Stress Tests, Swaps Rules, IPO Rules, CFPB: Compliance

U.S. banks with more than $10 billion in assets may get more time to institute internal stress testing required by the Dodd-Frank Act, U.S. banking regulators said yesterday.

The regulators proposed rules in December and January to require the big banks -- holding companies under the Federal Reserve and national banks under the Office of the Comptroller of the Currency -- to start self-testing their portfolios against adverse scenarios annually. The proposals, which initially called for banks to conduct tests this year, may be revised with a September 2013 deadline, the regulators said in coordinated statements.

The extension would apply to banks between $10 billion and $50 billion in assets, according to the Fed, OCC and the Federal Deposit Insurance Corp. The OCC said in its statement yesterday that banks with more than $50 billion may still have to run tests this year, with the agency reserving the right to let them “delay implementation on a case-by-case basis where warranted.”

Dodd-Frank, the 2010 regulatory overhaul, instituted the tests after the 2008 credit crisis in order to ensure banks were stable enough to withstand a future calamity. The final timeline for implementing the stress tests will be included in the rules eventually adopted by each agency.

In a separate stress-test requirement from Dodd-Frank, the Fed has conducted its own annual tests, reporting the first results in March. The Fed found 15 of the 19 largest U.S. banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Wells Fargo & Co., could maintain adequate capital levels in a recession scenario in which they kept paying dividends and buying back stock.

Compliance Policy

U.S. Swaps Rule May Lead to Regulatory Conflict, Say U.K., EU

U.K. and European financial regulators warned their U.S. counterparts that a rule on trading swaps outside the U.S. could conflict with laws elsewhere, according to letters sent to the Commodity Futures Trading Commission.

Rules defining U.S. entities in the trades are overly broad and could lead to regulatory overlaps, officials with the European Commission and the U.K.’s Financial Services Authority said in letters dated Aug. 24.

“This will lead to duplication of laws and to potentially irreconcilable conflicts of laws for market operators,” said Jonathan Faull, the European Commission’s director general for financial services. “EU and U.S. firms could face permanent legal uncertainty if this issue is not resolved.”

The CFTC and Securities and Exchange Commission have been writing regulations for the $648 trillion swaps market required by the Dodd-Frank Act after largely unregulated trades helped fuel the 2008 credit crisis. The law aims to have most swaps guaranteed at clearinghouses and traded on open venues. Banks have lobbied against automatically applying the rules to overseas operations, saying it would hurt their competitiveness.

CFTC members proposed interpretive guidance in June allowing for so-called substituted compliance for branches, subsidiaries and other overseas affiliates of U.S. banks when foreign jurisdictions have comparable rules. That move is appreciated but insufficient, both letters said.

The European regulators want U.S. rules to give more consideration to other jurisdictions when they have equally strong regulations. The CFTC is otherwise leaving the potential for multiple systems of rules to be applied to the same transaction, making it “economically and financially unsustainable for U.S. and EU firms,” Faull said.

Steve Adamske, a CFTC spokesman, didn’t immediately return a call seeking comment on the letters.

SEC Staff May Seek Public Comment Over IPO Quiet Period Rules

U.S. Securities and Exchange Commission Chairman Mary Schapiro has asked staff members to consider seeking public comment on whether the agency should relax rules limiting firms’ communications before initial public offerings.

The SEC’s review of restrictions during the pre-IPO “quiet period” follows enactment of a federal law directing the agency to loosen limits on how closely held companies can raise capital, Schapiro said in an Aug. 23 letter to House Oversight and Government Reform Committee Chairman Darrell Issa.

The Jumpstart Our Business Startups Act, or JOBS Act, “has made, and will continue to make, significant changes to the way IPOs are conducted and the permissible communications in both IPOs and unregistered offerings,” Schapiro wrote.

Issa, a California Republican, questioned IPO rules in a letter to Schapiro after Facebook Inc.’s share price declined following its May 18 public offering, setting off claims that institutional investors got advance word of a potential revenue decline that retail investors weren’t privy to. Issa in his June letter questioned whether conflicts of interest might be interfering with the pricing of offerings.

Morgan Stanley, Facebook’s lead underwriter, has been faulted for improperly pricing the Menlo Park, California-based social networking company at $38 a share. Shares have since declined by about 50 percent, closing Friday at $19.41.

Schapiro’s response to Issa was first reported by the Wall Street Journal.

Compliance Action

Julius Baer Says Employee Stole German Offshore Client Data

Julius Baer Group Ltd., the Swiss wealth manager, is contacting German customers after an employee stole information on their offshore bank accounts in Switzerland.

“We launched an internal investigation and we discovered a case of data abuse,” Jan Vonder Muehll, a spokesman for the Zurich-based bank, said yesterday by phone. “We are in contact with potentially affected clients.”

The suspected data thief was fired by the company and arrested, according to Vonder Muehll, who declined to give further details of the theft. SonntagsZeitung first reported the information theft.

Switzerland’s Office of the Attorney General is investigating the data theft, Jacqueline Buhlmann, a spokeswoman for the office, said in an e-mailed statement. The suspected data thief is still being detained, she said.

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CFTC Sanctions Russian SMP Bank Over Wash Sales in Yen Options

The U.S. Commodity Futures Trading Commission sanctioned Moscow-based SMP Bank over claims its employees conducted transactions with themselves that could have disrupted prices in Japanese Yen options contracts.

SMP agreed to pay $700,000 to settle the CFTC’s claims, and Epaster Investments Ltd., a Nicosia, Cyprus-based investment company that was used by SMP traders to execute two of the so-called wash sales, will pay $280,000 to resolve the matter, the agency said yesterday in a statement. In settling the claims, SMP and Epaster didn’t admit or deny wrongdoing.

SMP employees knowingly executed trades in the March 2012 Japanese Yen options contracts listed on the Chicago Mercantile Exchange at prices higher than any bids and offers in the market at the time, the CFTC said. In three instances SMP bought contracts from itself and on two occasions the employees used trading accounts at Epaster to carry out the transactions.

Wash sales, in which a party buys a contract from itself, can alter the price of a contract if they are executed above or below market rates. They are illegal when done intentionally to manipulate prices.

A phone call and e-mail to SMP Bank after regular business hours were not immediately answered.

In the Courts

Ghavami’s Rigged Bids Betrayed Municipal Issuers, U.S. Says

Ex-UBS AG managing director Peter Ghavami and two former colleagues lied and cheated to rig bids for city and state finance deals, a federal prosecutor said in closing arguments at their criminal trial.

Ghavami and former co-workers Gary Heinz and Michael Welty defrauded municipal-bond issuers by manipulating the competitive bidding process for investment transactions, the prosecutor, John Van Lonkhuyzen, told jurors yesterday in federal court in Manhattan.

States, cities and other issuers of tax-exempt municipal bonds must use competitive bidding to select firms that will invest proceeds of the securities, according to a six-count indictment in the case. Ghavami and his co-defendants are accused of circumventing that process.

From August 2001 to at least July 2002, the defendants colluded with conspirators at banks and at least one brokerage firm to learn about other bids before submission deadlines, according to an indictment. They also conspired to commit wire fraud from March 2001 to November 2004, prosecutors said.

UBS, Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and GE Funding Capital Market Services, a former General Electric Co. unit, have paid more than $700 million to settle U.S. claims over the scheme. As many as 13 individuals have pleaded guilty to criminal charges.

Ghavami, a Belgian citizen, was co-head of the municipal bond reinvestment and derivatives group at Zurich-based UBS from about January 2001 to March 2004, with Heinz and Welty reporting to him, according to prosecutors.

Ghavami’s attorney, Charles Stillman, argued during his closing argument that the government had “not come close” to proving its case. Ghavami was a “diligent, successful employee who carried out his work in good faith,” he said. Closing arguments are scheduled to continue today.

During the trial, which began July 30 before U.S. District Judge Kimba Wood, prosecutors sought to show that the defendants rigged auctions by talking to competitors and by paying kickbacks to brokerage firm CDR Financial Products Inc.

Ghavami and co-conspirators often attempted to deliberately lose auctions rather than win them, according to the indictment.

Defense lawyer Marc Mukasey, a lawyer for Heinz, told jurors that there were “plenty of sound, legitimate, honest business reasons,” for firms to bid on deals they didn’t want to win.

The case is U.S. v. Ghavami, 10-cr-1217, U.S. District Court, Southern District of New York (Manhattan).

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HSH Nordbank Sues Over $634 Million in Mortgage Securities

HSH Nordbank AG, a German regional lender bailed out during the financial crisis, sued Goldman Sachs Group Inc. and Morgan Stanley over more than $634 million in residential mortgage-backed securities.

HSH Nordbank accused Goldman Sachs and Morgan Stanley, both based in New York, of making “material misrepresentations and omissions” about the underwriting standards used to issue mortgage loans that were pooled together into the securities, according to documents filed Aug. 24 in New York State Supreme Court in Manhattan.

Goldman Sachs declined to comment on the lawsuit, Tiffany Galvin, a company spokeswoman, said in a telephone interview. Lauren Onis, a spokeswoman for Morgan Stanley, declined to comment on the lawsuit immediately in a telephone interview.

HSH Nordbank sued Goldman Sachs over $110 million in mortgage securities and Morgan Stanley over $524 million of the investments, according court papers.

Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.

HSH Nordbank, based in Hamburg, is one of a group of regional German lenders sued in state court in Manhattan over mortgage-backed securities during the past year. Other banks sued by HSH Nordbank include UBS AG and Barclays Plc.

The new cases are HSH Nordbank AG v. Morgan Stanley, 652988/2012, and HSH Nordbank AG v. Goldman Sachs Group Inc., 652991/2012, New York State Supreme Court, New York County, (Manhattan).

Express Scripts Wins Dismissal of Medco Acquisition Claims

Express Scripts Inc. won dismissal of most of the legal claims filed by groups of retail drug stores challenging its $29.1 billion acquisition of Medco Health Solutions Inc.

The National Association of Chain Drug Stores, the National Community Pharmacists Association and independent pharmacies sued Express Scripts and Medco in March, claiming the pharmacy-benefit managers’ merger would reduce competition and make fewer services available to retail customers.

U.S. District Judge Cathy Bissoon in Pittsburgh yesterday threw out the retailers claims made as buyers of national, full-service benefit-management services, saying any injuries they’d suffer from a loss of competition would be compensable with cash while they’d sought only injunctive relief.

Bissoon provisionally dismissed other claims -- including those the retailers said arose as potential competitors in prescription benefits management business -- and gave the plaintiffs until Sept. 10 to re-plead them.

Finally, the judge declined to toss retailer claims the Express Scripts/Medco combination could choke off competition in the dispensation of medicine requiring special handling, also known as clinical specialty drugs.

Lisa Boylan, a spokeswoman for the plaintiff National Association of Chain Drug Stores, didn’t immediately return a telephone message left after regular business hours seeking comment on the ruling.

The association’s attorney, Robert Robertson of Hogan Lovells LLP in Washington, who argued the case for the plaintiffs at the April hearing, declined to comment on the ruling in an e-mail message.

Brian Henry, a spokesman for St. Louis-based Express Scripts, declined to comment on the court’s decision.

The case is National Association of Drug Stores v. Express Scripts Inc., 12cv395, U.S. District Court for the Western District of Pennsylvania (Pittsburgh).

Rajat Gupta Insider-Trading Sentence Is Reset for Oct. 17

Ex-Goldman Sachs Group Inc. director Rajat Gupta’s sentencing on securities fraud for leaking inside information to fund manager Raj Rajaratnam was reset for Oct. 17, a day earlier than previously set.

Gupta, 63, formerly managing partner of McKinsey & Co., was convicted by a federal court jury in Manhattan on June 15 of three counts of securities fraud and one count of conspiracy. Prosecutors said Gupta, who sat on the board of New York-based Goldman Sachs and Cincinnati-based Procter & Gamble Co., leaked tips he learned from board meetings to Rajaratnam, who had also been his business partner.

U.S. District Judge Jed Rakoff, who presided over the trial, originally set Gupta’s sentencing for Oct. 18. Rakoff, in an order made public yesterday, said that date had been reset with “the consent of the parties.”

The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).

Comings and Goings

Consumer Bureau Names Acting Director for Its Rule-Writing Unit

The U.S. Consumer Financial Protection Bureau named Kelly Thompson Cochran, formerly a lawyer with Wilmer Cutler Pickering Hale & Dorr LLP, to serve as the agency’s acting assistant director for regulations.

Cochran, who worked as the bureau’s deputy assistant director for regulations after joining from the Treasury Department, will replace Leonard Chanin, who left last week to join law firm Morrison & Foerster LLP. The consumer agency announced Cochran’s appointment in a statement yesterday.

Stephen Van Meter, who previously was the assistant general counsel for policy, will become deputy general counsel, the bureau said in its statement. Meredith Fuchs became general counsel of CFPB in June after Leonard Kennedy became an adviser to consumer bureau Director Richard Cordray.

The bureau also announced that Chris Lipsett will join from WilmerHale to become senior counsel in Cordray’s office and Delicia Reynolds Hand will serve as staff director for the consumer advisory board and councils.

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