Insider Trading, Finra’s Trace, IBM Request: Compliance

A former director of store operations at J.Crew Group Inc. agreed to pay more than $120,000 to settle allegations that he traded stock based on non-public information.

The U.S. Securities and Exchange Commission said yesterday it settled with Frank LoBue, whom it accused of trading on store-sales results and cost information before the announcement of company earnings for the first and second quarters of 2009.

LoBue made just over $60,000 in profit from his trades, according to the complaint. LoBue didn’t admit to wrongdoing as part of the settlement. He “had been trained not to do insider trading” at J.Crew, Scott Friestad, an associate director in the SEC’s enforcement division, said in a telephone interview.

Robert Heim, a partner at Meyers & Heim LLP in New York who represents LoBue, said his client “is looking forward to putting this behind him and moving on.” Heim declined to comment further.

Friestad said that while insider-trading cases often center on “one-time events like a takeover, this case is a reminder that there is a lot of market-moving information that employees routinely come in possession of and they need to be careful not to trade in those circumstances.”

J.Crew was bought by private equity firms TPG Capital LP and Leonard Green & Partners LP last year.

The case is Securities and Exchange Commission v. LoBue, 12-cv-07944, U.S. District Court, Southern District of New York (Manhattan).

Compliance Policy

SEC Approves Mortgage Trade Disclosure Rules for Finra’s Trace

The U.S. Securities and Exchange Commission approved rules intended to increase transparency in a corner of the market for mortgage- and asset-backed bonds.

The SEC agreed to a plan by the Financial Industry Regulatory Authority to create public reporting for trades of so-called specified government-backed mortgage bonds and securities tied to Small Business Administration loans, according to an Oct. 23 notice posted on its website.

The protocols for disclosures through Finra’s Trace system will allow for the unique identifiers of bonds called CUSIPs to be hidden, in favor of generic information about the securities.

Finra has been expanding Trace to securitized debt after the opacity of trading in securities including mortgage bonds without government backing contributed to the worst financial crisis since the Great Depression in 2008, by fueling doubt about the health of banks and funds. The non-governmental regulator oversees more than 4,000 brokerage firms.

The Trace system started in 2002, providing the first real-time data on most corporate bond trading to anyone with Internet access. Finra, which operates from Washington and New York, began last year disclosing daily market-level information culled from data on individual securitized-debt trades it had started collecting earlier.

CFTC Said to Allow More Swaps Trading Via Phone in Final Rule

The Commodity Futures Trading Commission will allow more swaps to be traded over the phone than initially indicated under proposed Dodd-Frank Act reforms, according to people familiar with the matter.

Chairman Gary Gensler outlined the changes in a meeting earlier this week in New York with executives of firms that want to create regulated entities allowed to trade swaps, known as swap execution facilities, or SEFs, according to two people who attended.

The details of what will be allowed are still being worked out for the final draft rule, according to one of the people, who asked not to be named because the discussions are private.

The change in phone trading contrasts with the proposal written in the Federal Register in January 2011, which said that “entities offering the following services do not comply with the statutory definition of a SEF: one-to-one voice services for the execution or trading of swaps (other than for the execution of block trades).”

Trades in interest-rate, credit-default and other types of swaps historically have been done over the phone in negotiations between banks and their customers. Gensler, with the backing of Congress through the Dodd-Frank reforms passed in 2010, has made electronic trading of the instruments a central feature of regulation in a market with $648 trillion of contracts outstanding.

David Gary, a CFTC spokesman, declined to comment.

Expanded phone trading would be a victory for inter-dealer brokers who facilitate transactions between banks. The firms, which use a combination of phone and computer trading to match buyers and sellers, lobbied the CFTC through the Wholesale Market Brokers Association, Americas to allow flexible methods of trading.

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Hertz Bid for Dollar Thrifty Said to Raise Concerns at FTC

Hertz Global Holdings Inc.’s bid for antitrust clearance to buy Dollar Thrifty Automotive Group Inc. is meeting resistance at the U.S. Federal Trade Commission, according to people familiar with the situation.

An understanding that the deal could be approved with conditions, reached with the FTC’s Bureau of Competition, faces opposition at the agency’s Bureau of Economics, where some staffers think the $2.6 billion merger should be blocked, said the people, who declined to be identified because the matter isn’t public. The two bureaus submit their recommendations to the five-member commission, which makes the final decision.

Hertz, based in Park Ridge, New Jersey, announced the acquisition on Aug. 26 and it said it expected FTC approval by mid-October. On Oct. 18, Hertz extended the deadline for the FTC to rule on the transaction to Nov. 16 from Oct. 31 because the agency needed more time to complete its review.

Hertz, which has sought to take over Dollar Thrifty for more than five years, agreed to sell its Advantage brand to address concerns that the deal would crimp competition in the rental-car market, the people said.

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EU May Toughen Commodity Swaps Curbs in Financial Market Law

Commodity derivative speculators may face tougher curbs under compromise plans to overhaul the European Union’s financial market rules.

Governments may seek to restrict the number of commodity-derivative contracts that traders can enter into, according to a draft version of the rules prepared by Cyprus, which holds the rotating presidency of the EU. Such a requirement would go beyond a draft law published last year by Michel Barnier, the EU’s financial services chief.

The position-limit rule wouldn’t apply in cases where businesses are trying to use the derivatives to shield themselves from losses on investments, according to the documents. Regulators would also have some, limited power to grant other case-by-case exemptions.

Aid organizations and some governments, including France and Germany, have demanded restrictions on commodity derivatives speculation, which they blame for worldwide spikes in food prices. The Institute of International Finance, an association representing global lenders, has said there is “little convincing evidence linking financial investment with trends in commodity prices and volatility.”

Barnier’s proposals, published last year, would have given regulators the chance to find alternatives to position limits.

Speaking to lawmakers in the European Parliament yesterday, Barnier said he backed moves to toughen the planned measures for commodity derivatives.

Treasury, Fed Reject Call to Stop Using Libor Rates in TARP

The U.S. Treasury Department and the Federal Reserve defended the use of Libor in rates tied to the Troubled Asset Relief Program, rejecting a request from the watchdog of the U.S. financial crisis bailouts.

Neither the Treasury nor the Fed has “the authority to change unilaterally the interest rate on the small number of remaining loans that rely on Libor,” Timothy Massad, the Treasury’s assistant secretary for financial stability, said in a letter to Christy Romero, special inspector general for TARP.

“If we sought to renegotiate the rate, it is likely that borrowers either would not agree to a rate change or would agree only to a change that would result in a lower payment to the taxpayers,” according to the Oct. 9 letter obtained by Bloomberg News.

Romero had asked the Treasury and Fed to use other reference rates instead of Libor for Treasury’s Public-Private Investment Program, or PPIP, and the Fed’s Term Asset-Backed Securities Loan Facility, or TALF.

U.S. taxpayers “may have been at risk and may continue to be at risk from the manipulation of Libor,” the London interbank offered rate, Romero said in an August letter to Fed Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner.

Bank of America Corp., Citigroup Inc. and Royal Bank of Scotland Plc are among the banks under investigation for Libor-rate tampering. Barclays Plc, Britain’s second-biggest lender by assets, was fined $450 million in June when it became the first bank to settle with regulators over the rigging of interest rates. Chief Executive Officer Robert Diamond and Chairman Marcus Agius resigned in the aftermath.

“The time for Treasury and the Federal Reserve to act is now, rather than wait for global Libor reform, because there are $598.6 million in outstanding TALF loans and $5.685 billion in outstanding PPIP debt with interest rates tied to Libor,” the special inspector general for TARP said in a quarterly report to Congress.

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Compliance Action

SocGen, RBC Among Banks Said to Get N.Y. Libor Probe Subpoenas

Societe Generale SA, Royal Bank of Canada and Bank of America Corp. are among nine additional banks that were subpoenaed in New York and Connecticut’s probe of alleged manipulation of Libor, a person familiar with the matter said.

The subpoenas, issued by New York Attorney General Eric Schneiderman starting in August, bring to 16 the total number of banks that have been subpoenaed in the states’ investigation, said the person, who asked not to be identified because there wasn’t authorization to speak publicly.

Schneiderman and Connecticut Attorney General George Jepsen are jointly investigating claims that banks rigged the London interbank offered rate, or Libor, a worldwide benchmark for borrowing. The same person said in August that seven banks were subpoenaed in their investigation, including JPMorgan Chase & Co. and Barclays Plc.

The states are coordinating with “a much larger group of attorneys general,” Susan Kinsman, a spokeswoman for the Connecticut attorney general, said in September. Florida Attorney General Pam Bondi has also issued subpoenas to more than a dozen financial institutions, including UBS AG, Deutsche Bank AG and HSBC Holdings Plc.

Besides Societe Generale, Royal Bank of Canada and Bank of America, the other six banks to receive subpoenas from New York are: Credit Suisse Group AG, Bank of Tokyo Mitsubishi UFJ Ltd., Norinchukin Bank, Rabobank, Lloyd’s Banking Group Plc and West LB AG, a German lender that ceased operations.

