Post-Knight Rules, Shoddy Mortgages, Higher One: Compliance

The U.S. Securities and Exchange Commission is writing new rules in the wake of Knight Capital Group Inc. losses that could turn longstanding policies for how exchanges manage their automated systems into regulations.

After Knight suffered a $440 million trading loss Aug. 1 that almost put it out of business, the SEC began work to bolster existing policies meant to ensure the exchanges’ systems can safely handle trading demands, according to a person familiar with the SEC’s work who spoke on condition of anonymity because the process isn’t public.

SEC Chairman Mary Schapiro said in an Aug. 3 statement that she asked her staff to hasten work “to require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems.” The agency will hold a Sept. 14 public meeting with industry participants to talk about “how we can strengthen the stability of our market structure while still preserving the many benefits of electronic trading,” Schapiro said in a statement yesterday.

The malfunction at Knight tripped safeguards previously put into place by the SEC after technical faults caused the one-day, May 6, 2010, market crash. The SEC’s so-called automation review policies, put in place with exchanges after the 1987 market crash, require the venues to notify the regulator of trading failures or security lapses. Portions of those policies will serve as the basis for the new rules, the person said.

Compliance Policy

BofA Law Firm Says Lenders May Need More Mortgage Reserves

Bank of America Corp.’s law firm defending the company against MBIA Inc. in a dispute over defective mortgages said that a court ruling in a separate case means lenders should reevaluate their reserves for bad loans.

Lenders could be forced to repurchase shoddy mortgages even if banks’ misrepresentations weren’t responsible for defaults, O’Melveny & Myers LLP said in a client note on its website. The law firm cited a June 19 ruling in which the judge sided with bond insurer Syncora Holdings Ltd. against a mortgage company.

“In light of a recent federal court ruling, banks may wish to reevaluate litigation risk from plaintiff insurers claiming injury” in bonds they backed, Robert Stern, an O’Melveny partner, said in the note dated July 27. Firms “facing such lawsuits may wish to reevaluate their exposure and possibly adjust reserves set aside to cover such risks.”

The Syncora ruling contrasts with Bank of America’s argument that bond insurers and other firms should only win refunds if they prove that loan defects led to defaults. While Chief Executive Officer Brian T. Moynihan committed more than $40 billion to clean up mortgages at the second-biggest U.S. lender, he has yet to resolve disagreements with MBIA, whose claims make it one of the bank’s biggest remaining adversaries.

The note “was not a commentary on any institution’s reserve decisions,” said Majory Appel, a spokeswoman for O’Melveny & Myers. Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment on the law firm’s note.

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Compliance Action

Standard Chartered CEO Says ‘No Grounds’ to Revoke License

Standard Chartered Plc Chief Executive Officer Peter Sands hit back at a New York regulator’s claims the bank broke U.S. sanctions, and said he saw “no grounds” for revoking the lender’s license.

Standard Chartered has tumbled about 16 percent in London trading this week after New York regulator Benjamin Lawsky threatened to strip the London-based bank of its license to operate in the state, alleging it processed $250 billion of deals with Iranian banks subject to sanctions.

“We reject the position and portrayal of facts by the Department of Financial Services,” Sands said on a conference call with reporters yesterday, his first public comments since the regulator’s report on Aug. 6. “It would be disproportionate and wholly inconsistent with the actions of other U.S. authorities in other sanctions matters” to revoke the bank’s New York license, he said.

The dispute is becoming increasingly political. Mayor of London Boris Johnson yesterday accused New York of seeking to damage its biggest competitor as a financial center, while Bank of England Governor Mervyn King criticized the regulator for failing to co-ordinate with its counterparts.

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Standard Chartered might be asked to pay as much as $700 million to resolve money-laundering allegations filed by New York’s banking superintendent after his department grew impatient with inaction by federal regulators, a person familiar with the case said.

Lawsky, who heads up New York’s Department of Financial Services, tried unsuccessfully a few months ago to get U.S. regulators to punish the London-based bank for conduct involving disguised Iranian money transfers, said the person, who asked not to be identified because the matter is confidential. The transfers have been under investigation by federal agencies for more than two years, according to Lawsky’s Aug. 6 order.

A settlement of $700 million would match the amount that HSBC Holdings Plc set aside last month after a Senate committee found the bank gave terrorists, drug cartels and criminals access to the U.S. financial system. A payment of that sum by HSBC would be the largest paid by any bank so far.

A large fine and loss of a banking license could result in Standard Chartered becoming a takeover target for bigger lenders, Jon Kirk, a partner of financials research at Redburn Partners LLP, said in a note to clients.

Lawsky’s agency notified federal and local regulators and prosecutors about his order, the person familiar with the matter said. David Neustadt, a spokesman for the Department of Financial Services, or DFS, declined to comment on the reasons for Lawsky’s actions.

Standard Chartered is also being investigated by the Federal Reserve Bank of New York, the Justice Department and the Manhattan District Attorney, the bank said in a statement.

The Federal Bureau of Investigation is also reviewing the wire transfers, said a person familiar with the investigation who asked not to be identified because the probe is active.

On a conference call yesterday, Standard Chartered Chief Executive Officer Peter Sands denied that the bank broke U.S. anti-money laundering laws, saying it “has always tried to comply with U.S. sanctions.”

A hearing over whether the bank’s license to operate in New York should be revoked is slated for Aug. 15.

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Separately, the U.S. Treasury Department confirmed yesterday its Office of Foreign Assets Control is investigating Standard Chartered for “potential Iran-related violations as well as a broader set of potential sanctions violations.”

The U.S. Treasury made the statement in a letter to the U.K. Treasury in London. The letter was obtained by Bloomberg News.

OFAC Director Adam Szubin said in the letter that “we will continue to coordinate with other federal and state agencies” in the investigation.

Higher One Pays Students $11 Million for Unfair Fees, FDIC Says

Higher One Holdings Inc. and Bancorp Bank have agreed to pay civil penalties for their handling of student debit cards, according to the U.S. Federal Deposit Insurance Corp.

Higher One will pay $11 million in restitution to students cheated by extra fees, the FDIC said yesterday in a statement. The New Haven, Connecticut-based company is affiliated with Bancorp Bank of Wilmington, Delaware, which has agreed in the settlement to improve its compliance management. The companies will pay a combined $282,000 in civil penalties, the FDIC said.

Mitsubishi UFJ Suspends Third London-Based Worker on Libor Probe

Mitsubishi UFJ Financial Group Inc. said its banking unit suspended a London-based employee, the third worker in a month, as U.K. authorities investigate suspected manipulation of benchmark interest rates.

The Bank of Tokyo-Mitsubishi UFJ Ltd. worker has been asked to stay at home, Hironori Imafuku, a Tokyo-based spokesman for Mitsubishi UFJ, said without naming the employee or giving further details.

The lender’s decision comes after the bank on July 10 said it suspended two traders in London in relation to the local regulator’s interbank lending rate probe. Barclays Plc in June was fined 290 million pounds ($454 million) for rigging Libor as authorities in Europe, Asia and the U.S. broaden inquiries into manipulation of benchmark gauges for borrowing.

The Yomiuri newspaper reported earlier today that U.K. regulators are investigating the unidentified individual.

Japan’s Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corp. and Norinchukin Bank are among 18 banks that contribute to the fixing of U.S. dollar Libor at the British Bankers’ Association, according to the group’s website. The three and Tokyo-based Mizuho Corporate Bank Ltd. are among 13 banks that set Japanese yen Libor, the association said.

Taiwan FSC to Allow China Companies IPOs, Commercial Times Says

Companies registered on the mainland of China or that are at least 30 percent owned by Chinese citizens will be allowed to hold initial listings in Taiwan, subject to approval, the Commercial Times reported, citing Wu Tang-chieh, vice chairman of Financial Supervisory Commission, as saying.

