Municipal Bonds, UPS, JPMorgan, Student Loans: Compliance

A former Bank of America Corp. executive was indicted for allegedly participating in what prosecutors said was a “far-reaching conspiracy” to defraud municipal bond investments through bid rigging.

Phillip D. Murphy, former head of Bank of America’s municipal derivatives desk, was charged with conspiracy to defraud the U.S., wire fraud and conspiracy to make false entries in bank records, according to the indictment filed July 19 in federal court in Charlotte, North Carolina.

Murphy “allegedly participated in a complex fraud scheme and conspiracies to manipulate what was supposed to be a competitive process,” Scott D. Hammond, a deputy assistant attorney general in the Justice Department’s Antitrust Division, said in an e-mailed statement. “The division recently convicted at trial several individuals in this investigation, which is ongoing.”

So far, 13 individuals from banks including Bank of America, JPMorgan Chase & Co. and UBS AG have pleaded guilty in the Justice Department’s investigation. Bank of America, JPMorgan, UBS, Wells Fargo & Co. and General Electric Co. have paid more than $700 million in restitution and penalties.

Bank of America, which self-reported the illegal activity, has been cooperating for more than four years with Justice Department prosecutors who say that bankers paid kickbacks to CDR Financial Products to rig bids on investment contracts sold to local governments. Municipalities bought the contracts with money raised through bond sales, which allowed them to earn a return until the funds were needed for schools, roads, and other public works.

Susan Necheles, Murphy’s lawyer, said her client would plead not guilty.

“The government has been investigating this for, I believe, seven years,” Necheles said. “I think it’s indicative of the lack of evidence against him that it took such a long time for them to bring any charges.”

Bill Halldin, a spokesman for Charlotte-based Bank of America, declined to comment on the charges.

The case is U.S. v. Murphy, 12-cr-00235, U.S. District Court, Western District of North Carolina (Charlotte).

For more, click here.

Compliance Action

UPS Faces Extended EU Antitrust Investigation Over TNT Bid

United Parcel Service Inc., the world’s biggest package-delivery company, faces an in-depth European Union antitrust review over its bid for TNT Express NV.

The deal may reduce the number of so-called integrated express delivery services from four to three across Europe, the European Commission said in an e-mailed statement. It extended the deadline to rule on the deal until Nov. 28.

“The proposed acquisition could in particular reduce competition for the provision of the fastest express delivery services, to the detriment of direct customers and ultimately of European consumers,” EU Competition Commissioner Joaquin Almunia said in the statement.

UPS is seeking to expand in Europe with the biggest deal in its 105-year history. It will vault to equal footing there with Deutsche Post AG’s DHL, the market-share leader. The tie-up with money-losing TNT will immediately add to earnings on an adjusted basis once the deal is done, the company said in March.

Atlanta-based UPS said earlier this month it expects the acquisition to close in the fourth quarter because EU regulators needed more time to examine the impact of the deal. It plans to extend its 5.16 billion euros ($6.3 billion) cash offer for TNT beyond Aug. 31.

“We have to wait and see what’s going to happen,” said Anton van der Lande, a Brussels-based UPS spokesman. “We retain dialogue with the commission and remain confident that we will receive clearance.”

Regulators said there are potential competition concerns for small parcel delivery services, in particular international express services, in several European countries where the companies would have very high combined market shares.

“During the next two weeks, UPS and TNT Express will continue to have a dialogue with the commission,” said Ernst Moeksis, a Hoofddorp, Netherlands-based TNT spokesman.

He said both companies “remain confident that we will receive clearance for the proposed acquisition within the fourth quarter.”

Duke Board Lost Confidence in New CEO After Nuclear Delays

Duke Energy Corp.’s board lost confidence in Bill Johnson as its next chief executive officer after he missed deadlines and failed to provide adequate information about a troubled nuclear reactor, the lead director said.

Johnson, the CEO of Progress Energy Inc. before its acquisition by Duke, made the board wait nine weeks after it requested a meeting with the Crystal River nuclear plant’s insurer, Ann Maynard Gray testified to the North Carolina Utilities Commission on Friday. That was a “tipping point,” she said at the hearing in Raleigh. She never spoke to Johnson about her concerns on the delay, which followed “many failed deadlines” for the reactor.

The North Carolina Utilities Commission on Friday held its third day of hearings on why Duke’s board replaced Johnson hours after the $17.8 billion merger closed on July 2.

For more, click here.

Compliance Policy

SEC Is Requesting Comment on JPMorgan’s Proposed ETF for Copper

The U.S. Securities and Exchange Commission is requesting comments on JPMorgan Chase & Co.’s proposed exchange-traded fund in copper.

The SEC is seeking comments within 30 days after publication in the Federal Register, according to a notice on its website on July 19. It is seeking information on the copper market, factors affecting stockpiles and whether the planned product will affect the supply of copper. JPMorgan spokesman Patrick Burton declined to comment.

Funds backed by copper would stockpile the metal and leave less available for industrial users, including manufacturers and builders, Senator Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations, said in a letter dated July 16 to the SEC. He 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.

FDIC Methods for Estimating Losses to Fund ‘Deficient,’ GAO Says

The U.S. Federal Deposit Insurance Corp. is correcting deficiencies in how it estimates certain losses to the fund that protects depositors when banks fail, according to the Government Accountability Office.

The GAO found “deficiencies in controls” over loss-estimation methods at the agency, it said in a report released July 20. The FDIC needs to better document how it estimates its share of losses under agreements with firms buying the assets of failed banks and needs to verify data in its loss models, the GAO recommended.

The FDIC accepted the GAO’s recommendations. In a response letter signed by FDIC Chief Financial Officer Steven O. App, the agency pledged it would fix each of the shortcomings this year.

The FDIC dismantles failed U.S. banks and uses its Deposit Insurance Fund to make sure customers don’t lose money when banks collapse. When selling off the banks’ assets, the FDIC makes agreements with the buyers to share a portion of any loss connected with the assets. The GAO reviewed that process in an April report that cited a “significant deficiency,” and the report released July 20 made further recommendations.

In the Courts

JPMorgan Ordered to Identify Witness in Blavatnik Lawsuit

JPMorgan Chase & Co. was ordered to identify the person with the most knowledge of possible regulatory probes of its J.P. Morgan Investment Management and Chase units related to the labeling of residential real estate-backed securities as part of a lawsuit by billionaire Len Blavatnik, according to a court filing.

Blavatnik, 55, sued New York-based JPMorgan, the biggest U.S. bank by assets, in 2009, claiming it put twice as much money into risky mortgages as his investment guidelines allowed while the bank was unloading such securities from its books. Blavatnik says the bank lost $98 million of his funds.

New York state Supreme Court Justice Melvin L Schweitzer on July 19 ordered JPMorgan to identify the person or provide a sworn affidavit that there is no such investigation after a “thorough and appropriate inquiry” within 30 days.

Blavatnik’s lawyers had served JPMorgan with a notice to name witnesses on a variety of topics, including one related to U.S. Securities and Exchange Commission and regulatory probes of the units, under an agreement to identify witnesses for the purpose of taking depositions in the case, according to Schweitzer’s order.

JPMorgan objected to the request and refused to identify the person, saying Blavatnik’s lawyers hadn’t shown that any such investigation exists or is likely to exist, that it would be “overly burdensome” to determine so, and that any such probe would be “irrelevant,” according to Schweitzer’s ruling.

Jennifer Zuccarelli, a spokeswoman for JPMorgan Chase, didn’t immediately respond to a telephone message and an e-mail seeking comment on the ruling.

The case is CMMF LLC v. J.P. Morgan Investment Management Inc., 601924-09, New York State Supreme Court (Manhattan).

Meat Industry Loses Challenge to Renewable Fuel Standard

The National Chicken Council and two other meat-industry groups lost a court challenge to the EPA’s national renewable-fuel standard that they said will increase feed prices in the U.S as more corn is used to produce ethanol.

A three-judge panel of the U.S. Appeals Court in Washington on Friday rejected the group’s lawsuit accusing the Environmental Protection Agency of improperly exempting some ethanol producers from requirements that their fuels have fewer greenhouse gas emissions than petroleum fuels. The judges found the groups lacked the authority to bring the case.

“The petitioners fail to show a ’substantial probability’ that qualifying ethanol plants would reduce their ethanol production,” if the rule were vacated by the court, U.S. Circuit Judge Janice Rogers Brown wrote in the opinion.

Brown said the court’s decision didn’t foreclose a later challenge to the rules, noting in the ruling that a different lawsuit “could allow us to address the merits of EPA’s reading.”

The groups, which include the National Turkey Federation and the National Meat Association, claimed EPA didn’t have the authority to exempt certain ethanol producers from the fuel standards. They argued they had the right to sue because the exemption will lead to an increase in the amount of corn being diverted to produce ethanol, thus leading to an increase in prices for animal feed.

“Although we are disappointed with the result reached by the court in this case, we are heartened by the court’s concluding point that the merits of this questionable regulation remain open to challenge,” Tom Super, a spokesman for the National Chicken Council, said in an e-mail.

The case is National Chicken Council v. Environmental Protection Agency, 10-1107, U.S. Court of Appeals for the District of Columbia (Washington).

Sulfur Dioxide Emissions Limits Upheld by U.S. Appeals Court

U.S. limits for sulfur-dioxide emissions from power plants, factories and industrial sources were upheld by a federal appeals court, which rejected a lawsuit brought by North Dakota and Texas.

A three judge panel of the U.S. Appeals Court in Washington said on Friday that the Environmental Protection Agency didn’t act “arbitrarily” in setting the 2010 rule that restricts sulfur-dioxide levels in the air to 75 parts per billion over a one-hour period.

“EPA cites evidence that current levels of SO2 in the ambient air, even when the air quality meets the current SO2” standards, “still cause respiratory effects in some areas,” U.S. Circuit Judge David Sentelle wrote in the opinion.

The regulation revokes standards for the pollutant adopted in 1971 that included limits of 140 parts per billion measured over 24 hours. North Dakota and Texas were among five states that sued over the rule.

The EPA cited research that shows short-term exposure to sulfur pollution poses a greater health threat than past rules took into account, including risks to children, the elderly and people with asthma. Power plants account for almost 70 percent of sulfur dioxide in the air, according to the EPA.

On July 13, a different appeals court panel in Washington upheld EPA’s standards for nitrogen dioxide.

The case is National Environmental Development Association’s Clean Air Project v. Environmental Protection Agency, 10-1252, U.S. Court of Appeals for the District of Columbia (Washington).

UISA Finance Appeals $146 Million Merrill Lynch Award

UISA Finance and Usinas Itamarati SA appealed a $146 million federal court judgment won in April by Bank of America Corp.’s Merrill Lynch unit.

U.S. District Judge Richard Sullivan assessed the damages in April in a breach-of-contract suit against UISA Finance and Usinas Itamarati involving a derivatives transaction in 2008. Sullivan conducted a five-day trial without a jury in June 2011. UISA Finance and Usinas Itamarati filed the appeal on July 20 in federal court in Manhattan.

UISA Finance is the financial arm of Usinas Itamarati, a Brazil-based manufacturer of sugar and ethanol. UISA and Usinas are owned by Companhia Itamarati de Investimentos.

Merrill Lynch sued in 2009 seeking $146 million in damages. UISA borrowed $125 million from Merrill in 2007, according to court filings. After the loan, UISA made an agreement with the bank for an interest-rate swap in order to reduce its interest payments.

When the financial crisis deepened in late 2008, UISA was unable to provide acceptable collateral to Merrill and the swap was terminated, according to the judgment. At that time UISA and Itamarati, the guarantor of the agreement, owed $146 million.

The case is Merrill Lynch Capital Services v. UISA Finance, 09-02324, U.S. District Court, Southern District of New York (Manhattan).

Interviews, Speeches and Reports

Impossible for Traders at 5 Banks to Rig Euribor Rates, EBF Says

Traders at five banks would have found it impossible to successfully manipulate the euro interbank lending rate known as Euribor, said the head of the European Banking Federation.

“It’s impossible for those five banks to really have an impact on the daily Euribor index,” Guido Ravoet, the EBF’s chief executive officer, told Bloomberg Television in an interview on Friday. “You need at least more than 15 banks really aligning their quotes to have any effect on the Euribor.”

Confidence in the Euribor and London interbank offered rate, or Libor, benchmarks for trillion of dollars’ 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 ($455 million), told British lawmakers this month that other banks also lowballed Libor submissions.

Ravoet said in a separate interview that he had no direct knowledge of whether any traders had attempted to rig Euribor and was referring to press articles that cited the involvement of traders at five banks.

He said he is confident that Euribor rates weren’t successfully manipulated because of the difficulty of coordinating rates between the 44 banks on the panel.

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 ($295 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.

European Union antitrust regulators in October raided banks that offer financial derivatives linked to the Euribor rates, saying they were investigating possible collusion. The European Commission is also separately reviewing the governance of interbank lending rates, which are based on banks’ own estimates of what it would cost to lend or borrow every day.

U.S. Treasury Says Lack of Data Threatens Financial System

Regulators face “significant gaps” in understanding the financial system, and the lack of adequate data threatens stability, the U.S. Treasury Department’s research arm said.

The Office of Financial Research, in its inaugural report to Congress released by the Treasury on Friday, said the gaps remain in analytical work by regulators because “none of them individually has authority to look across the entire financial system.”

The office, created by the Dodd-Frank financial-overhaul law, helps the Financial Stability Oversight Council in trying to prevent another crisis. The council, which includes Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke, analyzes potential threats to U.S. financial stability, including the European debt crisis.

“Gaps in analysis, data, and data standards represent threats to financial stability, and helping to fill those gaps” is part of the research office’s mandate, according to the report.

Manipulation of the London interbank offered rate “resulting from an opaque and closed process that allows a small number of firms to have significant influence -- poses significant risks to market integrity and investor trust, and will require continuing regulatory focus,” the OFR said.

The research office also said better data are needed for regulators to adequately analyze the repurchase-agreement market.

“Understanding the repo market requires collection of transactions-level data about the repo market -- information that is presently unavailable to regulators,” the office said.

The research unit said it is working with U.S. regulators to get transaction, position and pricing information on credit-default swaps contracts.

CFPB Says Students Victimized by ‘Subprime-Style’ Lending

Students grew indebted and went into default at the hands of a “subprime-style” private loan market that contracted amid the 2008 financial crisis, a U.S. government report issued on Friday concluded.

“Our findings reveal that students were yet another group of consumers that were hurt by the boom and bust,” Richard Cordray, director of the Consumer Financial Protection Bureau, said in an e-mailed statement. “Too many student loan borrowers are struggling to pay off private student loans that they did not understand and cannot afford.”

Education Secretary Arne Duncan, whose department co-wrote the study, urged students to make federal loans their “first option” to pay for college.

“Subprime-style lending went to college and now students are paying the price,” Duncan said in the statement. “We still have some work to do to ensure that students who take out private student loans have the same kinds of protections offered by federal loans.”

Private loans can have higher interest rates and lack the same protections as federal loans, including fixed rates, deferments and income-based repayment programs. They represent about 15 percent of the $1 trillion educational debt load.

The CFPB was created by the 2010 Dodd-Frank Act to protect them consumer from abuses related to financial products including student loans, mortgages and credit cards. The act required it and the Education Department to report on the private loan industry one year after the CFPB officially started work on July 21, 2011.

Cordray recommended that Congress require schools to certify that private loans being offered do not exceed the borrower’s need and that it reconsider a 2005 law that made it harder to discharge student debt in bankruptcy. He also called for better publicly available data on private loans.

In a conference call with reporters, Cordray declined to specify what the CFPB might do with its authority under the Dodd-Frank law to regulate private loan terms.

Duncan made similar recommendations in the report. He also suggested Congress require schools to determine whether students exhaust their eligibility for federal loans, which often have lower interest rates, before resorting to private lenders.

For more, click here.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE