Short-Selling, U.K. Insider Trading, Libor: Compliance

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Spain and Italy reinstated a short-sale ban on stocks as bank shares plunged to record lows, bond yields rose and the euro traded below its lifetime average against the dollar on concern the debt crisis is growing.

Spain’s CNMV market regulator banned the creation of negative bets on equities through shares, derivatives and over-the-counter instruments for three months. Italy’s Consob prohibited the practice on 29 banking and insurance stocks for one week, citing “grave tensions” in financial markets.

Yesterday’s move echoes decisions in August last year by the two nations plus France and Belgium after European banks hit their lowest levels since the credit crisis of 2008 and 2009. Most bank stocks extended their decline once the bans were lifted.

Short-sellers sell borrowed shares with plans to buy them back later at a lower price, a practice some politicians and investors blame for roiling markets.

The European Securities and Markets Authority “is aware” of the bans, David Cliffe, an ESMA spokesman, said in a telephone interview yesterday. ESMA was set up last year to harmonize the implementation of market rules across the European Union.

France’s markets regulator, the AMF, said in an e-mail yesterday it has no plans at this stage to introduce a ban because of the current market situation “does not seem to justify such a decision.” Veerle De Schryver, a spokeswoman at Belgium’s markets regulator in Brussels, also said the agency has no plans to introduce new limitations on short-selling.

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Six Guilty in U.K. Insider-Trading Ring at Banks’ Printers

Six men were found guilty by a U.K. jury of making 732,044 pounds ($1.13 million) from trading on inside information taken from the print rooms for UBS AG and JPMorgan Chase & Co.

The case is the largest insider-trading ring prosecuted by the U.K. Financial Services Authority. The London jury reached a partial verdict on July 20 and continued deliberating yesterday on counts against two of the defendants before reaching a final decision in the 18-week trial.

“This sort of behavior poses a significant risk to the integrity of markets and cheats honest investors,” Tracey McDermott, FSA acting director of enforcement, said in a statement yesterday. “We will continue to use all of the tools at our disposal to ensure those who seek to abuse the system have nowhere to hide.”

The FSA filed charges in the case, known as Saturn, in 2010 after a 21-month investigation, which used around 25 lawyers and investigators probing 130 trading accounts. The defendants were either family members or friends, and were able to coordinate their actions, according to the FSA.

The six men convicted were granted bail yesterday until their sentencing on July 27.

Two of the defense lawyers, Giles Bark-Jones of Bark & Co. Solicitors and John Williams at Bankside Law, declined to comment on the verdicts. Lawyers for the other men weren’t immediately available for comment.

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CFTC’s Chilton Sees Silver Investigation Concluding This Year

A four-year probe of potential price manipulation in the silver market may be completed as early as September, according to Bart Chilton, a member of the U.S. Commodity Futures Trading Commission.

“I am hopeful and expect the silver investigation to conclude in the not-too-distant future, hopefully in September or October,” Chilton, a 52-year-old Democrat, said in an e-mail. “It has already taken way too long.”

The enforcement division of the Washington-based agency, the main U.S. overseer of derivatives markets, began pursuing allegations of manipulation in the silver market in September

2008. Investigators have analyzed more than 100,000 documents and interviewed dozens of witnesses, the CFTC said in a November 2011 statement.

Chilton, who didn’t say whether the probe has uncovered evidence of manipulation, said previously that there had been “repeated attempts” to influence prices.

“There have been fraudulent efforts to persuade and deviously control that price,” he said at an October 2010 hearing in Washington. “Any such violation of the law in this regard should be prosecuted.”

Steve Adamske, a CFTC spokesman, didn’t immediately respond to an e-mail seeking comment on the status of the investigation sent outside of regular business hours.

The agency concluded in a May 2008 report, before starting the investigation, that there was no evidence of manipulation in the market between 2005 and 2007. The CFTC, in the preceding two decades, had received “numerous letters, e-mails and phone calls from silver investors” alleging that silver futures on the New York Mercantile Exchange had been manipulated downward, according to the report.

Santander Joins Six Others in Interest-Rate Swap Sales Probe

Banco Santander SA’s U.K. arm and six other lenders will review potential rule violations in sales of interest rate hedging products to small businesses as part of the Financial Services Authority’s plan to compensate customers.

Allied Irish Banks Plc, Bank of Ireland Plc, and units of the National Australia Bank Ltd. joined Co-Operative Bank Plc and Northern Bank Ltd. in the review, which could lead to compensation to buyers of improperly sold interest-rate derivatives. The banks make up around 10 percent of the U.K. market for the products, the FSA said in an e-mailed statement.

Barclays Plc, Royal Bank of Scotland Group Plc and Britain’s two other biggest banks said last month they would compensate small and medium-size d businesses for sales of swaps that lost money as interest rates plunged. While the FSA found “serious failings” by the banks dating back to 2001, it stopped short of fining the firms.

“It is appropriate and fair that any business which purchased these products is offered the opportunity to discuss them with us,” Steve Pateman, head of U.K. banking at Santander, said in an e-mailed statement.

Santander said it would review sales of interest-rate products to around 200 customers who bought them from December 2001 onwards.

Banks offered derivatives to small businesses and individual customers on concern that they might not be able to service loans if floating rates rose.

“This is a major exercise but one that we hope will ensure even more businesses benefit from having their individual situation reviewed,” Clive Adamson, director of supervision at the U.K. financial watchdog’s market conduct unit, said in the statement.

Neugebauer Seeks More Documents From Fed on Libor Manipulation

Representative Randy Neugebauer is seeking more information from the Federal Reserve Bank of New York on its communications with banks that are involved in setting the London interbank offered rate.

Neugebauer in a letter released yesterday asked for all communications from August 2007 until July of this year between employees of the New York Fed and staff at the 16 banks pertaining to Libor rate submissions. Neugebauer is a Republican from Texas.

“There are still many outstanding questions that merit further investigation,” Neugebauer, who serves on the House Financial Services Committee, said in the letter addressed to William C. Dudley, president of the regional Fed bank.

The Fed has come under increased scrutiny from lawmakers critical of its record as a bank supervisor after the New York Fed released documents on July 13 showing it was aware that Barclays Plc underreported Libor rates in 2008. Barclays was fined a record 290 million pounds ($450 million) last month for rigging interest rates and the scandal cost Chief Executive Officer Robert Diamond his job. At least a dozen banks are being investigated.

Chairman Ben S. Bernanke defended the Fed’s response to Congress last week, saying the U.S. central bank cooperated with other regulators and suggested a fix. The documents released by the New York Fed showed that Timothy F. Geithner, then the president of the regional Fed bank, sent a memo in June 2008 to Bank of England Governor Mervyn King recommending changes to how Libor was calculated.

Andrea Priest, a spokeswoman for the New York Fed, declined to comment.

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Compliance Policy

Two U.S. Senators Propose Letting SEC Impose Bigger Penalties

U.S. senators Jack Reed and Charles Grassley introduced a bill to authorize the Securities and Exchange Commission to impose bigger sanctions after the agency said it didn’t have adequate tools to deter financial fraud.

Under the proposed legislation, fines against individuals would be capped at $1 million per violation instead of $150,000 and penalties for firms would be limited to $10 million from $725,000 for each misdeed, according to a joint statement yesterday by Reed, the Rhode Island Democrat who leads a subcommittee that oversees the SEC, and Grassley, the Iowa Republican.

The proposals reflect a November request by SEC Chairman Mary Schapiro that Congress authorize the agency to seek penalties based on the scope of investor losses.

CME Group Plan Would House Customer Money Away From Brokerages

CME Group Inc., the world’s largest futures market, said it’s considering a plan to house all customer funds at clearinghouses or other depositories after futures investors have lost money held at MF Global Holdings Ltd. and Peregrine Financial Group Inc.

The exchange operator said any interest earned by the customer money would be returned to the futures brokerages to maintain a key feature of how the firms earn revenue, according to a letter to customers sent yesterday by Executive Chairman Terrence Duffy and Chief Executive Officer Phupinder Gill.

“While these firms may have been at fault, it’s nevertheless our problem as an industry, and this problem needs a solution,” they wrote in the letter. Customers at MF Global are still missing $1.6 billion in segregated funds after the firm filed for bankruptcy in October.

About $220 million in segregated client money is unaccounted for at Peregrine after its founder and Chief Executive Officer Russell Wasendorf Sr. was arrested July 13 after a suicide attempt and a signed confession that he had defrauded customers for 20 years.

In both cases, the excess customer money held at the brokerages is what disappeared. The customer funds held by CME Group in the MF Global case and at Jefferies Group Inc. in the Peregrine situation were protected.

In the Courts

Devon Energy, Texas Sue EPA Over Ozone Limits Set by Bush

Devon Energy Corp. and the state of Texas sued the U.S. Environmental Protection Agency to challenge the way ozone emission limits set by President George W. Bush’s administration are being implemented.

The lawsuits, brought in the U.S. Court of Appeals in Washington, are among more than 10 filed since July 19 opposing the agency’s designation of 46 areas across the country as failing to meet the 2008 federal maximum standard of 75 parts per billion. Devon Energy objects that Wise County, Texas, where it has natural gas operations, is on the list.

“The science behind the designation is lackluster, and relies on methods rejected by other EPA regions,” Joe Leonard, an environmental, health and safety engineer at Devon Energy, said in testimony before the House Committee on Oversight and Government Reform on July 13.

A state or locality must develop a plan to cut its ozone pollution if it’s tagged with the designation of “non-attainment” for exceeding the 75 parts-per-billion standard.

EPA Administrator Lisa Jackson proposed lowering the standard to 70 parts per billion, which President Barack Obama turned down in September after a lobbying campaign by industry groups.

Other challengers include Targa Resources Corp., the state of Tennessee and the Gas Processors Association.

Chip Minty, a spokesman for Oklahoma City-based Devon Energy, and David Bloomgren, an EPA spokesman, didn’t immediately respond to telephone messages seeking comment on the lawsuit.

The Devon Energy case is Devon Energy Corp. v. U.S. Environmental Protection Agency, 12-01322; the Texas case is Texas v. U.S. Environmental Protection Agency, 12-01316, U.S. Court of Appeals for the District of Columbia (Washington).

Walnut Place Withdraws From BofA Mortgage-Bond Case

Walnut Place, which was challenging Bank of America Corp.’s proposed $8.5 billion mortgage-bond settlement with investors, withdrew from litigation over the deal.

Walnut Place entities that intervened in the case sought court permission to withdraw, according to a filing yesterday in New York State Supreme Court that didn’t give a reason. Justice Barbara Kapnick approved an order permitting the withdrawal.

The move bolsters Charlotte, North Carolina-based Bank of America, which reached the settlement last year to resolve claims over Countrywide Financial mortgage bonds. The accord is before a New York state judge for approval.

Walnut Place is among a group of investors that intervened in the case seeking more information about the agreement. Walnut Place has said in court papers that it has “serious concerns” about the adequacy of the settlement and that Bank of America was paying $8.5 billion to resolve claims “worth many times that amount.”

Walnut Place is a pseudonym used by hedge fund Baupost Group LLC, Theodore Mirvis, a Bank of America attorney, said at a court hearing, according to a transcript.

Owen Cyrulnik, an attorney for Walnut Place, declined to comment on the withdrawal. Elaine Mann, a spokeswoman for Boston-based Baupost, who said in March that the firm doesn’t comment on specific investments, didn’t immediately return a call seeking comment yesterday.

The case is In the matter of the application of the Bank of New York Mellon, 651786-2011, New York State Supreme Court (Manhattan).

Sealy Directors Mismanaged Firm, Investor Says in Suit

Sealy Corp., the world’s largest bedding maker, and its directors were sued by a shareholder who contends they mismanaged the company by allowing 44 percent-stakeholder Kohlberg Kravis Roberts & Co. undue influence.

The lawsuit also questions the propriety of more than $20 million in payments to KKR since 2006 and continuing consulting fees in addition to “false and misleading statements” about payments, amid millions of dollars in losses and allegedly adverse publicity.

“Board members have failed to disclose information about the nature of KKR’s relationship with the company and the provision of large payments to KKR,” shareholder Jay M. Plourde said in a complaint filed July 19 in Delaware Chancery Court in Wilmington.

The lawsuit asks a judge to award damages to the Trinity, North Carolina-based company from officials for their alleged wrongdoing, as well as legal fees and costs of litigation, according to court papers.

Michael Murray, a spokesman for Sealy, and Kristi Huller, a spokeswoman for KKR, didn’t immediately return calls seeking comment on the lawsuit.

The case is Plourde v. Rogers and Sealy, CA7709, Delaware Chancery Court (Wilmington).

Goldman Sachs, Bain Ask for Bid-Rigging Lawsuit to Be Thrown Out

Goldman Sachs Group Inc., Bain Capital Partners LLC and Carlyle Group LP urged a federal judge to dismiss an investor lawsuit accusing the largest investment banks and private-equity firms of conspiring to rig bids on leveraged buyouts.

The financial companies were among the defendants seeking summary judgment from U.S. District Judge Edward Harrington in the five-year-old class-action, or group lawsuit, according to court filings yesterday in Boston.

Goldman Sachs, in its filing, said the plaintiffs haven’t proved that the banks and private-equity firms “participated in any conspiracy in violation of the antitrust laws.” Most documents supporting the motions are under seal. The plaintiffs are expected to file their motions for summary judgment next month.

Individuals and a pension fund that held shares in companies including Freescale Semiconductor Ltd., Neiman Marcus Group and Aramark Holdings Corp. sued the firms in 2007 and


The defendants also include Blackstone Group LP, Kohlberg Kravis Roberts & Co., JPMorgan Chase & Co., Apollo Global Management LLC, Providence Equity Partners Inc., Thomas H. Lee Partners LP, Silver Lake Technology Management LLC and TPG Capital.

The case is Dahl v. Bain Capital Partners LLC, 07-12388, U.S. District Court, District of Massachusetts (Boston).

Masco Price-Fixing Trial Canceled Amid ‘Serious’ Talks

Masco Corp.’s trial on claims by independent contractors that it colluded with insulation makers to fix prices was canceled by a federal judge after a lawyer said the parties were in talks with a mediator.

U.S. District Judge Julie Carnes in Atlanta yesterday called off the trial, according to a docket entry. Opening arguments were set to begin this week in the case, which was brought in 2004 by independent contractors who accused Masco and four insulation makers of conspiring to force them to pay more than Masco, one of the largest U.S. installers of home insulation.

In a trial that was expected to last six weeks, 369 independent contractors were seeking $150 million in damages against Masco, the sole remaining defendant after the insulation makers settled for undisclosed terms.

“We have been through the mediator since Wednesday in continued discussions, and I think it’s fair to say it’s serious discussions,” William R. Sherman, the Masco attorney, told the judge, according to a transcript.

Sherman didn’t immediately return a call seeking comment on the cancellation or the talks. Steven Rosenwasser, an attorney for the contractors, declined to comment. Maria C. Duey, a Masco spokeswoman, didn’t immediately return a phone call seeking comment.

Details of the settlements with the manufacturers, including CertainTeed Corp. and Johns Manville Inc., have been sealed by the court.

Masco, based in Taylor, Michigan, has previously called the contractors’ allegations baseless. Its motion to dismiss the lawsuit remains sealed by the court.

In a 2009 ruling allowing the case to go to trial, Carnes said there was evidence the insulation makers established a price “spread” that gave Masco a 10 percent to 12 percent discount over independent contractors.

The case is Columbus Drywall & Insulation Inc. v. Masco Corp., 04-cv-03066, U.S. District Court, Northern District of Georgia (Atlanta).

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