Money Laundering, Price Gouging, Bank Suits: Compliance

HSBC Holdings Plc said it’s likely to face criminal charges from U.S. anti-money-laundering probes and the cost of a settlement may “significantly” exceed the $1.5 billion the bank has set aside.

The lender made an additional $800 million provision in the third quarter to cover a potential settlement, adding to the $700 million it had already earmarked. HSBC also put aside $357 million in the period to compensate U.K. clients wrongly sold payment-protection insurance on loans as it posted an increase in pretax profit that missed analysts’ estimates.

“The resolution of at least some of these matters is likely to involve the filing of corporate criminal as well as civil charges,” HSBC said in a statement yesterday.

Chief Executive Officer Stuart Gulliver’s attempts to reduce costs at the bank are being hobbled by the U.S. probes and compensation claims from U.K. clients. A Senate committee said in July that failures in HSBC money-laundering controls allowed terrorists and drug cartels access to the U.S. financial system. Standard Chartered Plc, which like HSBC makes most of its profit in Asia, paid $340 million in August to settle a regulator’s claim it broke Iranian sanctions rules.

HSBC has been in talks with U.S. regulators over allegations it laundered funds of sanctioned nations including Iran and Sudan. The probes prompted Standard & Poor’s to question whether the lender, Europe’s largest by market value, is too big to be managed effectively.

A settlement of $1.5 billion would be the biggest reached in the U.S. over such allegations, topping the $619 million in penalties paid in June by ING Groep NV, the biggest Dutch financial-services company.

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Compliance Action

Price-Gouging Complaints Probed by N.Y., N.J. After Sandy

The attorneys general in New York and New Jersey are investigating complaints from consumers about price gouging for gasoline, food and generators following Hurricane Sandy.

New York is investigating “hundreds of complaints” from across the state, mostly related to gas prices, New York Attorney General Eric Schneiderman said in a statement yesterday. New Jersey said Nov. 2 that it had issued subpoenas to 65 businesses.

New York’s price-gouging law prohibits merchants form taking advantage of consumers by selling goods or services for an “unconscionably excessive price” during “abnormal disruption of the market.”

New Jersey Governor Chris Christie and Attorney General Jeffrey Chiesa said in a statement Nov. 2 that the Division of Consumer Affairs was investigating more than 500 consumer complaints about prices for gas, generators, batteries, food and lodging. Gas prices in some cases allegedly rose by $1 or more a gallon following the storm and in some instances allegedly exceeded $5 a gallon, according to the statement.

A spokesman for the Division of Consumer Affairs didn’t return a phone call seeking comment yesterday.

Deutsche Post Bulk-Mail Pricing Probed by Antitrust Agency

Deutsche Post AG, the world’s biggest carrier of air and sea freight by volume, is being probed by Germany’s Federal Cartel Office over claims it is undercutting competitors on bulk-mail pricing.

Pricing for bulk mail at banks, health insurers and telecommunication companies are being investigated and questionnaires have been sent to Deutsche Post clients, the regulator said in an e-mailed statement yesterday.

“The allegation is that Deutsche Post charges prices below its costs,” Andreas Mundt, the regulator’s president, said in the statement. “We are probing whether Deutsche Post is trying to push competitors out of the market by using a price war strategy.”

Competitors complained last year to another regulator, the Federal Network Agency, about the pricing policy at Deutsche Post’s Infopost service, which lets companies send letters to multiple recipients at a reduced price as long as the content is identical. The network regulator, which oversees former state-owned monopolies, in April asked Deutsche Post to change some policies for the product.

Dirk Klasen, a spokesman for Bonn, Germany-based Deutsche Post, said the company was surprised the regulator opened a case and contacted clients before discussing the allegation with the company. The network agency has also looked into the rebate system for bulk mail and found no violation, he said.

Ebix Accounting Practices Said to Be Probed by SEC

Ebix Inc., the insurance software company that said it was targeted by short sellers last year, is being investigated by the U.S. Securities and Exchange Commission for its accounting practices, four people with direct knowledge of the probe said.

