American Express, Deutsche Bank, Taxes: Compliance

American Express Co., the biggest credit-card issuer by purchases, will pay $112.5 million to settle claims it violated consumer safeguards from marketing to collection in products sold to about 250,000 customers.

“Several American Express companies violated consumer protection laws and those laws were violated at all stages of the game -- from the moment a consumer shopped for a card to the moment the consumer got a phone call about long overdue debt,” Consumer Financial Protection Bureau Director Richard Cordray said yesterday in a statement announcing the settlement.

According to the statement, units of New York-based American Express deceived customers who signed up for a particular card, leading them to believe they would get $300 and bonus points. The company also charged illegal late fees, discriminated against applicants on the basis of age and failed to report consumer disputes to credit bureaus, regulators said.

The settlement with American Express involves state regulators from Utah, where American Express owns banks, and four federal agencies, according to statements from the CFPB and the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp. Under the agreement, the company will refund about $85 million to customers and pay civil penalties totaling $27.5 million to the four federal regulators, with $14.1 million going to the CFPB.

American Express neither admitted nor denied regulators’ accusations in the settlement, which its board approved on Sept. 24, according to the Fed’s consent order.

“Reserves were established in previous quarters for a substantial portion of these fines and the estimated customer refunds,” Michael O’Neill, an American Express spokesman, said in a statement. “Separately, the company is continuing its own internal reviews and cooperating with regulators in their ongoing regulatory examination of add-on products in accordance with the industrywide review.”

The settlement is the third involving the consumer bureau, which previously resolved claims against credit card issuers Capital One Financial Corp. and Discover Financial Services.

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Compliance Action

JPMorgan Sued by Schneiderman for Fraud Over Mortgage Securities

JPMorgan Chase & Co., the biggest U.S. bank, was sued by New York Attorney General Eric Schneiderman, who alleged that the Bear Stearns business the bank took over in 2008 defrauded mortgage-bond investors.

Investors were deceived about the defective loans backing securities they bought, leading to “monumental losses,” Schneiderman said in a complaint filed yesterday in New York State Supreme Court.

“Defendants systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans,” Schneiderman’s office said.

Schneiderman in January was named co-chairman of a state-federal group formed to investigate misconduct in bundling of mortgage loans into securities leading up to the financial crisis. The group includes officials from the U.S. Justice Department, the Securities and Exchange Commission, the FBI and other federal and state officials.

Joe Evangelisti, a JPMorgan spokesman, said the New York-based bank would contest the complaint, which is “entirely about” conduct by Bear Stearns. JPMorgan acquired Bear Stearns in 2008.

“We’re disappointed that the NYAG decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record -- instead relying on recycled claims already made by private plaintiffs,” Evangelisti said in an e-mail.

The state’s complaint names J.P. Morgan Securities, JPMorgan Chase Bank and JPMorgan’s EMC Mortgage unit as defendants.

The case is People of the State of New York v. J.P. Morgan Securities, 451556-2012, New York State Supreme Court (Manhattan).

Ex-SAC Capital Manager Tells FBI Fund Used Insider Information

A former SAC Capital Advisors LP portfolio manager told the FBI it was “understood” that those assigned to give their best trading ideas to founder Steven A. Cohen would provide him with insider information, according to an agent’s notes of the conversation.

The former fund manager, Noah Freeman, pleaded guilty to securities fraud in February 2011 after speaking to Federal Bureau of Investigation agents and federal prosecutors in New York in late 2010, in a so-called proffer session. Defendants use such sessions to determine whether to cooperate with the government against others.

Freeman, one of five current or former SAC portfolio managers or analysts implicated in insider trading, isn’t quoted as saying Cohen, 56, knew the information came from illegally obtained tips, ordered him to provide them or traded on the data. Neither Cohen nor Stamford, Connecticut-based SAC Capital, which manages $14 billion in assets, has been accused of criminal or civil wrongdoing.

Michael Steinberg, a portfolio manager at SAC’s Sigma Capital Management unit implicated in insider trading, has been placed on leave by SAC, a person familiar with the matter said. He is an unindicted co-conspirator related to the case against Jon Horvath, a former SAC analyst he supervised, people familiar with the case said last week.

Horvath pleaded guilty Sept. 28 to being part of a “criminal club” of fund managers and analysts who made $62 million by swapping nonpublic information about technology companies. Steinberg hasn’t been charged with a crime.

Freeman and another SAC fund manager, Donald Longueuil, were accused last year by prosecutors in the office of Manhattan U.S. Attorney Preet Bharara with being part of an insider-trading scheme while at SAC.