Representatives of those banks couldn’t be reached for comment or declined to comment on the subpoenas.

Lloyd’s has said it is assisting various regulators in their investigations into the setting of Libor. Royal Bank of Canada has said it is cooperating with regulators and found no evidence of collusion with other banks.

Rabobank said in a report this year that it has received subpoenas and requests for information from regulatory agencies in the U.S., Europe and Asia and is cooperating.

Melissa Grace, a spokeswoman for Schneiderman, and Jaclyn Falkowski, a spokeswoman for Jepsen, declined to comment on the probe.

IBM Received Request From SEC Over Dealings With Iran, ZTE

International Business Machines Corp. received a request from the Securities and Exchange Commission to describe its interactions with Iran, following reports that ZTE Corp. resold some IBM products in the country.

IBM supplied information to the SEC, which completed its investigation in September, according to documents released yesterday. As IBM’s business partner, ZTE is required to comply fully with U.S. regulations, including economic sanctions and export laws, IBM said in its response to the SEC.

“Iran is designated as a state sponsor of terrorism by the State Department and is subject to U.S. economic sanctions and export controls,” the SEC said in an August letter to IBM. “Please describe to us the nature, duration, and extent of your past, current, and anticipated contacts with Iran, whether through subsidiaries, distributors, resellers, or other direct or indirect arrangements.”

The SEC also requested information about IBM’s contacts with Syria, Sudan and Cuba. IBM responded on Sept. 10, saying it “complies with all U.S. economic sanctions and export laws and regulations, including those regarding countries identified as state sponsors of terrorism.” In a follow-up letter to IBM on Sept. 25, the SEC said it had completed its review.

Ed Barbini, a spokesman for Armonk, New York-based IBM, didn’t immediately respond to a request for comment. Margrete Ma, a spokeswoman at Shenzhen, China-based ZTE, didn’t reply to an e-mail sent after business hours local time.

Ex-JPMorgan Trader Fired for Aluminum Mispricing Loses Lawsuit

A former JPMorgan Chase & Co. commodities trader, fired for mispricing aluminum trades, lost a lawsuit against the bank when a London judge ruled he couldn’t explain why the errors had all been profitable.

Daragh Nott, who was fired in September after the bank found as many as 90 erroneous trades, sued for unfair dismissal at an employment tribunal saying he had made honest mistakes as a result of the pressure of his job.

Nott “failed to answer adequately why the large number of errors he had made on the aluminum book all favored his” account, adding about $400,000 to his 2010 trading profits, according to an Oct. 17 written decision from employment judge A. Isaacson.

Investment banks have reduced bonuses, shed jobs and increased scrutiny of staff in the wake of losses from the 2008 financial crisis, leading to a rising number of employment disputes in London courts and tribunals.

Nott’s lawyer Richard Woolmer didn’t respond to an e-mail seeking comment. JPMorgan spokeswoman Kate Haywood declined to comment on the ruling.

The New York-based bank in March won a case in which a currency trader sought about 580,000 pounds ($935,000) over a missing decimal point in his contract. Commerzbank AG was ordered in May to pay 50 million euros ($65 million) to more than 100 Dresdner Kleinwort bankers who sued after the lender slashed bonuses.

JPMorgan found after an internal probe that the odds of all Nott’s mistakes benefiting his trading book were as much as a-trillion-to-one, Isaacson said in her judgment.

At a hearing in September, Nott admitted to making “numerous errors across all books due to the nature of,” and pressures that went with, his job. He said his health suffered as a result of being fired and the internal company appeal process he used to try to get it back.


Rajaratnam Appellate Judges Voice Concern Over U.S. Wiretap Bid

Judges hearing the appeal of Galleon Group LLC co-founder Raj Rajaratnam, who is serving 11 years in prison for insider trading, voiced concern over whether prosecutors improperly won authority to wiretap his phone calls.

A three-judge panel in Manhattan heard arguments yesterday over whether to reverse Rajaratnam’s conviction for insider trading. The central issue is whether prosecutors misled the lower court judge who authorized the wiretaps in 2008 by omitting key facts from their request, and if Rajaratnam’s conviction should be overturned as a result.

“What happens if we agree with you? Does this mean it’s a new trial?” U.S. Circuit Judge Robert Sack asked Rajaratnam’s lawyer, Patricia Ann Millett, at the start of the argument.

A second judge, Jose Cabranes, suggested in his questions that prosecutors acted properly. The third judge, Susan Carney, asked Millett what the “remedy” would be if the judges agreed that prosecutors had misled the district court.

Rajaratnam was convicted of directing the biggest hedge fund insider-trading scheme in U.S. history. At the trial, the government introduced 45 wiretap recordings, along with documents and testimony derived from the wiretaps. That evidence must be thrown out and his conviction overturned, his lawyers argued.

Kozlowski Sues New York Parole Board for Denying Release

L. Dennis Kozlowski, the former Tyco International Ltd. chief executive officer convicted in 2005 of looting the company, sued New York’s parole board for refusing to release him.

The board in April denied the 65-year-old Kozlowski’s request for parole in April “due to concern for the public safety and welfare.” Kozlowski was sentenced to 8 1/3 to 25 years in prison in 2005 after a Manhattan jury found him guilty.

In a petition filed Oct. 24 in New York State Supreme Court, Kozlowski asked a judge to annul the decision and grant his application for parole or give him a new hearing, saying that the board relied on erroneous information in making its ruling.

“The parole board denied petitioner parole using non-statutory factors, impermissibly conclusory reasoning, and incorrect information,” Kozlowski said. “The board’s arbitrary and capricious decision violated petitioner’s due process.”

The New York State Department of Corrections and Community Supervision, which operates the parole board, didn’t immediately respond to a request for comment on the lawsuit.

The case is Kozlowski v. New York State Board of Parole, 104097/2012, New York State Supreme Court, New York County (Manhattan).

University of California Must Disclose Fund Investments Details

The University of California, which manages a $70 billion investment portfolio for retirees, faces a tentative court order to make “a good faith effort” to get and disclose the returns it earns from Sequoia Capital and Kleiner Perkins Caufield & Byers funds.

State court Judge Evelio Grillo in Oakland, California, said in a tentative ruling that information about the university’s commitment to the funds, cash invested, current net asset values and returns for individual investment vehicles with Kleiner and Sequoia, as well as communications with the private equity firms, aren’t exempt from disclosure under state laws passed in 2005.

Grillo rejected the university regents’ argument in a public records lawsuit that the information should remain secret. The 26-member board of regents governs the university.

The ruling came in a public records lawsuit against the university filed by Reuters America LLC, a unit of Thomson Reuters Corp. The news agency is a competitor of Bloomberg News.

“We don’t believe it’s appropriate to comment until he issues his final ruling after considering the arguments presented by the parties” at an Oct. 19 hearing, said Dianne Klein, a spokeswoman for the University of California’s office of the president, in an e-mail yesterday.

Kleiner, based in Menlo Park, California, and Sequoia aren’t named as defendants in the lawsuit. Andrew Kovacs, a spokesman for Menlo Park-based Sequoia Capital Operations LLC, declined to comment on the ruling. There was no immediate response to an e-mail to Kleiner’s media office.

The case is Reuters v. Regents, RG12-613664, Alameda County Superior Court (Oakland, California).

Speeches and Interviews

EU Banks Need ‘TARP-Like’ Program, Millstein and Studzinski Say

European banks, battered by the sovereign-debt crisis and tougher regulation, need a “TARP-like” program to help boost market confidence and lending, Jim Millstein and John Studzinski said.

“Ultimately, they need a central authority providing equity behind the banking system’s liabilities,” Millstein, the former U.S. Treasury Department chief restructuring officer who started the turnaround advisory firm Millstein & Co., said in a panel discussion at Bloomberg’s Dealmakers Summit in New York yesterday. “The large European banks are actually more leveraged than our banks were at the beginning of the crisis.”

TARP is the Treasury Department’s Troubled Asset Relief Program, a $700 billion bank-bailout fund that provided capital injections to firms including Citigroup Inc. and Bank of America Corp. during the financial crisis. European banks are struggling to fulfill a pledge made last year to cut more than $1.2 trillion of assets to help them weather the sovereign-debt crisis, stoking investor concern about financial stability.

“The traditional model in Europe for the banking system is bust,” said Studzinski, senior managing director and global head of Blackstone Advisory Partners LP, citing the dependency of companies on banks as well as the structure of large banks and local state-owned lenders. He also called for a TARP-like program for the region’s banks.

“You need some sort of pan-European deposit guarantee system” to slow down the flight of capital, said billionaire investor Wilbur Ross, speaking at the same event. He called it a “conceptual error” to try to impose new Basel III regulations while simultaneously asking banks to lend more. “It’s not going to work.”

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