Insider Trading, Mortgage Discrimination, ECB: Compliance

U.S. regulators sued a Georgia accountant over claims he passed confidential information on Sanofi-Aventis Inc.’s 2009 offer to buy Chattem Inc. to friends who then made illegal trades ahead of the deal’s announcement.

Thomas D. Melvin Jr., who was an accountant for a Chattem board member, learned of the pending deal in December 2009 when his client asked how an ownership change would affect his stock options and tax liability, the Securities and Exchange Commission said yesterday in a complaint filed in federal court in Atlanta. Melvin’s tips generated more than $500,000 in profits for the seven people who traded on the information, the SEC said.

Shares of Chattem, maker of products such as Allegra allergy medicine and Gold Bond foot powder, rose 33 percent on Dec. 21, 2009, after Paris-based Sanofi-Aventis said it would make a tender offer for all of the company’s stock at a 32 percent premium over the previous day’s close. Melvin had told three friends and a partner at his accounting firm about the impending transaction, the SEC said. The information was subsequently passed to three others, according to the complaint.

Sanofi completed its acquisition of Chattem on March 11,


Four of the seven people who traded on the confidential information agreed to settle the SEC’s claims, paying back their illegal profits, plus interest and penalties, for a total of more than $175,000, the SEC said.

Melvin didn’t trade; according to the lawsuit, his benefit was “in the form of furthering both his personal and professional relationship with” one of the tippees.

Melvin is represented by C. Brian Jarrard of Jones Cork & Miller LLP in Macon, Georgia. Jarrard didn’t immediately return a call seeking comment on the complaint.

The case is Securities and Exchange Commission v. Melvin, U.S. District Court, Northern District of Georgia (Atlanta).

Compliance Action

GFI Mortgage to Pay $3.56 Million in Race Bias Suit Accord

GFI Mortgage Bankers Inc., a firm concentrating on New York, New Jersey and Florida, agreed to pay $3.56 million to resolve a lawsuit in which it was accused of discriminating against black and Hispanic borrowers.

The New York-based company admitted to charging higher interest rates and fees to black and Hispanic borrowers than for similarly qualified white borrowers from 2005 to 2009, the U.S. Attorney’s Office in Manhattan said yesterday. The firm also agreed to reform its practices, the government said.

The Justice Department sued the lender in April alleging that it engaged in a pattern of discriminatory lending. The company described itself on its website as “one of the largest licensed home mortgage firms” and said it funds more than $1 billion in mortgages annually.

GFI previously argued that it had no legal liability for any of the conduct alleged in the case, according to a consent order filed Aug. 27 with the court.

In settling the case, the company acknowledged that a statistical analysis showed it charged interest rates that were from 19 to 41 basis points higher for black borrowers and from 20 to 23 basis points higher for Hispanic borrowers than for white borrowers with similar credit characteristics, according to the order.

The analysis also showed the company charged fees that were from 73 to 105 basis points higher for black borrowers and from 27 to 56 basis points higher for Hispanic borrowers than for similarly situated white borrowers, the filing said.

A basis point is the equivalent of 0.01 percentage point.

“Notwithstanding its strong denial of DOJ’s discrimination claims in this lawsuit, GFI has always preferred to settle this case provided it could do so on affordable terms,” said Andrew L. Sandler, counsel for the lender, of Buckley Sandler LLP. “Last week, DOJ offered such terms and the case quickly settled. GFI can now return its full focus to its mortgage lending business.”

The case is U.S. v. GFI Mortgage Bankers Inc., 1:12-cv-02502, U.S. District Court, Southern District of New York (Manhattan).

PepsiCo, Energy-Drink Makers Said to Be Probed by New York

The New York attorney general is investigating PepsiCo Inc. and two other energy-drink makers over their marketing practices, according to a person familiar with the probe.

Attorney General Eric Schneiderman in July subpoenaed PepsiCo, maker of the Amp energy drink, as well as Monster Beverage Corp. and Living Essentials LLC, which makes 5-Hour Energy, said the person, who declined to be named because the person wasn’t authorized to speak publicly about the probe.

Schneiderman’s office is investigating the companies’ marketing practices and ingredient disclosures, including whether energy drinks are improperly marketed as dietary supplements, the person said. The companies also don’t disclose the true amount of caffeine in the drinks, the person said.

Michelle Duffy, a spokeswoman for Schneiderman, declined to comment. The probe was first reported by the Wall Street Journal.

Monster, the largest U.S. energy-drink maker by volume sales, said in a regulatory filing this month that an unspecified attorney general was investigating the company’s flagship drink and ingredients.

A message left before regular business hours for Roger Pondel, a spokesman for Corona, California-based Monster, wasn’t immediately returned.

Jeff Dahncke, a spokesman for Purchase, New York-based PepsiCo, declined to comment.