The SEC investigation, conducted over the past year, is focused on revenue recognition, internal controls and the accuracy of the company’s public statements to shareholders, said three of the people, who asked not to be named because the probe wasn’t public.

Robin Raina, Ebix’s chairman and chief executive officer, said his company wasn’t under SEC scrutiny.

“You could not be more off the mark -- that is a complete lie and at least not known to us in any manner whatsoever,” Raina wrote in an e-mail.

There’s no public indication that SEC litigation of any kind is imminent, given that Ebix hasn’t received a Wells Notice, a warning from the SEC that it is prepared to sue.

“We’ve received no notice from SEC enforcement that they’re investigating us,” said John Jordak, a lawyer for Ebix at Alston & Bird LLP.

Justin Jeffries, the SEC attorney said to be leading the investigation, didn’t return phone calls seeking comment on the probe. Kevin Callahan, an SEC spokesman, declined to comment.

The SEC probe comes as Atlanta-based Ebix is fighting at least four lawsuits accusing it of inflating income levels or mishandling internal accounting.

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U.K. Financier Levene Sentenced to 13 Years in Prison for Fraud

Nicholas Levene, the London-based financier, was sentenced to 13 years in prison after pleading guilty to fraud, false accounting and obtaining a money transfer by deception, the U.K. Serious Fraud Office said.

Levene, the former deputy chairman of both Nicola Horlick’s Bramdean Asset Management LLP and Leyton Orient Football Club, lost more than 32 million pounds ($51.1 million) of investors’ cash between 2005 and 2009, the SFO said in an e-mailed statement. He was sentenced yesterday at Southwark Crown Court in London.

“This was a complex and extensive fraud where Nicholas Levene used investors’ monies to finance a lavish personal lifestyle,” Jonathan Midgley, an SFO lawyer, said in the statement.

Between January 2005 and October 2009, Levene obtained over 250 million pounds from investors, according to the SFO. Over 18 million pounds was used to buy property in the U.K. and Israel, or spent on overseas travel and “lifestyle expenses.”

The SFO started its criminal investigation of Levene in October 2009 and charged him in 2011. Levene, 48, admitted to 12 counts of fraud, and one each of false accounting and obtaining a money transfer by deception on Sept. 24.

In the Courts

JPMorgan Loses Bid to Dismiss FHFA Mortgage Securities Suits

JPMorgan Chase & Co. lost a bid to have a U.S. judge dismiss lawsuits filed by the Federal Housing Finance Agency against 16 U.S. banks over mortgage-backed securities.

JPMorgan, Bank of America Corp. and Citigroup Inc. were among the lenders sued last year for allegedly misleading Fannie Mae and Freddie Mac about the soundness of loans underlying billions of dollars of residential mortgage-backed securities. JPMorgan served as the lead underwriter for 30 out of the 103 securitizations at issue in this case.

U.S. District Judge Denise Cote in Manhattan yesterday rejected a bid to throw out the FHFA’s complaint, overruling arguments that the agency lacked factual support that the loans underlying the securitizations weren’t underwritten in accordance with the guidelines set out in the offering documents.

“The agency’s reliance on this information is not, as the defendants allege, an effort to argue ‘fraud by hindsight’; rather the amended complaint suggests that these market events are telltale signs of defects that were present in the securitizations all along, albeit, unbeknownst to the public,” the judge wrote.

Fannie Mae and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.

Cote did narrow the case, dismissing some claims alleging violations of the Virginia Securities Act as well as fraud claims regarding the owner-occupancy and loan-to-value ratio of the securities for which New York-based JPMorgan served as lead underwriter.

Joe Evangelisti, a spokesman for JPMorgan, declined to comment on the ruling.

Also sued by the FHFA were Barclays Plc, Nomura Holdings Inc., HSBC Holdings Plc, Societe Generale SA, Morgan Stanley, Ally Financial Inc., Royal Bank of Scotland Group Plc, Credit Suisse Group AG, Deutsche Bank AG and First Horizon National Corp.

The case is Federal Housing Finance Agency v. JPMorgan Chase & Co., 11-CV-6188, U.S. District court, Southern District of New York (Manhattan).

Royal Park Sues Bank of America Over Mortgage Securities

Royal Park Investments SA/NV sued Bank of America Corp., the second-largest U.S. bank, in New York state court over losses on about $1.6 billion in residential mortgage-backed securities.

The suit seeks damages of more than $713 million for losses on the securities, which were initially purchased by third parties, according to a complaint filed in New York State Supreme Court in Manhattan on Oct. 26.

Royal Park, based in Brussels, was set up in May 2009 by Fortis Bank SA/NV, the Belgian state and BNP Paribas SA to manage a pool of distressed-debt securities. It sued Bank of America’s Merrill Lynch unit and other defendants, including JPMorgan Chase & Co., Goldman Sachs Group Inc., Credit Suisse Group AG, and Deutsche Bank AG in the same court in July over losses on mortage-backed securities.

Royal Park said in the complaint that it relied on “misrepresentations and omissions” in offering materials for the securities, and accused the bank of making “false and misleading” statements about statistical characteristics of the loans underlying the investments, such as the percentage of owner-occupied properties.

Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, didn’t immediately respond to an e-mail seeking comment on the suit.

Bank of America said in a regulatory filing on Nov. 2 that it settled three cases where foreign mortgage-bond investors accused the lender of misrepresenting the quality of loans with the securities.

The firm settled suits with Dexia SA, Sealink Funding Ltd. and Bayerische Landesbank, Germany’s second-biggest state-owned lender, on Sept. 27, Bank of America said in the regulatory filing. The firm didn’t disclose the amounts it paid.

The lender also said it could have as much as $2.8 billion in legal costs as of Sept. 30 beyond what it has already set aside. That’s a decline from the $4.1 billion estimated three months earlier because of a settlement of a class-action suit tied to the 2009 takeover of Merrill Lynch & Co., said Jerry Dubrowski, a Bank of America spokesman.

The case is Royal Park Investments SA/NV v. Bank of America Corp., 653773/2012, New York State Supreme Court, New York County (Manhattan).

Fired Bankers’ Lawsuits Fail as Judges Tire of Bonus Claims

Fired bankers suing for unfair dismissal and unpaid bonuses have found little success at London’s specialty employment courts as continuing anger over the financial crisis has left judges unsympathetic.

The adverse decisions from the U.K. Employment Tribunal come after London bankers had a run of legal successes with courts ruling they were entitled to large bonuses written into contracts before the economic downturn. The latest round of cases have largely been based instead on wrongful termination, where the banks have been able to make stronger arguments.

A former JPMorgan Chase & Co. banker, fired for mispricing aluminum trades, discovered the new reality the hard way Oct. 17, when a London judge threw out his suit for not properly explaining how “a large number of errors” he made benefited his trading book by about $400,000. Other claims tossed this year involved securities manipulation and threats from colleagues.

“In the current climate there is little sympathy for bankers,” said Andreas White, an employment lawyer at Kingsley Napley LLP in London. “Banking is the only industry where claimant employees are even less popular” than their bosses.

While the U.K government currently is seeking to restrict damages at specialty tribunals, claims in the trial courts, known as the High Court, can reap unlimited rewards.

Before this year, the High Court generally ruled in favor of bankers in disputes over bonuses in the face of public anger about the financial crisis triggered in part by the collapse of Lehman Brothers Holdings Inc.

“Many cases coming through were contractual, but now we’re seeing more fact-reliant cases that perhaps aren’t as strong,” said Sean Nesbitt, a lawyer at Taylor Wessing LLP. “The tribunal isn’t disposed to being sympathetic towards opportunistic claims.”

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