.S. v. Oria, 12-MAG-1854, U.S. District Court, Southern District of New York (Manhattan).

Hedge Fund Consultant Wesley Wang Admits to Passing Tips

Wesley Wang, a hedge fund consultant, pleaded guilty to federal charges that he passed inside information about Cisco Systems Inc., Polycom Inc. and Marvell Technology Group Ltd.

Wang pleaded to two counts of conspiracy to commit securities fraud in Manhattan federal court on July 13, Jerika Richardson, a spokeswoman for U.S. Attorney Preet Bharara, said yesterday. He’s set to testify against Doug Whitman, the hedge fund founder indicted in February for insider trading, at a trial slated to begin July 30, according to a filing in Whitman’s case.

Wang worked from 2005 to 2008 as a consultant for a hedge fund with offices in New York, prosecutors said in a charging document filed July 13. The U.S. said he traded tips with two unnamed co-conspirators: the president of a California investment advisory firm and the managing director of a different hedge fund with New York offices.

In a second conspiracy, Wang passed tips to a third unnamed co-conspirator while working for a different New York hedge fund from 2002 to 2005, prosecutors said.

Wang was paid $1.5 million for his work for the hedge fund between 2005 and 2008, according to the charges.

His lawyer, Michael Celio, didn’t immediately return phone messages and e-mails seeking comment on the charges.

Bill McBride, a spokesman for Whitman, had no immediate comment on Wang’s expected testimony.

The case is U.S. v. Wang, 12-CR-541, U.S. District Court, Southern District of New York (Manhattan).

Byman to Lead Jenner & Block’s Review of Peregrine for NFA

Robert Byman, the Jenner & Block LLP partner who worked with Lehman Brothers Holdings Inc.’s bankruptcy examiner Anton Valukas, is conducting the National Futures Association’s internal review of its auditing procedures and its oversight of Peregrine Financial Group Inc.

“I’ll be heading up our team but it’s an internal matter and I can’t comment further,” Byman said by phone yesterday.

The NFA on July 9 announced at least $200 million in client funds were unaccounted for at Cedar Falls, Iowa-based Peregrine.

The U.S. Commodity Futures Trading Commission sued Peregrine in federal court in Chicago on July 10, accusing Wasendorf and his firm of misappropriating client funds.

Peregrine filed for Chapter 7 court protection in U.S. Bankruptcy Court in Chicago on July 10.

Larry Dyekman, a spokesman for the NFA, declined to comment on the review of Peregrine.

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).

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).

Compliance Policy

JPMorgan Copper ETF Plan Opposed by Michigan Senator Levin

JPMorgan Chase & Co.’s plan for an exchange-traded fund linked to copper will disrupt supplies to the market and drive up prices to “create a bubble and burst cycle” in the metal, Senator Carl Levin told regulators.

Funds backed by copper would stockpile the metal and leave less available for industrial users, including manufacturers and builders, Levin said in a letter dated July 16 to the U.S. Securities and Exchange Commission. Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations, said a proposed rule change to list and trade the firm’s JPM XF Physical Copper Trust should be denied.

ETFs trade like stocks, giving investors access to commodities such as copper without taking physical delivery. NYSE Arca Inc., the electronic platform of NYSE Euronext, filed with the SEC to list and trade JPM XF Physical Copper Trust, according to an April 2 document.

JPMorgan, BlackRock Inc. and ETF Securities Ltd. have said they planned to start exchange-traded funds for industrial metals. ETF Securities started the first exchange-traded products backed by copper, nickel and tin in London in December 2010.

In the Courts

Bank of America to Settle Credit Protection and Syncora Cases

Bank of America Corp. won preliminary court approval of a $20 million settlement of a consumer lawsuit over its marketing of credit protection.

Credit card customers alleged that they were charged a monthly fee for “Credit Protection Plus” and got nothing meaningful in return, according to documents filed in federal court in San Francisco. Bank of America charged customers for the service without authorization, enrolled them through deceptive marketing and improperly denied benefits, their lawyers alleged.

Bank of America created a $20 million fund to pay card holders who enrolled in the program starting in 2006. Some may be eligible for $50 and $100 awards. The bank also agreed to change some of its practices related to the program. U.S. District Judge Thelton Henderson in San Francisco gave preliminary approval to the settlement yesterday.

The bank denied wrongdoing, according to the settlement. Betty Reiss, a spokeswoman for Charlotte, North Carolina-based Bank of America, didn’t immediately return a voice-mail message seeking comment about the accord.

Separately, Bank of America, the second-largest U.S. lender by assets, agreed to pay Syncora Holdings Ltd. $375 million as part of a deal to resolve a dispute over soured mortgages.

The agreement with the bank will “have a materially positive effect” on Syncora’s surplus, the Bermuda-based insurer said in a statement. The cost of the settlement will be covered by the bank’s reserves, said a person with knowledge of the deal who asked not to be identified because the lender hasn’t discussed it publicly.

Bank of America Chief Executive Officer Brian T. Moynihan, 52, has spent more than $40 billion cleaning up defective mortgages tied to the 2008 purchase of Countrywide Financial Corp. The settlement with Syncora follows a deal with bond insurer Assured Guaranty Ltd. valued last year at $1.6 billion.

The Syncora dispute focused on insurance provided on securitized pools of home equity lines of credit, Bank of America has said in regulatory filings.

The credit protection case is In Re: Bank of America Credit Protection Marketing and Sales Practice Litigation, 11-2269, U.S. District Court (San Francisco).

The Syncora case is Syncora Guarantee Inc. v. Countrywide Home Loans Inc., 650042/09E, Supreme Court of the state of New York (Manhattan).

