Citigroup Fined, Argentine Debt, Wells Fargo: Compliance

Updated on

Massachusetts’s top financial watchdog fined Citigroup Inc. $2 million after a junior analyst improperly disclosed confidential information before Facebook Inc.’s initial public offering.

As a part of Facebook’s underwriting syndicate, Citigroup Global Markets was barred from disseminating research until 40 days after the stock offering, Massachusetts Secretary of the Commonwealth William F. Galvin said Oct. 26 in a statement. Weeks before the IPO, a junior analyst at the unit e-mailed two employees at seeking feedback on a Facebook document that contained a senior analyst’s view of investment risks and revenue estimates, Galvin said.

A slump in Facebook’s stock after the May 18 offering has fueled shareholder complaints, regulatory probes and more than 40 lawsuits, with some investors claiming the social-network company’s managers failed to revise forecasts before the IPO. Citigroup’s e-mail exchanges were provided to Galvin’s office on Sept. 14 in response to a subpoena, and the junior analyst was terminated about two weeks later, the watchdog said.

Galvin faulted the Citigroup subsidiary for failing to supervise its analysts. The firm settled, admitted to a statement of facts and pledged to abide by state securities laws, he said.

“We are pleased to have this matter resolved,” Sophia Stewart, a Citigroup spokeswoman, said in an e-mail. “We take our internal policies and procedures very seriously and have taken the appropriate actions.”

According to a person with direct knowledge of the matter, Citigroup has also fired Mark Mahaney, a senior technology analyst. Mahaney, 46, wasn’t ousted because of the Facebook case, said the person, who asked not to be identified because the move was private. The exit resulted from earlier actions uncovered in the course of the Facebook probe, the person said.

Mahaney, who was based in San Francisco, declined to comment when reached Oct. 26 by mobile phone.

Galvin has also subpoenaed Facebook’s lead underwriters Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Chase & Co. in connection with the IPO his office said.

JPMorgan spokesman Joseph Evangelisti declined to comment on Galvin’s probe, as did Mary Claire Delaney, a Morgan Stanley spokeswoman, and Leslie Shribman, a Goldman Sachs spokeswoman.

The U.S. Securities and Exchange Commission also is looking at the IPO, said a person familiar with the probe who asked not to be identified because the probe is confidential.

For more, click here.

Compliance Action

Ex-Galleon Executive Settles SEC Lawsuit for $1.75 Million

Kris Chellam, a former Galleon Group LLC executive, agreed to pay $1.75 million to settle U.S. Securities and Exchange Commission claims that he passed inside information to Raj Rajaratnam, the hedge-fund’s co-founder.

Chellam, 61, of Saratoga, California, shared information with Rajaratnam in December 2006 indicating that chipmaker Xilinx Inc. wouldn’t meet its revenue forecasts, the SEC said Oct. 26 in a statement. Rajaratnam shorted Xilinx stock and reaped illicit profits of $978,684 after the news was made public.

When he passed the tip, Chellam had money invested with Galleon and was in talks with Rajaratnam about taking a job at the hedge fund, the SEC said. Chellam was Xilinix’s chief financial officer at Xilinx from 1998 to 2005, the SEC said. In 2007, he was made co-managing partner of the Galleon Special Opportunities Fund, a venture capital fund that focused on technology companies.

Rajaratnam is serving an 11-year sentence in a Massachusetts federal prison after being convicted last year of insider trading. Chellam hasn’t been charged with a crime.

Christopher Steskal, a lawyer for Chellam, didn’t immediately return a call seeking comment about the complaint. The settlement requires court approval.

Chellam now works as an independent consultant to closely held technology companies, the SEC said.

The case is SEC v. Chellam, 12-cv-7983, U.S. District court, Southern District of New York (Manhattan).

Ex-Deloitte Partner Gets 21 Months for Insider Trades

Thomas P. Flanagan, a former Deloitte & Touche LLP partner, was sentenced to 21 months in prison on Oct. 26 for trading on insider information about the accounting firm’s clients, including Best Buy Co. and Walgreen Co.

Flanagan, 65, who pleaded guilty to a single count of securities fraud in August, was also sentenced to one year of supervised release by U.S. District Judge Robert M. Dow in Chicago. Flanagan left Deloitte in 2008, ending an association with the New York-based firm and its predecessors that lasted more than three decades.

Flanagan served as an advisory partner and liaison between the audit-management teams of Walgreen, Best Buy and Sears Holdings Corp. and the firm’s auditors, according to the original charging papers filed in July.

His job gave him access to non-public information involving those companies and the technology firm formerly known as Motorola Inc., including quarterly earnings results and potential acquisition targets, according to a plea agreement he signed in August.

Citing Flanagan’s plea, penance and devotion to family and community, defense attorney Joel Levin asked Dow to impose a sentence of six months’ incarceration and 1,000 hours of community service.

Prosecutors said Flanagan’s personal history didn’t outweigh the severity of his crime and argued for a punishment that would promote deterrence.

