Money-Market Funds, Peregrine, Volcker Rule: Compliance

The Federal Reserve Bank of New York said money-market fund investors should be prohibited from withdrawing all their assets at once as a way to make the $2.5 trillion industry “safer and more fair.”

Money funds should set aside a portion of every investor’s balance as a “minimum balance at risk” that could only be withdrawn with a 30-day notice, the New York Fed’s staff said yesterday in a report. The provision would reduce systemic risk and protect small investors who don’t pull out of a troubled fund quickly, according to the report.

The idea, opposed by the funds industry, is already part of a proposal before the U.S. Securities and Exchange Commission that would force money funds to float their share value or build capital cushions and impose withdrawal restrictions, a person familiar with the plan said last month. The agency hasn’t made the proposal public and hasn’t scheduled a meeting for commissioners to vote on it.

Regulators have worked on money fund proposals since the September 2008 collapse of the $62.5 billion Reserve Primary Fund triggered an industry run, helping to freeze global credit markets.

Compliance Action

Peregrine Trustee to Have Claims-Payout Estimate in 14 Days

Peregrine Financial Group Inc.’s bankruptcy trustee will tell some former clients within 14 days about how much they have to put on deposit so they can redeem specific property claims against the defunct futures brokerage.

Robert Fishman, a lawyer for Ira Bodenstein, the trustee, yesterday told U.S. Bankruptcy Judge Carol Doyle in Chicago that the preliminary estimate -- a percentage of the properties’ value -- was needed as a guide for processing 11 potential claims, primarily from owners of warehouse receipts for precious metals held by the collapsed Cedar Falls, Iowa-based firm.

“We’ll be pretty conservative,” Fishman told reporters after the hearing, in which Doyle gave the trustee permission to notify the clients about their property.

Clients will have 14 days from when they are notified to say whether they want to reclaim that property, mostly warehouse receipts for precious metals. Because claimants in the same class must be treated equally, each one seeking the return of property must deposit a percentage of its cash value, to be held for ultimate pro rata distribution to claims class members.

The percentage estimate will apply for now only to members of this group, Fishman said.

Peregrine filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code on July 10, one day after the National Futures Association, an industry self-regulator, said the firm’s bank accounts were short more than $200 million.

Russell Wasendorf Sr., Peregrine’s founder and chief executive officer, has been charged with making false statements to the U.S. Commodity Futures Trading Commission. He’s in federal custody pending a bail hearing set for July 27 in Cedar Rapids, Iowa.

The bankruptcy case is In re Peregrine Financial Group Inc., 12-27488, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

The criminal case is U.S. v. Wasendorf, 12-mj-00131, U.S. District Court, Northern District of Iowa (Cedar Rapids). 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).

Ex-Progress CEO Says Duke Tried to Exit Merger Amid Tensions

Bill Johnson, the man who was chief executive officer of Duke Energy Corp. for eight hours after its $17.8 billion takeover of Progress Energy Inc., said he battled Duke to preserve the deal after federal officials raised objections to the merger.

Tensions flared between top executives over the cost of complying with anti-competition demands of the Federal Energy Regulatory Commission, Johnson testified to the North Carolina Utility Commission in a hearing yesterday. Duke CEO James Rogers “explored every avenue to get out of the merger,” he said.

“They had buyer’s remorse,” Johnson told Commission Chairman Edward Finley. “They wanted the merger, then they didn’t want it, then they couldn’t get out of it, then they didn’t want to be stuck with me as the person who dragged them to it.”

The expense of easing the federal agency’s competition concerns was estimated to be about $110 million, according to a March 26 statement by the two companies. That narrowed Duke’s already “thin” benefit from the takeover, Johnson said yesterday.

The former Progress CEO testified as the state expands its investigation into the last-minute executive change. Johnson, 58, was replaced by the CEO of Duke who was slated to become executive chairman after the merger closed.

Duke directors signed an employment agreement with Johnson June 27, then after the transaction closed, voted to request his resignation, according to filings.

The state utility commission hearing is providing Johnson the chance to refute statements by Rogers, who told the agency on July 10 that Duke’s board lost confidence in the incoming CEO because of his “autocratic style” and his handling of Progress’s nuclear fleet.

“None of these concerns were expressed to me,” Johnson said. “I am not autocratic.” During his meetings with Rogers, “we never talked about autocratic style, culture, Progress financials, any of those.”

Shareholders have sued Charlotte, North Carolina-based Duke’s directors for allegedly misleading them and damaging the company’s reputation.

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Anil Kumar Gets Two Years’ Probation in Insider-Trading Case

Former McKinsey & Co. partner Anil Kumar was sentenced to two years’ probation for insider-trading crimes in light of what prosecutors called his “extraordinary” cooperation in the trials of Raj Rajaratnam and Rajat Gupta.

U.S. Circuit Judge Denny Chin in Manhattan yesterday declined to send Kumar to prison, noting that he was a key witness in what the government has called the biggest insider-trading cases in U.S. history. Chin also ordered Kumar, 53, to pay a $25,000 fine and forfeit $2.26 million.

“I am persuaded that this was aberrational conduct and that Mr. Kumar has led a law-abiding and productive life,” Chin said. “I am persuaded he cooperated not to get a lighter sentence but to make amends for what he did.”

Kumar testified at the trials of Rajaratnam, the co-founder of hedge-fund company Galleon Group LLC, and Gupta, the former Goldman Sachs Group Inc. director who once led McKinsey. Both men were convicted of securities fraud and other crimes.

Kumar, who worked at McKinsey from 1986 to November 2009, pleaded guilty in January 2010 to one count each of conspiracy and securities fraud. At Rajaratnam’s trial last year, he said he passed inside information about client matters, including Advanced Micro Devices Inc.’s deal to sell chips to Hewlett-Packard Co. and AMD’s acquisition of ATI Technologies Inc.

The case is U.S. v. Kumar, 10-cr-00013, U.S. District Court, Southern District of New York (Manhattan).

Feeding Frenzy Seen If Wall Street Sues Itself Over Libor

Wall Street, grappling with mounting regulatory probes and investor claims over alleged interest-rate manipulation, may face yet another formidable foe: Itself.

Goldman Sachs Group Inc. and Morgan Stanley are among financial firms that may bring lawsuits against their biggest rivals as regulators on three continents examine whether other banks manipulated the London interbank offered rate, known as Libor, said Bradley Hintz, an analyst with Sanford C. Bernstein & Co. Even if Goldman Sachs and Morgan Stanley forgo claims on their own behalf, they oversee money-market funds that may be required to pursue restitution for injured clients, he said.

Because Libor is based on submissions from only some of the world’s largest banks, the probes threaten to pit firms uninvolved in setting the rate against any implicated in its manipulation, Hintz said. Libor serves as a benchmark for at least $360 trillion in securities.

Libor and similar rates are derived by surveying a group of banks daily. Participating firms are asked how much it would cost them to borrow from one another for 15 different periods in currencies including dollars, euros, yen and Swiss francs. After a set number of quotes are excluded, those remaining are averaged and published.

Regulators are looking at whether banks made submissions that understated funding costs during the credit crisis or if traders at the firms influenced Libor to boost profits.

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SEC Agrees on Real-Time System for U.S. Stock Order, Trade Data

The U.S. Securities and Exchange Commission took a step toward improving its oversight of equity and options markets, contracting for a system that collects quote and trade data that is sold mainly to private users.

Regulators will be able to tap into real-time feeds of orders, quotes and transactions that are generated by exchange companies such as NYSE Euronext and CBOE Holdings Inc. and were, until now, used primarily by banks and automated trading firms. Tradeworx Inc., a high-frequency firm and technology vendor in Red Bank, New Jersey, will deliver a platform this year that can compile the data under an SEC contract.

The initiative to enhance access to trading-related data is separate from a much broader market oversight project known as the consolidated audit trail that SEC commissioners voted to mandate last week. That plan, years away from implementation, will let regulators monitor an order’s “life cycle,” including information circulated before it gets to an exchange or another venue, or is canceled. That project, which will capture information the morning after it occurs, will also identify the firms making trading decisions.

The fee for the market-data system is $2.5 million for the first year, Manoj Narang, CEO of Tradeworx, said in an e-mail.

The new market-data project, for use by as many as 100 people at the agency, will allow the SEC to monitor trading and hunt for abusive activity. The SEC may generate hundreds of daily queries about trading activity, the regulator told vendors in response to questions last year.

Securities Technology Monitor, a trade publication, first reported the SEC’s selection of Tradeworx for the platform.

SEC Sues STEC CEO for Insider Trading That Reaped $134 Million

The U.S. Securities and Exchange Commission sued the chief executive officer of STEC Inc. over claims he reaped $134 million by selling the company’s stock after learning confidential information about a drop in demand for one of the company’s most-profitable products.

Manouchehr Moshayedi, who co-founded the Santa Ana, California-based technology company with his two brothers in 1990, sold 4.5 million STEC shares in an August 2009 secondary offering after learning that a major customer would scale back purchases of the ZeusIOPS flash memory product, the SEC said in a lawsuit filed yesterday in federal court in Santa Ana.

STEC’s share price increased more than 800 percent from January to August 2009 as the company reported higher revenue, sales and margins for its products, particularly ZeusIOPS, the SEC said. The gain was helped by a July 2009 announcement that EMC Corp., STEC’s largest customer, had agreed to buy $120 million worth of ZeusIOPS in the third and fourth quarters, according to the complaint.

Before the secondary offering, Moshayedi learned that EMC’s actual demand was lower -- only about $34 million for the third quarter -- and wouldn’t be sufficient to ensure that STEC met its revenue guidance or analysts’ estimates, the SEC said.

According to the SEC, Moshayedi then entered into a secret side deal with EMC. Moshayedi persuaded EMC to take $55 million of ZeusIOPS product in the third quarter in exchange for an undisclosed additional $2 million price discount on the product in the fourth quarter.

When Moshayedi disclosed in November 2009 what he had known before the August secondary offering, the stock price plummeted more than 38 percent, the SEC said.

A phone call to William Baker, Moshayedi’s attorney, wasn’t immediately returned.

The case is Securities and Exchange Commission v. Moshayedi, 12-cv-01179, U.S. District Court, Central District of California (Santa Ana).

Compliance Policy

JPMorgan Among Six Banks Moving Toward Volcker Rule, Curry Says

Six of the largest U.S. banks have already taken steps to shut down their proprietary trading operations in anticipation of a ban known as the Volcker rule, U.S. Comptroller of the Currency Thomas Curry said.

In a letter to U.S. Representative Carolyn Maloney, Curry identified the six banks as JPMorgan Chase & Co., Bank of America Corp., Citibank NA, Morgan Stanley, PNC Financial Services Group Inc. and Wells Fargo & Co.

Curry said it was too soon to determine whether the banks were already in compliance with the rule, which is still being revised by five U.S. regulators. Curry’s letter, dated July 18, was in response to a question from Maloney, a New York Democrat, at a June 19 congressional hearing.

The measures taken by the lenders show that “many large banks have recognized the validity of the Volcker rule and the risk in trading for their own gain at the same time they are working for their customers’ benefit,” Maloney said in an e-mailed statement yesterday. “I applaud these institutions who are not waiting for the final rules but who recognize that Dodd-Frank is the law of the land.”

Japan Ruling Party Seeks to Criminalize Stock Information Leaks

Japan’s ruling party is seeking changes to insider-trading rules that would allow criminal charges and fines for brokerages and bankers who leak stock offering information, according to a draft document obtained by Bloomberg News.

The Democratic Party of Japan’s 15-member working group, led by former Morgan Stanley managing director Tsutomu Okubo, will submit a final version to the party by July 31, officials at the lawmaker’s office said July 18, while declining to comment further. The DPJ will then submit a proposal to the country’s Financial Services Agency.

Japan’s Securities and Exchange Surveillance Commission has uncovered five insider-trading cases since March related to equity offerings in 2010. The watchdog has recommended fines for traders who made short sales based on leaked information in those cases, while underwriters who gave them tips have received no penalties, based on existing rules.

Other DPJ proposals include allowing lead underwriters to market equity offerings under strict confidentiality agreements before share sales are announced, according to the document. The working group is also proposing that pension funds pledge not to invest in hedge funds that have breached insider rules.

The SESC is continuing to inspect Nomura Holdings Inc., Japan’s biggest brokerage, after finding that its employees gave tips to traders on share sales it managed. As part of its efforts to crack down on insider trading, the regulator this month asked Nomura, Goldman Sachs Group Inc. and 10 other brokerages to review how they handle confidential information.

Nomura said on June 29 that it cut top executives’ pay, forced two managers to step down and suspended some operations following an internal probe into leaks ahead of 2010 equity offerings by Mizuho Financial Group Inc., Inpex Corp. and Tokyo Electric Power Co.

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