Freeman, Longueuil and two others charged in the case have pleaded guilty to criminal insider-trading charges. Longueuil, 36, is serving a 2 1/2-year prison term at the federal prison in Otisville, New York. Freeman is cooperating with prosecutors and hasn’t been sentenced.

Benjamin Rosenberg, a lawyer for Freeman, declined to comment on the memos filed about his client. U.S. Attorney spokeswoman Ellen Davis also declined to comment, as did FBI spokesman Jim Margolin.

Steinberg’s lawyer, Barry Berke, declined to comment on his client’s status at SAC. Steve Peikin, a lawyer for Horvath, didn’t return a voice-mail message left at his office seeking comment on Steinberg.

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

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Ex-Madoff Workers Face More Charges in Fraud Dating to 1970s

Five longtime employees of Bernard Madoff’s former investment firm are now facing more charges.

U.S. Attorney Preet Bharara in Manhattan yesterday released a revised indictment expanding the charges against former Madoff employees Daniel Bonventre, Annette Bongiorno, Joann Crupi, Jerome O’Hara and George Perez. The indictment adds to the 17 criminal counts filed against the former employees in November 2010, for a total of 33 counts. The government is now also alleging that the fraud dates to the early 1970s.

Bonventre, 65, and Bongiorno, 64, worked for Madoff for 40 years, with Bongiorno rising to the level of supervisor and account manager. Crupi, 51, an employee since 1983, tracked daily bank account activity, prosecutors said. Perez, 46, and O’Hara, 49, started at the firm in the early 1990s.

Madoff, 74, pleaded guilty to fraud in 2009 for cheating investors out of $20 billion in principal. He’s serving a 150-year term in federal prison in North Carolina.

The defendants are scheduled to be arraigned on the new charges at a hearing today before U.S. District Judge Laura Taylor Swain, Bharara’s office said in the statement.

The new charges put additional pressure on the former employees, who have pleaded not guilty in the case. New charges against Bonventre and Crupi include bank fraud, which is punishable by as much as 30 years in prison.

Bonventre’s lawyer, Andrew Frisch; Bongiorno’s lawyer, Maurice Sercarz; Crupi’s lawyer, Eric Breslin; O’Hara’s lawyer, Gordon Mehler; and Perez’s lawyer, Larry Krantz, didn’t immediately return voice-mail messages yesterday seeking comment on the new charges after regular business hours.

The case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).

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Ex-Deutsche Bank Broker Among Four Charged in Insider Case

Former Deutsche Bank AG managing director Martyn Dodgson was among four people charged with insider trading by U.K. authorities after an investigation spanning two-and-a-half years.

Dodgson, who was employed by Deutsche Bank at the time of his arrest in March 2010, as well as Andrew Hind, Benjamin Anderson and Iraj Parvizi were charged with “conspiracy to insider deal” between Nov. 1, 2006, and March 23, 2010, the Financial Services Authority said yesterday in an e-mailed statement. The agency alleges the men made more than 3 million pounds ($4.8 million) on improper trades.

The charges stem from an investigation into the front-running of block trades, known as Operation Tabernula, Latin for little tavern. The FSA arrested seven people and raided 16 addresses in London and southeast England in March 2010 as part of the crackdown. Two more arrests came later.

Front-running is a practice in which a trader takes a position to capitalize on advance knowledge of a transaction large enough to influence the price of securities.

Tabernula, conducted along with the U.K. Serious Organised Crime Agency, is the “largest and most complex insider dealing investigation to date,” the regulator said in the statement. The authority has been cracking down on market abuse and insider trading ahead of being disbanded next year and having its enforcement duties taken over by the Financial Conduct Authority.

Deutsche Bank “cooperated fully with the authorities,” the lender said in an e-mailed statement. “The investigation concerned one individual, Martyn Dodgson, and not the bank itself.”

Those arrested in 2010 include Dodgson, Julian Rifat of Moore Capital Management LLC, Clive Roberts, the head of European sales trading at Exane BNP Paribas and Novum Securities Ltd.’s Graeme Shelley. The agency said yesterday that, “a number of individuals remain under investigation.”

Parvizi “emphatically denies the charges and is determined to clear his name,” Peter Hughman, Parvizi’s lawyer, said in a telephone interview.