Wife of Convicted Ex-Credit Suisse Broker Fights for Assets

The wife of Eric Butler, a former Credit Suisse Group AG broker convicted in a $1 billion fraud, is protesting the government’s efforts to take over joint assets, according to a federal court filing.

Elizabeth Butler yesterday objected to a recommendation that the proceeds of joint accounts go to the government to satisfy a $5 million fine and $250,000 forfeiture order. Eric Butler began serving a five-year sentence in September for crimes associated with misleading clients about securities investments.

The government and the court “take the position that because certain assets in the web of linked accounts were in Mr. Butler’s name alone, this justifies giving Mrs. Butler nothing from the accounts always considered hers, and holding funds she earned,” according to the objection filed on behalf of the Butlers.

A federal jury in Brooklyn, New York, convicted Butler in August 2009 of intentionally misleading his institutional clients, including GlaxoSmithKline Plc and Roche Holding AG, about securities purchased on their behalf. Victims’ losses were more than $1.1 billion, according to the government.

Butler and his partner, Julian Tzolov, who testified against him at trial, falsely told their clients that securities they were buying were backed by federally guaranteed student loans. Tzolov pleaded guilty and was also sentenced to prison.

Robert Nardoza, a spokesman for the U.S. Attorney for the Eastern District of New York, declined to comment on Elizabeth Butler’s objection.

The case is U.S. v. Tzolov, 08-cr-370, U.S. District Court, Eastern District of New York (Brooklyn).

Duke Energy Directors Sued Over CEO Switch in Progress Deal

Directors of Duke Energy Corp., the largest utilities provider in the U.S., were sued over the ousting of Progress Energy Inc.’s chief executive officer after the companies merged.

Lesley C. Rupp, a Duke shareholder since 2009, alleged that Duke CEO and Chairman James E. Rogers and other directors misled investors and regulators and damaged the company’s reputation when Progress CEO William D. Johnson was removed as head of the combined companies hours after the deal closed.

The complaint was filed yesterday in Delaware Chancery Court in Wilmington. The directors’ “conspiracy and tactics have had a devastating effect on Duke’s credibility,” according to the complaint.

Tom Williams, a spokesman for Duke Energy, said in an e-mailed statement that the company believes the lawsuit is without merit and will defend itself vigorously.

The case is Rupp v. Rogers, CA7705, Delaware Chancery Court (Wilmington).

JPMorgan Can’t Justify Withholding Probe E-Mails, FERC Says

JPMorgan Chase & Co. can’t show that 25 e-mails sought in an investigation of possible energy-market manipulation contain advice from lawyers and should remain out of reach of regulators, the U.S. Federal Energy Regulatory Commission told a federal magistrate.

The agency, in a filing yesterday in U.S. District Court in Washington, said that JPMorgan made identical attorney-client privilege claims for 28 other e-mails that were later turned over to regulators. Some of the earlier e-mails that JPMorgan claimed contained legal advice were messages that said “Great job compliance,” “Are you being sarcastic?” and “Plse call ASAP,” according to the filing.

“JPMorgan’s current privilege claims are the same as those it improperly made about unprivileged documents,” Thomas Olson and Vivian Chum, lawyers for the agency, wrote in the filing.

FERC sued JPMorgan on July 2 to release the e-mails in an investigation of possible manipulation of power markets in California and the Midwest by J.P. Morgan Ventures Energy Corp. U.S. District Judge Colleen Kollar-Kotelly directed JPMorgan to explain why the e-mails shouldn’t be turned over to investigators.

JPMorgan, based in New York, submitted copies of the e-mails to the court on July 13 so they can be examined by U.S. Magistrate Deborah Robinson, who is handling the dispute.

“Each of the e-mails relates to the advice of counsel with respect to the investigation -- not the adoption of the bidding practices under investigation,” Michele Roberts, a lawyer for JPMorgan, wrote in the bank’s filing. “The only possible use the commission could make of the e-mails would be to peer into the details of respondent’s legal strategy.”

FERC opened the probe in August after complaints from California and Midwest grid operators that JPMorgan’s bidding practices were abusive, according to the agency’s initial court filing.

Jennifer Zuccarelli, a JPMorgan spokeswoman, didn’t immediately comment on yesterday’s filing because she hadn’t seen it yet. Mary O’Driscoll, a FERC spokeswoman, didn’t immediately respond to an e-mail message seeking comment on the filing.

The case is Federal Energy Regulatory Commission v. J.P. Morgan Ventures Energy Corp., 12-mc-352, U.S. District Court, District of Columbia (Washington).

Goldman Settles Class-Action Over $698 Million Offering

Goldman Sachs Group Inc. reached a class settlement with investors in a $698 million mortgage-backed securities offering, a lawyer for the plaintiffs told a federal judge in New York.

David Wales, who represents the Public Employees’ Retirement System of Mississippi, told U.S. District Judge Harold Baer in a letter made public yesterday that both sides had accepted a settlement proposed by a mediator. Details of the agreement weren’t disclosed.

Wales said the parties will file papers by July 31 asking Baer to approve the settlement.

The Mississippi retirement fund sued in 2009, claiming New Century Financial Corp., which originated the mortgages underlying the securities, failed to adhere to its underwriting standards and overstated the value of the collateral backing the loans. The fund claimed Goldman Sachs didn’t conduct proper due diligence when it bought the loans in 2005.

Baer in February granted a request by the Mississippi fund to represent a class of more than 150 investors in the offering.

Michael DuVally, a Goldman Sachs spokesman, declined to comment on the settlement.

The case is Public Employees Retirement System of Mississippi v. Goldman Sachs Group Inc., 09-cv-01110, U.S. District Court, Southern District of New York (Manhattan).

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