Elaine Lutz, a spokeswoman for 5-hour Energy, said the company had no additional comment beyond an earlier bond offering filing.

“We will appropriately disclose any new, material information,” Lutz said yesterday in an e-mail.

Hong Kong Seeks Court Order for Ernst & Young Audit Papers

Hong Kong’s Securities and Futures Commission asked a court to order Ernst & Young Hong Kong to produce audit papers related to the listing plans of Standard Water Ltd.

Ernst & Young failed to comply with the SFC’s request for the documents on Standard Water, a wastewater treatment company that applied to sell stock in Hong Kong in 2009, according to a statement from the watchdog on Aug. 27.

The audit firm said the documents requested were held by its joint venture partner in China and couldn’t produce them, according to the statement, which also cited Ernst & Young as saying it was restrained by Chinese secrecy laws. The SFC said its legal action followed consultation with the relevant authority in China.

“Accounting and audit working papers relating to private companies applying for listing in Hong Kong must be capable of being produced,” the regulator said. “Especially where the SFC is investigating suspected misconduct.”

In March 2010, Ernst & Young informed the Stock Exchange of Hong Kong of its resignation as reporting accountants and auditors of Standard Water upon discovery of certain inconsistencies in documentation provided by the company. The company withdrew its listing application shortly afterward.

“We understand our obligations to the SFC and endeavor to fully comply, while also meeting our compliance obligations with mainland China’s laws and regulations,” Ernst & Young said in an e-mailed statement. “As legal proceedings are under way, it would be inappropriate for us to comment further.”

Ernest Kong, a spokesman for the SFC, declined to comment on why the regulator was pursuing the case after the listing application had been withdrawn.

Ernst & Young Hong Kong’s Chinese partner also failed to produce the records to mainland authorities who had requested them, the SFC said in its statement.

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Assurant Details Force-Placed Sales After Pressure by SEC

Assurant Inc., facing reviews into whether it overcharges for insurance that some homeowners are compelled to buy, expanded disclosure about its profits after an inquiry from the U.S. Securities and Exchange Commission.

Premium revenue from so-called force-placed coverage was $36 million in New York and $54 million in California in the first six months of this year, New York-based Assurant said in its second-quarter regulatory filing. The coverage accounted for 89 percent of profit at Assurant’s specialty property unit this year through June 30, according to the filing.

California, Florida and New York are pressing force-placed insurers to cut premiums amid inquiries into whether firms including Assurant and QBE Insurance Group Ltd. charge too much. The National Association of Insurance Commissioners, an organization of state regulators, held a hearing on the coverage this month, and Assurant said other watchdogs may examine the business, also called lender-placed insurance.

“The company has experienced an increase in the number of inquiries from departments of insurance and other regulators,” Assurant said in a letter to the SEC dated June 29 which was released yesterday. “If in the aggregate such reviews lead to significant decreases in premium rates for the company’s lender-placed insurance products, our results of operations could be materially adversely affected.”

Force-placed coverage is typically selected by lenders and paid for by borrowers, and the business expanded as homeowners missed payments amid the financial crisis. It protects the mortgage holder from storm damage and vandalism when homeowners stop paying for their prior policies. Assurant and Sydney-based QBE control at least 90 percent of the U.S. market, Kevin McCarty, Florida’s insurance commissioner, said this month.

“Like all registered companies, our filings are subject to review by the SEC,” Robert Byrd, a spokesman for Assurant, said in an e-mail. “We will continue to work cooperatively with regulators at the national and state level.”

Residential Capital Faces SEC Investigation for Possible Fraud

Residential Capital LLC, the bankrupt mortgage unit of Ally Financial Inc., is being investigated by the U.S. Securities and Exchange Commission for possible fraud.

“The commission is investigating possible fraud in the offer and sale of residential mortgage-backed securities by ResCap and certain of its subsidiaries,” the SEC said in an Aug. 27 filing in federal court in Los Angeles.

The investigation started Feb. 22, according to the SEC’s filing.

Residential Capital, known as ResCap, filed for bankruptcy May 14 with plans to sell most of its assets and to resolve lawsuits related to mortgage-backed securities. ResCap has proposed settling a fight over mortgage-backed securities by giving investors the right to pursue an $8.7 billion claim in bankruptcy.

Ally, a Detroit-based bank that specializes in car loans, is majority-owned by the U.S. Treasury after receiving a bailout.

Susan Fitzpatrick, a spokeswoman for ResCap, declined to comment on the court filing.

The agency is also asking a judge to force R.R. Donnelley & Sons Co. to comply with an administrative subpoena for due diligence reports on the bonds that ResCap prepared. Doug Fitzgerald, a spokesman for Chicago-based R.R. Donnelley, a commercial printer, said the company was subpoenaed as a service provider, not as a party to the case.

The case is SEC v. R.R. Donnelley, 12-7331, U.S. District Court, Central District of California (Los Angeles).

The bankruptcy case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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Ex-Fund Managers Chiasson, Newman Face More Fraud Charges

The U.S. filed new securities-fraud charges against Level Global Investors LP co-founder Anthony Chiasson, ex-Diamondback Capital Management LLC portfolio manager Todd Newman and New York analyst Jon Horvath.

All three were charged in January by prosecutors in the office of Manhattan U.S. Attorney Preet Bharara with being part of a “criminal club” of friends and co-workers who reaped almost $62 million from insider trading in Dell Inc. shares.

The men were initially charged with conspiracy and securities fraud. The revised indictment filed yesterday adds charges of securities fraud stemming from the actions of Danny Kuo, a former analyst at Whittier Trust Co., a South Pasadena, California-based wealth-management company. Kuo, who was arrested with the defendants in January, pleaded guilty in April and agreed to cooperate with the government.

The revised indictment describes how the criminal club worked and how fund managers passed insider tips to each other.

Greg Morvillo, a lawyer for Chiasson; Steve Peikin a lawyer for Horvath; and Stephen Fishbein, a lawyer for Newman, didn’t return voice-mail messages left at their offices seeking comment about the charges.

The case is U.S. v. Newman, 12-00124, U.S. District Court, Southern District of New York (Manhattan).

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Compliance Policy

SEC Commissioners Fault Schapiro Over Money-Market Rule Debate

Two U.S. Securities and Exchange Commission members faulted Chairman Mary Schapiro’s handling of discussions over rules governing money-market funds, saying she misrepresented other commissioners’ dissents after proposing regulations that could “severely compromise” the industry.

“The changes the chairman advocated were not supported by the requisite data and analysis, were unlikely to be effective in achieving their primary purpose, and would impose significant costs on issuers and investors while potentially introducing new risks into the nation’s financial system,” Republican commissioners Daniel Gallagher and Troy Paredes said yesterday in a statement.

The statement is the latest in a string of public barbs among the SEC’s presidentially appointed commissioners following Schapiro’s decision last week to scrap a vote on a proposal for tighter money-market fund rules. In canceling the vote, Schapiro said “the issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away.”

Gallagher and Paredes, who had offered a counterproposal that would allow firms running money funds to stop investor flight in the event of a run, said they were “dismayed” by Schapiro’s statement. They also commended Luis Aguilar, a Democratic commissioner, who called for further study before proposing rules that could cause investors to move money from money-market funds to other unregulated investment vehicles.

“The chairman’s statement creates the misimpression that three commissioners -- a majority of the commission -- are not concerned with, or are somehow dismissive of, the goal of strengthening money-market funds,” Gallagher and Paredes said. “This is wholly inaccurate.”

SEC Guidance on Cyber-Disclosure Becomes Rule for Google, Amazon

U.S. Securities and Exchange Commission guidelines on when companies should disclose cyber-attacks have become de facto rules for at least six companies, including Google Inc. and Inc., agency letters show.

The six companies were asked to break silence and tell investors in future filings that intruders had breached their computer systems, according to the SEC letters. Companies such as Amazon argued that the attacks weren’t important enough to reveal. Hacking admissions can hurt reputations, give competitors useful information and trigger investor litigation.

Before the requests, Seattle-based Amazon, the largest Internet retailer, hadn’t said in its reports that cyber-thieves had raided its unit, stealing addresses and some credit card digits from 24 million customers in January. In April, Amazon was asked by the SEC to disclose the cyber-raid in its next quarterly filing, which it did.

Google, the world’s biggest search engine, agreed in May to put its previously disclosed cyber-assault in an earnings report. American International Group Inc., Hartford Financial Services Group Inc., Eastman Chemical Co. and Quest Diagnostics Inc. were also prodded to improve disclosures of cyber-risks, according to SEC letters available on the regulator’s website.

The U.S. Congress, reviewing a bill designed to boost defenses against computer attacks, has been debating ways to encourage companies to disclose such hacking, including a voluntary system for reporting.

The SEC instituted a voluntary disclosure plan in an October advisory. This year, the SEC sent dozens of letters to some companies, asking about cyber-security disclosures and later pushing companies to disclose, spokesman John Nester said.

“It’s not a rule, but the SEC, by taking a policy position, can effectively create a rule,” said Peter Henning, a former SEC lawyer who teaches at Wayne State University in Detroit. “It lets companies know what it would like to happen.”

Nester declined to say how many companies had been told to disclose in future filings. The SEC disclosure letters aren’t all public yet.

Cyber-attacks on U.S. computer networks rose 17-fold from 2009 to 2011, according to data cited by General Keith Alexander, head of the National Security Agency and U.S. Cyber Command, at a July conference.

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ECB Said to Urge Weaker Basel Liquidity Rule on Crisis Risks

The European Central Bank is pushing global banking regulators to relax a draft liquidity rule so that lenders can use some asset-backed securities and loans to businesses in a buffer they must hold against a possible credit squeeze, according to three people familiar with the talks.

The ECB, backed by the Bank of France, considers a draft version of the liquidity coverage ratio, or LCR, may hamper efforts to combat the euro-area debt crisis by curtailing lending and making it harder for central banks to implement their monetary policies, said the people, who couldn’t be identified because the discussions at the Basel Committee on Banking Supervision are private. They said the ECB stance is opposed by some other Basel members, including U.S. regulators.

The LCR was drawn up by the Basel group as part of a package of measures to prevent a repeat of the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc. The ECB is seeking to relax the rule -- designed to force banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze -- by expanding the range of eligible securities, aligning the standard more closely with its own collateral arrangements, the people said.

“As central banks have relaxed their rules” during the debt crisis in the euro area, “the LCR has become more and more out of sync with central-bank reality,” said Jesper Berg, senior vice president at Nykredit A/S, Denmark’s biggest mortgage bank.

The 212 largest global banks would have had a collective shortfall of 1.76 trillion euros ($2.2 trillion) as of June 2011 in the assets needed to meet the LCR, according to figures published by the Basel committee. The ratio is scheduled to take effect in 2015.

Lenders have warned that a provisional version of the LCR standard, published in 2010, would force them to cut loans by making them hoard cash and buy up more government bonds, because few assets other than sovereign debt would fully qualify.

There are concerns among some Basel members, including in the U.S., that far-reaching changes to the LCR may undermine the effectiveness of the measure, which was drawn up in part to make lenders less reliant on central bank support in crises, the people said. Germany’s Bundesbank and Swedish regulators are also among members skeptical of the ECB proposals, two of the people said.

Officials at the ECB and the Bank of France in Paris declined to comment.

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Virginia Governor McDonnell Asks EPA for Ethanol Waiver

Virginia Governor Bob McDonnell asked the U.S. Environmental Protection Agency to suspend the nation’s ethanol requirement, citing high grain prices.

McDonnell follows lawmakers from both political parties who have called for a suspension of the mandate in the wake of the worst U.S. drought in 56 years, prompting the U.S. Agriculture Department to reduce its forecast for this year’s corn crop to

10.779 billion bushels.

The governors of North Carolina, Arkansas, Maryland, Texas, Delaware and Georgia have asked the Obama administration to halt the law, which requires refiners to use 13.2 billion gallons of ethanol this year and 13.8 billion in 2013.

The EPA asked Aug. 20 for public comments on the waiver requests and said it has 90 days to make a decision.

Growth Energy, an ethanol trade group, sent a letter on Aug. 27 to Arkansas Governor Mike Beebe and the heads of the other states who have called for a waiver, saying that the measure isn’t needed.

Texas Governor Rick Perry was unsuccessful in a 2008 petition to the EPA to reduce the requirements.

In the Courts

Travelport, Sabre, Orbitz Must Face Antitrust Suit by American

Sabre Holdings Corp., Travelport LP and Orbitz Worldwide Inc. must face American Airlines Inc.’s antitrust claims, a federal judge ruled.

U.S. District Judge Terry R. Means in Fort Worth, Texas, yesterday publicly released his Aug. 7 decision at the companies’ request.

American claims Sabre, Orbitz and Travelport are conspiring to block the carrier from entering the electronic flight data and reservations market via its AA Direct Connect system, in violation of federal antitrust laws.

“American identifies the specific intent to monopolize allegedly shared by Sabre, Travelport and Orbitz,” Means wrote in his 23-page ruling, denying defense motions to dismiss those claims filed under a part of the Sherman Antitrust Act.

The case is part of a dispute triggered by Fort Worth-based American’s move to provide flight information directly to travel agents rather than going through the three data providers.

In an Aug. 16 ruling, Means threw out Travelport counterclaims against the airline owned by bankrupt AMR Corp. Jill Brenner, a spokeswoman for Atlanta-based Travelport, didn’t immediately reply to after-hours voice-mail and e-mail requests for comment on the decision unsealed by Means yesterday.

Orbitz’s media relations department didn’t reply to an e-mailed request for comment.

“There was no decision on the merits of the claims,” said Nancy St. Pierre, a spokeswoman for Southlake, Texas-based Sabre. “The judge did not say American’s claims were valid, only that American had made allegations sufficient to meet the minimal pleading requirements of federal court.”

“The court’s order confirms that American has adequately pleaded numerous antitrust claims against the defendants,” American said in a statement. “We would prefer to resolve our dispute with the defendants amicably, but any such resolutions need to end anticompetitive practices and to account for the harm done to American.”

The case is American Airlines Inc. v. Travelport Ltd., 11-cv-00244, U.S. District Court, Northern District of Texas (Fort Worth).

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