Michael Potts at Byrne and Partners, the lawyer for Anderson, declined to comment. Hind’s lawyer, Miles Herman at Lewis Nedas Law, couldn’t immediately be reached for comment. Tim Harris, a lawyer at Bark & Co. in London who represents Dodgson, didn’t immediately respond to a voice mail seeking comment on the charges.

Adoboli’s UBS Co-Worker Says He Used Secret Umbrella Account

John Hughes, a former UBS AG trader, testified he made the same unauthorized trades as his co-worker Kweku Adoboli, who is being prosecuted for fraud.

Hughes said during his fourth day of testimony at Adoboli’s fraud and false accounting trial in London that he made trades that benefited the fund Adoboli had dubbed his “umbrella” -- the first time another worker admitted using that account.

Charles Sherrard, Adoboli’s lawyer, presented evidence of at least five transactions on the umbrella account made by Hughes while Adoboli was on vacation in Greece in June 2011, and that accounting firm KPMG LLP had evidence of other such trades. Adoboli called it the umbrella because it could be tapped on “rainy days” to cover trading losses, prosecutors have said.

Adoboli was charged in relation to unauthorized trades on which UBS lost $2.3 billion. The former trader admitted hours before his arrest in September of last year that he had risked $5 billion on Standard & Poor’s 500 futures and a further $3.75 billion in the German futures market, a former manager testified. Adoboli has pleaded not guilty.

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Ex-IndyMac CEO Michael Perry Settles With SEC for $80,000

Michael Perry, the former chief executive officer of IndyMac Bancorp Inc., agreed to pay an $80,000 penalty to settle the remaining claim against him by the U.S. Securities and Exchange Commission.

Perry neither admits nor denies the SEC’s allegations, according to the terms of the settlement filed Sept. 27 in federal court in Los Angeles.

The single negligence-based claim was all that was left of the fraud case against Perry that the SEC had brought in 2011, accusing him of misleading investors about the mortgage lender’s worsening financial condition before its 2008 collapse. U.S. District Judge Manuel Real this year threw out the SEC’s other claims against Perry.

“The court ruled in Mr. Perry’s favor on every claim that was presented to it,” D. Jean Veta, a lawyer for Perry, said in an e-mailed statement. “Despite significant reluctance, Mr. Perry had long tried to resolve this case on reasonable terms. It just so happens that we needed to score some victories before the SEC was of a similar mind.”

IndyMac, once the second-largest U.S. independent mortgage lender, was seized by regulators in July 2008 after a run by depositors left the Pasadena, California-based firm strapped for cash. The SEC alleged that Perry failed to warn investors of the lender’s deteriorating capital and liquidity positions in 2007 and 2008 even though he had regularly received internal reports detailing the problems.

Donald Searles, a lawyer for the SEC in Los Angeles, didn’t immediately return a call for comment on the ruling.

The case is SEC v. Perry, 11-1309, U.S. District Court, Central District of California (Los Angeles).

Compliance Policy

U.S. Households Face $3,446 Tax Increase From Fiscal Cliff

U.S. households are facing an average tax increase of $3,446 in 2013 if Congress doesn’t avert the so-called fiscal cliff, the nonpartisan Tax Policy Center said in a study released yesterday.

The top 1 percent of households could face some of the largest tax increases in 2013 and would see their after-tax incomes fall by 10.5 percent if Congress does nothing. That would translate to an average tax increase of $120,537 for that group.

A typical middle-income household earning between about $40,000 and $60,000 would face a tax increase of about $2,000.

After the Nov. 6 election, Congress is scheduled to return to Washington to debate the automatic spending cuts and tax increases starting in January unless lawmakers act. For calendar year 2013, taxes would increase by $536 billion, or about 20 percent.

The estimated $536 billion tax increase doesn’t include provisions that expired at the end of 2011, including miscellaneous corporate tax breaks. The provision that prevents the alternative minimum tax from expanding also expired last year.

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Basel Bank Group Attacks EU, U.S. for Capital Rules Lapses

The U.S. and European Union may fail to fully implement bank-capital rules drawn up to prevent a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc., global watchdogs warned.

International teams of regulators found weaknesses in the U.S. and EU draft implementing measures for the so-called Basel III standards, the Basel Committee on Banking Supervision said yesterday in a statement on its website.

“There is now a window of opportunity for the gaps identified to be closed,” Stefan Ingves, the Basel group’s chairman, said in the statement. A related review found Japan’s rule-making to be compliant with Basel III, Ingves said.

The largest global banks would have needed an extra 374.1 billion euros ($482.4 billion) in their core reserves to meet Basel III had the standards been enforced at the end of 2011, according to data published by the committee last month. Nearly 200 billion euros of the collective shortfall was at banks in the 27-nation EU.

Michel Barnier, the EU’s financial services chief, said that he has “reservations” about some of the Basel group’s findings, “which do not appear to be supported by rigorous evidence and a well-defined methodology.”

There is a “lack of consistency” in how different jurisdictions have been reviewed, Barnier said in an e-mailed statement.

Lawmakers are struggling to meet a January 2013 deadline set by the Basel committee for implementing new standards, which more than triple the core capital that lenders must have to stave off insolvency and require banks to build up buffers of easy-to-sell assets. The measures were published by the group in


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Morgan Stanley Mortgage Sued for $111 Million Over Loans

Morgan Stanley Mortgage Capital Holdings LLC was sued for at least $110.8 million by a trustee for investors in mortgage-backed securities.

The Morgan Stanley unit made “numerous and repeated failures” to comply with promises about the loans underlying the securities, trustee U.S. Bancorp said in a Sept. 28 filing in New York State Supreme Court.

The original principal balance of loans sold as securities was $609 million, and the amount of defective loans is more than $129 million, according to the filing. U.S. Bancorp said it is seeking at least $110.8 million in damages.

Lauren Onis, a spokeswoman for New York-based Morgan Stanley, didn’t immediately respond to an e-mail seeking comment on the suit.

The case is Morgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, 653429-2012, New York State Supreme Court, New York County (Manhattan).

CFTC Should Appeal Ruling on Speculation Limits, Chilton Says

The U.S. Commodity Futures Trading Commission should appeal a federal judge’s decision blocking Dodd-Frank Act limits on speculation in oil, natural gas and other commodities, said Commissioner Bart Chilton.

The CFTC should also seek a stay of U.S. District Judge Robert Wilkins’s Sept. 28 ruling that the agency failed to assess whether limits were necessary and appropriate under the 2010 regulatory overhaul, Chilton said in remarks prepared for a speech tomorrow in Rome at the Food and Agriculture Organization of the United Nations.

“The struggle isn’t over,” said Chilton, one of three Democrats on the five-member commission. “I think the court opinion is deeply flawed.”

The court decision stymied rules from taking effect Oct. 12 that were challenged by the Securities Industry and Financial Markets Association and International Swaps and Derivatives Association Inc. The associations represent JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley and other banks and energy trading firms.

The agency should start drafting another version of the rule to account for the judge’s objections, Chilton said. The agency should issue an interim final rule with a 15-day period of public comment, he said.

LightSquared Extends Bankruptcy Control With Regulatory Plan

LightSquared Inc. won more time to file a bankruptcy plan after the wireless-broadband venture came up with a new regulatory strategy and lenders withdrew opposition to an extension of Philip A. Falcone’s control.

U.S. Bankruptcy Judge Shelley Chapman in Manhattan yesterday granted LightSquared’s request to extend its control of the bankruptcy case, giving it until Jan. 31 to file a plan and until April 1 to win creditors’ acceptance. The lenders, which say they own about $1.1 billion of secured debt of LightSquared’s LP unit, withdrew an objection to the extension that had called Falcone’s plan for the company “risky.”

Matthew Barr, a lawyer for LightSquared, told Chapman in court yesterday that lenders’ objections were resolved. The company has an application pending before the Federal Communications Commission to use a new spectrum of airwaves, he said.

“After months of constructive discussion with regulators we are now able to make public our steps,” Barr said, citing the company’s Sept. 28 application with the FCC. LightSquared proposed sharing airwaves with U.S. government users, and said it would give up the right to some airwaves near those used by global-positioning systems.

The FCC blocked LightSquared’s plan to use the GPS spectrum in February after GPS-device makers and users -- including the U.S. military and commercial airlines -- said it might interfere with their navigation.

Barr told Chapman that if the company gets FCC approval, it will provide wireless coverage across the U.S. The rollout will be “less than a home run” for the company’s business plan because there will still be some “small dead-zone areas,” which LightSquared is seeking to work out, he said.

The timeline for potential approval is in the FCC’s hands, following an initial 30-day comment period and a 45-day reply period before the regulator takes the issue under advisement, Barr said.

LightSquared, based in Reston, Virginia, filed for bankruptcy in May listing assets of $4.48 billion and debt of $2.29 billion. Harbinger acquired LightSquared in March 2010 for $1.05 billion in cash and controls 96 percent of its stock.

The case is In re LightSquared Inc., 12-12080, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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