Jonathan Gandal, a spokesman for Deloitte, said in an August e-mail that the firm sued Flanagan after it learned what he did.

“Deloitte unequivocally condemns the actions of this individual,” Gandal said.

Flanagan and his son Patrick agreed in 2010 to pay more than $1.1 million to settle related insider-trading claims brought by the U.S. Securities and Exchange Commission.

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

Compliance Policy

EU Commission Pushes Back Against ECB Bank Oversight Limits

The European Commission is resisting attempts by some national governments to set limits on the European Central Bank’s planned power to supervise all banks in the euro area.

The Brussels-based commission renewed its call for the ECB to have the right to take over tasks from national regulators without having to justify itself, including supervision of banks that haven’t received public aid and aren’t seen as systemically important, according to a document dated Oct. 25 and obtained by Bloomberg News.

The commission is fighting a move to set hurdles for the ECB to assume oversight of smaller banks and those that haven’t received bailouts. An earlier draft of the plan prepared by European Union member states had called for the ECB to present a “reasoned decision” before stepping in to supervise such lenders.

“National competent authorities should be responsible for assisting the ECB on its request,” according to the document. The ECB should be in charge of thrashing out how this cooperation will work, the commission said.

Cyprus, which holds the rotating presidency of the EU, proposed last week that the ECB should only be allowed to take over oversight for such lenders if financial stability is under threat. The ECB would also be required to consult with national regulators and explain its reasoning before stepping in.

EBF’s Clausen Says EU Likely to Delay Basel Bank Rule Overhaul

Banks in the European Union expect the bloc to delay applying the latest round of Basel bank capital rules as political negotiations on the measures drag on, the head of a lobbying group said.

Christian Clausen, president of the European Banking Federation, said the EU will push back the planned Jan. 1 start date for phasing in the standards because uncertainty over the final rules risks leaving lenders with additional costs.

“It’s of course a major concern,” Clausen, who is also chief executive officer of Nordea Bank AB, said in an interview in Brussels on Oct. 26. “I’m sure the date will be postponed.”

The EU has struggled to agree on how to apply the Basel capital rules for banks as legislators and officials spar over curbs on bonuses and how to ensure lenders can weather funding squeezes. The measures would more than triple the core capital that banks must hold as a buffer against insolvency.

The Jan. 1 deadline was agreed on by the Group of 20 nations in 2010. The rules were drawn up by global regulators in the Basel Committee on Banking Supervision.

The lack of legal certainty, coupled with the international deadline, means that banks might be forced to rely on draft versions of the rules for guidance on how to overhaul their internal compliance and reporting systems, Clausen said.

Lenders would then incur extra costs when they have to adapt again to the final standards, he said.

“It’s a cost issue, a very simple cost issue” he said, adding that the situation may also create confusion for investors.

The EBF brings together national associations of banks in the 27-nation EU.

In the Courts

Argentina Loses U.S. Appeal of Ruling on Defaulted Bonds

Argentina can’t make payments on restructured sovereign debt while refusing to pay holders of its defaulted bonds, a U.S. appeals court ruled in a victory for creditors including Elliott Management Corp.’s NML Capital Fund.

The U.S. Appeals Court in New York on Oct. 26 upheld lower-court decisions, which may help creditors who rejected the country’s restructuring offers collect $1.4 billion in defaulted debt. Argentine bonds dropped the most in four months on the news.

“We hold that an equal treatment provision in the bonds bars Argentina from discriminating against plaintiffs’ bonds in favor of bonds issued in connection with the restructurings,” U.S. Circuit Judge Barrington Parker said in the opinion.

The appeals court, which upheld orders issued by U.S. District Judge Thomas Griesa in Manhattan, rejected Argentina’s claims that the move would undermine its debt agreements, trigger a new financial crisis in the republic and make it impossible for countries including Greece, Spain and Portugal, to restructure their debt in the future. Argentina defaulted on more than $80 billion in foreign bonds in 2001.

The appeals court sent the case back to Griesa to clarify how a payment formula set by the judge is intended to work and to determine how the orders apply to intermediary banks and other third parties. After Griesa rules on those issues, the case will return to the appeals court for a review of his decisions, Parker said.

Jonathan Blackman, a lawyer representing Argentina, didn’t immediately return a phone message seeking comment on the ruling. The Argentine state news agency Telam, however said the country will appeal the ruling, citing Argentine Finance Secretary Adrian Cosentino.

Peter Truell, a spokesman for Elliott, declined to comment.

In its decision, the appeals court said the equal treatment, or pari passu, clause in the bond agreement means that Argentina can’t subordinate the interests of the defaulted bondholders to those of investors who chose to participate in debt restructurings in 2005 and 2010.

The appeals court said its ruling is unlikely to hamper other countries that may try to restructure their debt in the future. Almost all the bonds issued since January 2005 that are covered by New York law include “collective action clauses,” provisions that allow a super-majority of bondholders to agree on a debt restructuring that is binding on all holders, according to the court.

The case is NML Capital Ltd. v. Republic of Argentina, 12-00105, U.S. Court of Appeals for the Second Circuit (Manhattan).