Taiwan’s Financial Supervisory Commission will also allow yuan-denominated mutual funds to be set up in Taiwan, the newspaper reported.


Ex-Home Diagnostics CEO Pleads Guilty to Insider Trading

George Holley, former chief executive officer and chairman of Home Diagnostics Inc., pleaded guilty during his trial on insider-trading charges, according to the U.S. attorney’s office in New Jersey.

Holley, 72, pleaded guilty to two counts of securities fraud yesterday in federal court in Trenton, where prosecutors rested their case Aug. 7, Matthew Reilly, spokesman for Paul Fishman, the U.S. attorney in New Jersey said.

Holley illegally tipped at least six people that Osaka, Japan-based Nipro Corp., a maker of medical equipment, would buy his company, according to the indictment. Holley pleaded guilty to charges relating to two of those people.

Nipro bought Home Diagnostics, based in Fort Lauderdale, Florida, for $215 million in February 2010. The subsidiary, which makes blood glucose monitoring systems and disposable supplies for diabetics, is now known as Nipro Diagnostics.

“We felt that the plea agreement that was arrived at during trial was an appropriate, fair resolution of the case,” Kevin Marino, Holley’s defense attorney, said in a telephone interview.

Sentencing is scheduled for Dec. 4. Holley faces as many as 20 years in prison on each of the two counts.

Assistant U.S. Attorney Judith Germano and Assistant U.S. Attorney Christopher Kelly declined to comment on the plea.

The criminal case is U.S. v. Holley, 11-cr-66, U.S. District Court, District of New Jersey (Trenton). The SEC case is Securities and Exchange Commission v. Holley, 11-cv-205, U.S. District Court, District of New Jersey (Trenton).

Ex-Terex CFO Apuzzo Must Defend SEC Case, Appeals Court Says

Joseph Apuzzo, the former chief financial officer of Westport, Connecticut-based Terex Corp., must defend a U.S. Securities and Exchange Commission lawsuit claiming he aided an accounting fraud, an appeals court said.

The U.S. Court of Appeals in Manhattan reinstated a lawsuit that a Connecticut judge dismissed in 2010, reasoning that the SEC did not adequately allege substantial assistance by Apuzzo to the scheme.

“The SEC is not required to plead or prove that an aider and abettor proximately caused the primary securities law violation,” the appeals court said in an opinion yesterday reversing the lower court. “The complaint plausibly alleges that Apuzzo provided substantial assistance to the primary violator in carrying out the fraud.”

Seth Taube, a lawyer for Apuzzo, didn’t immediately respond to an e-mail request for comment. The appeals court didn’t rule on the merits and said only that the case may go forward.

The case is SEC v. Apuzzo, 11-696-cv, 2nd U.S. Circuit Court of Appeals (Manhattan).

Jury Fails to Reach Verdict at Trial of Ex-ISoft CEO, Directors

The jury in the trial of the former chief executive officer and two former directors of iSoft Group Plc failed to reach a verdict on charges brought by Britain’s Financial Services Authority that the men lied to the market about revenue in order to win contracts and boost merger talks.

The judge at a London criminal court discharged the jury after a three-and-a-half month trial and scheduled another hearing for Sept. 7, according to the FSA. The agency is considering whether to seek a retrial.

Ex-Deloitte Partner Admits to Securities Fraud, U.S. Says

Ex-Deloitte & Touche LLP partner Thomas P. Flanagan pleaded guilty to one count of securities fraud and admitted he traded on inside information about clients of the firm, the U.S. Justice Department said.

Flanagan, 64, entered his plea yesterday before U.S. District Judge Robert Dow in Chicago, acting U.S. Attorney Gary Shapiro said in a press statement. The accountant engaged in the conduct from December 2006 to May 2008, the government said.

He left the firm in the latter year, ending a 30-year association with Deloitte and its corporate predecessors. Flanagan made about $420,000 in illicit profits for himself and $58,000 more for a relative, according to prosecutors.

“The profits resulted from illegally trading on the inside information that Flanagan obtained regarding Deloitte clients,” Shapiro said.

Flanagan, who is free on his own recognizance, will be sentenced on Oct. 25. A plea agreement with prosecutors calls for a term of three to four years. He has settled a related lawsuit with the SEC.

A defense lawyer, Joel Levin in the Chicago office of Perkins Coie LLP, didn’t immediately reply to a voice-mail message seeking comment.

Jonathan Gandal, a Deloitte spokesman, said the firm sued Flanagan for his actions after learning of them and added that Flanagan “concealed from Deloitte his trades in the securities of our clients,” and “lied about his compliance” with the firm’s policies and reporting system.

The case is U.S. v. Flanagan, 1:12-cr-00510, U.S. District Court, Northern District of Illinois (Chicago).


Maughan Expects StanChart to Keep U.S. Banking License

Simon Maughan, a financial industry strategist at Olivetree Securities, talked about money-laundering allegations filed against Standard Chartered Plc.

He spoke with Guy Johnson on Bloomberg Television’s “City Central.”

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Keating Says Obama ‘Demonizes’ U.S. Banking Industry

Frank Keating, president and chief executive officer of the American Bankers Association, discussed the impact of scandals and President Barack Obama’s remarks on the financial services industry, the importance of community banks and the impact of regulations on bank profitability.

Keating, who spoke with Erik Schatzker on Bloomberg Television’s “Market Makers,” also talked about proposals to break up larger banks.

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Banks Risk Criminal Exposure, Burns Says in Interview

Douglas Burns, a former federal prosecutor, talked about New York state’s allegations that Standard Chartered Plc violated U.S. law on financial transactions with Iran and rules on the subject administered by the Treasury Department’s Office of Foreign Assets Control (OFAC).

He spoke with Pimm Fox on Bloomberg Television’s “Taking Stock.”

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Comings and Goings

FSA’s McDermott Named Enforcement Chief After Leading Libor Case

Tracey McDermott has been named the U.K. financial regulator’s head of enforcement after leading its investigations into attempted manipulation of interbank offered rates and a push to prosecute insider trading.

McDermott was named director of the Enforcement and Financial Crime Division at the Financial Services Authority, a role she’s performed in an acting capacity since April 2011, FSA Managing Director Martin Wheatley told staff in an e-mail today. She will head the enforcement unit at the Financial Conduct Authority when the FSA is split in two next year.

McDermott took over as acting enforcement chief when Margaret Cole was appointed managing director last year, a post she left in March to join the private sector. The enforcement division has won 10 convictions for insider trading and levied its largest fines ever against a firm and an individual since McDermott took over, Wheatley said. She joined the FSA in 2001 as an associate in enforcement.

Carney Signals He Isn’t a Candidate for Bank of England Governor

Bank of Canada Governor Mark Carney signaled he isn’t a candidate to succeed Mervyn King as the next Bank of England chief.

Carney, asked yesterday on the BBC’s Hardtalk program in London whether he would be interested in becoming governor of the U.K. central bank, said he’s “very focused” on his current posts and “interested in who they pick” to replace King. Questioned on whether his answers meant “a no or a never consider the job?” he said: “It’s both. How’s that?”

Carney’s name has been frequently listed among candidates ever since the Financial Times reported in April that the Canadian had been approached for the role by the Bank of England’s court of directors, a claim refuted by its chairman. Chancellor of the Exchequer George Osborne said the same month that he would begin work in the autumn on a formal search to replace King, who will retire in June 2013.

In a separate interview with CTV television, Carney said he hasn’t been approached by the Bank of England’s court or spoken to Prime Minister David Cameron on the matter. He said he planned to “fulfill” his role as Bank of Canada governor, which is due to last until 2015.

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