For more, click here.

Wells Fargo Loses Bid to Force Arbitration in Overdraft Case

Wells Fargo & Co., the biggest U.S. home lender, lost a bid to force the arbitration of customer disputes about overdraft fees.

The bank can’t force arbitration after twice waiving its right to do so, the U.S. Appeals Court based in Atlanta ruled on Oct. 26, denying the bank’s motion to dismiss a class-action lawsuit.

The court found that the bank put the customers through a litigation process that lasted years and yielded about 900,000 documents before asserting its right to force the customers to arbitrate their dispute.

“We’re disappointed with the ruling,” Richele Messick, a Wells Fargo spokeswoman, said in an e-mailed statement. The company will continue to defend its position in the litigation, she said.

Customers have sued more than 30 banks claiming they reordered overdrafts to maximize fees. Bank of America Corp. agreed to pay $410 million last year to settle customer claims and JPMorgan Chase & Co. reached a preliminary agreement in February to pay $110 million to resolve a lawsuit. A suit against other banks is pending in federal court in Miami.

Wells Fargo, based in San Francisco, declined a trial court’s offer to arbitrate the disputes in November 2009 and April 2010. The company filed a motion to dismiss five proposed class-action, or group, lawsuits two days after the Supreme Court ruled in April that federal law allows companies to compel customers and employees to arbitrate claims individually, trumping state laws that may bar such provisions.

Before the Supreme Court ruling, laws in some states made arbitration provisions that contained class-action waivers unenforceable, the bank said.

Wells Fargo acted “inconsistently” with the arbitration right, the appeals court said.

“If we were to compel arbitration, the plaintiffs would suffer substantial prejudice,” the court said.

The appeals case is Garcia v. Wachovia, 11-16029, U.S. Court of Appeals for the Eleventh Circuit. The trial court case is In Re Checking Account Overdraft Litigation, 09-md-02036, U.S. District Court, Southern District of Florida (Miami).

Adoboli Says He Booked Fake Trades to Conceal Profit, Losses

Kweku Adoboli, the former UBS AG trader accused of causing the largest unauthorized trading loss in British history, said he booked fake trades to hide profits and losses on real transactions and others on his desk knew what he was doing and helped him.

Adoboli, 32, first booked a so-called holding trade in late 2008 in order to take another off his desk’s book to hide the risk, he testified on Oct. 26 as he took the stand for the first time in his fraud trial.

“I had seen traders in my peer group and traders more senior than me either hold positions off-book by not booking them as soon as they did the trade, or by booking a covering trade to take them beyond the first day or two,” Adoboli said during testimony that lasted about four hours. “I don’t believe that what we were doing was illegitimate.”

Adoboli is accused of booking fake hedges to hide the risk of trades, causing the Swiss bank a $2.3 billion loss. He was charged in September of last year with two counts each of fraud and false accounting.

Prosecutors on Oct. 26 added two more false accounting charges tied to his so-called umbrella account. He has pleaded not guilty.

Adoboli tearfully told jurors that he neglected family and friends, working as many as 16 hours a day and twice sleeping at the office for the benefit of UBS’s exchange-traded-funds desk.

For more, click here.

Ex-Citic Pacific Executive Chui Convicted of Insider Trading

Citic Pacific Ltd.’s former deputy head of finance Chui Wing Nin was convicted of insider trading ahead of the steelmaker and property developer’s 2008 profit warning.

Chui’s sale of Citic Pacific shares to avoid losses “speaks for itself,” Magistrate Li Kwok-wai said Oct. 26 in Hong Kong’s Eastern Magistrates’ Court.

Chui, now chief financial officer of Agile Property Holdings Ltd., had pleaded not guilty to two counts of selling Citic Pacific shares after becoming aware of the company’s losses not yet made public. Citic Pacific, controlled by China’s biggest state-owned investment company, fell 55 percent on Oct. 22, 2008, after disclosing potential losses of as much as HK$15.5 billion ($2 billion) from wrong-way currency bets.

Chui sold a total of 81,000 shares on Sept. 9 and Sept. 12 and avoided losses of as much as HK$1.36 million, according to Hong Kong’s Securities and Futures Commission. “This was blatant insider dealing,” the SFC’s executive director of enforcement, Mark Steward, said in a statement.

Chui’s lawyer, Joseph Tse, said his client would consider an appeal after considering factors including the sentence. He faces as long as three years in prison in total for the two counts under the magistrates ordinance.

Another hearing in the case was scheduled for Nov. 27.

The case is Securities and Futures Commission and Chui Wing Nin, ESS27729/2011 in Hong Kong’s Eastern Magistrates’ Court.

Interviews and Speeches

Finra Is Combining Firm Violations to Encourage Compliance

Brad Bennett, executive vice president and chief of enforcement at the Financial Industry Regulatory Authority, said in an interview with Bloomberg News that Finra is combining multiple violations against a firm into a single case.

The effort is intended to maximize the “deterrent effect” of Finra’s enforcement actions, he said.

For more, click here.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE