Mortgage-Backed Bonds, EU Banks, Taxes: Compliance

JPMorgan Chase & Co., the biggest U.S. bank, reached a settlement with regulators to resolve claims tied to its home-loan business and said it would buy back as much as $3 billion of shares.

The agreement in principle with the U.S. Securities and Exchange Commission covers two investigations related to mortgage-backed bonds handled by JPMorgan and Bear Stearns Cos., which the bank acquired in 2008, New York-based JPMorgan said yesterday in a filing.

The SEC has issued notices to banks including JPMorgan in probes focusing on mortgage securities and whether lenders failed to disclose underlying credit weaknesses. Goldman Sachs Group Inc. paid $550 million in 2010 to settle SEC claims that it misled investors on a mortgage-linked investment in 2007. In that case, Goldman Sachs said it made a “mistake” in omitting disclosures.

One investigation related to delinquency disclosures in a single mortgage-backed security deal, JPMorgan said in yesterday’s filing. The other involved claims against the lender and Bear Stearns over disclosures of settlements of disputes against originators of loans included in Bear Stearns securitizations.

The SEC warned JPMorgan in January that it may bring complaints related to mortgage securitizations, the company said in February. Goldman Sachs and Wells Fargo & Co. also said they were facing U.S. scrutiny over mortgages.

Regulators are still examining how banks packaged and sold home loans to investors more than four years after mounting mortgage defaults prompted unprecedented government bailouts of the financial system.

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Compliance Policy

Draghi Renews Call for Operational ECB Bank Oversight in 2013

European Central Bank President Mario Draghi renewed his endorsement of the establishment of euro-area bank oversight by 2013, a day after German Chancellor Angela Merkel cautioned against rushing to install the new supervisor.

Draghi told reporters in Frankfurt yesterday that the ECB’s Governing Council supports an Oct. 19 pledge by European Union leaders to integrate euro-area financial systems.

Negotiations to create an ECB-based bank supervisor have bogged down over disagreements on the regulator’s scope and setup. A German-led alliance this week sought to limit the supervisor to big banks and also called for wholesale changes to plans for managing oversight within the central bank.

The proposal from Germany, Finland, Luxembourg and the Netherlands contrasts with EU Financial Services Commissioner Michel Barnier’s plans to put the ECB in charge of all euro-area banks. All 27 EU leaders last month affirmed their pledge to establish ECB oversight of euro-area banks and set a Dec. 31 goal for political agreement on the new supervisor’s design.

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Affluent Americans Considering Investments After Obama Victory

President Barack Obama is expected to support letting the tax cuts enacted during the George W. Bush era expire for high earners at year-end. Obama wants to increase the top federal income tax rate to 39.6 percent from 35 percent, boost rates on long-term capital gains to as much as 23.8 percent, and shrink exemptions from estate-and-gift taxes.

Wealthy investors have about a month and a half to examine their investment gains and losses left over from previous years, as well as to consider ways to move income into 2012 and transfer assets to heirs, Jeff Saccacio, a personal financial services partner at New York-based PricewaterhouseCoopers LLP, Saccacio said.

“Acceleration of investment income is clear,” said Elda Di Re, partner and personal financial services area leader for Ernst & Young LLP in New York. “If anyone was planning on realizing a gain in the next two to three years on either securities or real estate, there’s a considerable amount of money to be saved.”

Investors shouldn’t accelerate sales of securities just to avoid a higher tax rate, said Saccacio, who is based in Los Angeles. They should consider how long they planned to hold stocks and whether they need to rebalance. Those who decide to sell at current capital gains rates can re-invest in the securities if they remain attractive without violating so-called wash-sale rules under the Internal Revenue Service code that apply to stocks sold at a loss, he said.

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Brokers Mine Social-Media Sites for Personal Data, Lawmakers Say

People who use social-media websites such as Facebook and LinkedIn may have their information harvested by companies that collect, analyze or sell consumer data, a group of U.S. lawmakers said yesterday.

Acxiom Corp.; Epsilon Data Management LLC, a unit of Alliance Data Systems Corp.; and Intelius Inc. are among those saying they collect publicly available social-media information, in response to questions sent by a group of House members led by Representatives Ed Markey and Joe Barton.

“Posting to Facebook should not also mean putting personal information into the hands of data reapers seeking to profit from details of consumers’ personal lives,” Markey said in an e-mail. “Users of social media want to share with friends, not enable the sale of their personal information to data miners.”

Markey, a Massachusetts Democrat, and Barton, a Texas Republican, sent letters on July 24 to companies including Equifax Inc., Experian Plc and Fair Isaac Corp., the company that developed the FICO consumer credit rating score.

Markey and Barton lead the Congressional Bipartisan Privacy Caucus.

AT&T Seeks Rules Relief as Part of $14 Billion Digital Switch

AT&T Inc. wants to rid the U.S. phone system of regulations from the Bell system era as it replaces its traditional network with Internet technology, a move competitors say could lead to higher prices for business telecommunications service.

The largest U.S. telephone company on Nov. 7 said it would invest $14 billion for wireless and wireline improvements. It also asked the Federal Communications Commission to approve trial runs in unnamed test areas where legacy regulations wouldn’t apply.

Some requirements to provide connections to smaller companies should be eliminated when the transition takes place, leaving minimal federal regulation, AT&T said in an August FCC filing.

“There’s going to be a lot of issues raised,” Robert Quinn, a Washington-based senior vice president for AT&T, said in an interview. “We’re trying to do the first couple of these in areas where we can tee up these policy issues, and demonstrate to people that this is a good product. Our intent here is to provide everybody in our footprint with a good product.”

Some of the rules AT&T wants the FCC to eliminate have been in place since before the court-ordered breakup of the Bell system monopoly in the 1980s. Congress in 1996 said rules should be trimmed, and since then companies have argued over what constraints should apply as AT&T, second-largest company Verizon Communications Inc. and other providers replace circuits-and-switches networks with faster Internet-based technology.

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Compliance Action

Hudson Valley Capital Barred by Finra for Fraudulent Trading

Hudson Valley Capital Management was expelled from the securities industry and its top executive barred for life for fraudulently allocating trading losses to customers, the Financial Industry Regulatory Authority said.

Chief Executive Officer Mark Gillis defrauded clients this year by covering up losses and sticking stock in customer accounts at inflated prices, the Wall Street-funded regulator said yesterday in a statement. One lost about $400,000, Finra said.

Gillis, 42, shared ownership of the Croton-on-Hudson, New York-based brokerage with Charles Doller, who wasn’t banned or suspended, according to Finra. Doller told Finra that he notified regulators and clients as soon as he learned about the fraudulent trades, according to regulatory records.

Messages left at numbers listed for Gillis and Doller weren’t immediately returned. Gillis moved last year to Saranac Lake, New York, where he’s planning to open a microbrewery, the Adirondack Daily Enterprise reported in August.

SEC Sues Louisiana Fund Firm for Hiding Mortgage-Linked Loss

A Louisiana hedge fund firm hid $32 million in losses tied to investments backed by residential mortgages as prices collapsed in 2008, U.S. regulators said.

Walter Morales instructed employees at his Baton Rouge-based firm Commonwealth Advisors Inc. to conduct a series of manipulative trades between funds they advised to conceal losses after investing in the riskiest slices of a collateralized debt obligation known as Collybus, the Securities and Exchange Commission said yesterday in a lawsuit filed at federal court in Louisiana.

Commonwealth clients, which included pension funds and individual investors, were sustaining heavy losses as mortgage markets began to decline in 2007 and rating firms began to downgrade securities with lower credit quality, the SEC said. Rather than come clean with its investors, Morales directed employees to execute more than 150 deceptive trades between two hedge funds they managed at prices below its own valuation for those securities.

After the trades were conducted, Morales instructed an employee to mark the securities at fair market value, creating a fraudulent $19 million gain for the acquiring hedge fund at the expense of the funds that sold, the SEC said. Morales falsely represented that the transactions were for a legitimate business purpose and at prevailing market prices, according to the complaint.

Frederick Tulley, an attorney for Morales and Commonwealth, said his clients intend to fight the SEC’s claims.

“We seriously dispute the SEC’s version of what happened,” Commonwealth said in an e-mailed statement. “We plan to vigorously defend the action and we are confident that, in the end, the decisions made by Commonwealth and its management will be vindicated in the courts.”

Ex-Madoff Controller Irwin Lipkin Pleads Guilty to Two Counts

Irwin Lipkin, the first employee hired by Bernard Madoff’s defunct investment firm, pleaded guilty to falsifying books and records and told a judge he didn’t know that Madoff was running a vast fraud.

“While working for Bernie Madoff, I made accounting entries in financial records that I knew were inaccurate,” Lipkin, 74, told U.S. District Judge Laura Taylor Swain at a hearing yesterday in Manhattan. “These filings helped Mr. Madoff run the Ponzi scheme that harmed thousands of people.”

Lipkin, Madoff’s former controller, pleaded guilty to conspiracy and to making false statements in employment records. Lipkin, who used a wheelchair at the sentencing, was to have pleaded guilty in September. He told Swain that he has been hospitalized twice in the past several months and suffered from pneumonia. Lipkin faces as long as 10 years in prison when he’s sentenced on March 22.

Lipkin said he retired from Madoff’s firm in 1998.

“I would like the court to know that at no time before I retired was I ever aware that Mr. Madoff or anyone else at the company was engaged in the Ponzi scheme reported in the media,” Lipkin said. “My belief in Bernie Madoff’s trading skills was such that I encouraged my own family to invest their money in accounts managed by Mr. Madoff.”

David Richman, Lipkin’s lawyer, didn’t elaborate on his client’s statement when asked after the hearing how Lipkin could have not known of Madoff’s fraud.

Swain said Lipkin may remain free until sentencing on a $1.5 million bond, to be secured with $250,000 in cash or property.

Lipkin’s son, Eric Lipkin, pleaded guilty to six criminal counts in June 2011, admitting he falsified documents to show non-existent holdings in accounts and to pay people for no-show jobs. Eric Lipkin, who is cooperating with the government’s investigation into the Madoff fraud, faces as long as 70 years in prison when he’s sentenced.

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

In the Courts

Fluor Accused of Using Energy Department Funds for Lobbying

Fluor Corp. is accused of using funds from an Energy Department contract to pay for lobbying activities that sought more federal money, according to court papers filed by the U.S. Justice Department.

The department announced yesterday that it is joining a false claims lawsuit in federal court in Spokane, Washington, alleging that Fluor Corp. and Fluor Hanford Inc. paid two lobbying companies more than $650,000 with money meant to train emergency personnel at the Energy Department’s Hanford nuclear site.

“The taxpayer money Congress allocated for this program was for training federal emergency response personnel and first responders, not to lobby Congress and others for more funding,” Stuart F. Delery, acting head of the Justice Department’s Civil Division, said in an e-mailed statement.

The lawsuit was originally filed by whistle-blower Loydene Rambo, a former employee of Fluor, the largest publicly traded U.S. engineering and construction company.

Keith Stephens, a spokesman for Irving, Texas-based Fluor, didn’t immediately respond to a phone message seeking comment on the lawsuit.

Last year, the company paid $4 million to settle U.S. allegations that it knowingly submitted false claims and paid and received kickbacks involving an Energy Department contract at the same nuclear site.

The case is U.S. ex rel. Rambo v. Fluor Hanford LLC, 11-cv-05037, U.S. District Court, Eastern District of Washington (Spokane).

Argentine Bond Case Is Set for U.S. Court Conference Today

The U.S. judge overseeing lawsuits against Argentina by holders of the country’s defaulted debt will hold a court conference today, a court clerk said.

U.S. District Judge Thomas Griesa is scheduled to hear from the parties in litigation by Elliott Management Corp.’s NML Capital Fund and other investors who are trying to collect on $1.3 billion in the defaulted bonds.

A federal appeals court in New York ruled Oct. 26 that Argentina can’t make payments on its restructured sovereign debt while refusing to pay holders of the defaulted bonds. The appeals court sent the case back to Griesa to clarify how a payment formula is intended to work and to determine how the court’s orders apply to intermediary banks and other third parties.

On Nov. 6, lawyers for NML Capital asked Griesa for an expedited decision on those questions, citing press statements by Argentine President Cristina Fernandez de Kirchner and members of her cabinet that, according to NML, show the country is trying to evade the appeals court ruling.

In a letter to Griesa dated Nov. 5, Argentina said it’s seeking a rehearing from the three-judge appeals panel that ruled against it or in front of the full New York-based appeals court. In their letters, the two sides disagreed over whether an order staying his earlier decisions against Argentina is still in effect after the appeals court decision.

The case is NML Capital Ltd. v. Republic of Argentina, 08-CV-6978, U.S. District Court, Southern District of New York (Manhattan).

New Hampshire Settles With Shell, Sunoco Over Contamination

New Hampshire reached a $35 million settlement with Shell Oil Co. and Sunoco Inc. of a lawsuit over claims that the gasoline refiners and manufacturers used chemicals that contaminated groundwater.

The state sued a number of oil companies in 2003, charging that they knew the gasoline additive methyl tertiary butyl ether, or MTBE, would pollute water supplies, state Attorney General Michael Delaney said yesterday in a statement.

A trial against the other remaining defendants, which include Exxon Mobil Corp., ConocoPhillips, Irving Oil Ltd., Citgo Petroleum Corp. and Vitol SA, is set to begin in Concord, New Hampshire, in January. It may last three to four months.

The state has settled the suit with other oil companies, including Hess Corp. and Chevron Corp., Assistant Attorney General Mary Maloney said in an interview.

Maloney said the state may seek “several hundreds of millions” of dollars in damages in the jury trial. MTBE continues to be a pollutant in New Hampshire, especially since many residents use well water, she said.

“MTBE, because of its ubiquity and solubility, gets into the bedrock,” she said.

Press representatives for Houston-based Shell and Philadelphia-based Sunoco didn’t immediately reply to messages seeking comment on the settlement. Shell’s U.S. unit is part of Netherlands-based Royal Dutch Shell Plc, and Sunoco is a unit of Dallas-based Energy Transfer Partners LP.

The case is State of New Hampshire v. Hess Corp., 03-C-0550, State of New Hampshire Superior Court (Merrimack).

BNY Mellon Ends Virginia’s Whistle-Blower Currency-Trading Suit

Bank of New York Mellon Corp., the largest custody bank, reached a deal to end a lawsuit accusing it of defrauding state pension funds through foreign-currency transactions, according to a spokesman for Virginia Attorney General Kenneth Cuccinelli.

The settlement provides $1.14 million to Grant Wilson, a former foreign exchange trader at the bank who made the allegations, said a person familiar with the matter who asked not to be identified because a judge hasn’t signed off on the request to dismiss the case.

The money is being paid by the state and not the bank, the person said. The state and the bank filed a request to dismiss the case in state court. The filing couldn’t be immediately confirmed from court records.

BNY Mellon has been sued by several states and the U.S. attorney in Manhattan over pricing of foreign-currency trades on behalf of clients. Cuccinelli sued the New York-based bank in August 2011, claiming it violated state law by charging “undisclosed markups” on currency-exchange trades to six retirement funds. Virginia was seeking about $931.6 million in damages.

“BNY Mellon did not make any payments to the whistle-blower,” Kevin Heine, a spokesman for the bank, said in an e-mailed statement. “The whistle-blower case was dismissed by the court.”

The cases against BNY Mellon and other custody banks center on the pricing of small foreign-exchange transactions handled automatically on behalf of the pension funds, a service known as standing instruction.

The banks say they acted as a principal, selling one currency for another in arms-length transactions at a set price that customers were free to accept or reject.

The states claim the banks were obliged to act as an agent, obtaining the best possible exchange rate in the interbank currency market. Banks misled clients on how they set prices, the states contend.

The case is Commonwealth of Virginia v. Bank of New York Mellon Corp., 09-15377, Circuit Court for the County of Fairfax, Virginia (Fairfax).

BofA Whistle-Blower in $1 Billion Case Faced Fraud Claims

The whistle-blower helping the U.S. government mount a $1 billion fraud lawsuit against Bank of America Corp. was himself accused of fraud by an investor in a financing company he co-founded, and now works at Fannie Mae, one of two entities he claims the bank defrauded.

Edward O’Donnell sued Bank of America, the second-biggest U.S. lender by assets, in February under the False Claims Act, saying the bank’s Countrywide Financial unit, where he once worked, issued defective mortgages and sold them to Fannie Mae and Freddie Mac. Last month, the Justice Department joined his suit, making it the first time the U.S. has accused a bank of fraud over loans sold to the two government-sponsored mortgage-finance companies.

To make the case, the U.S. may have to confront its whistle-blower’s own tangled history. A year after leaving Countrywide, O’Donnell was sued by an investor in a deal organized by a commercial financing firm he co-founded. Bank of America may use that lawsuit, and O’Donnell’s job at Fannie Mae, to raise doubts about his credibility before a jury, according to Peter Hutt, a lawyer who defends whistle-blower cases.

“It could certainly be argued that the whistle-blower had an interest in making the allegation either to secure employment at Fannie Mae or making himself look good at Fannie Mae,” Hutt, a partner at Akin, Gump, Strauss, Hauer & Feld LLP in Washington, said in a phone interview.

Still, if documents and other evidence support O’Donnell’s claims, “there won’t be any direct effect” on the U.S. case from disclosures about his background, said Hutt, who isn’t involved in the Bank of America lawsuit.

O’Donnell referred a call about the earlier lawsuit to his lawyer, David Wasinger, who declined to comment. Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara in New York, whose office joined the Bank of America case, declined to comment on O’Donnell.

The bank has denied the allegations against it in the whistle-blower suit.

“Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters,” Lawrence Grayson, a spokesman for the Charlotte, North Carolina-based company, said in a statement after the U.S. joined the case. “Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn.” Grayson declined to comment on the investor claims made against O’Donnell.

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BofA’s Merrill Unit Loses Bid to Dismiss FHFA Mortgage Bond Suit

Bank of America Corp.’s Merrill Lynch & Co. unit must face a lawsuit by the Federal Housing Finance Agency, the conservator for Fannie Mae and Freddie Mac, over mortgage-backed securities sold by the investment bank.

U.S. District Judge Denise Cote in New York yesterday denied Merrill’s request to dismiss the FHFA’s securities law and fraud claims, except for fraud claims based on loan-to-value ratios and ownership-occupancy reporting. The judge said FHFA had failed to sufficiently allege fraudulent intent for those claims.

The FHFA sued Merrill Lynch and other investment banks last year as conservator of Freddie Mac and Fannie Mae, the government-sponsored enterprises created to support the housing market by buying residential mortgages in the secondary market. It alleges negligent misrepresentations and fraud related to the mortgage-backed securities the banks sold from 2005 to 2007.

Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment on the ruling. Bank of America completed its acquisition of Merrill Lynch on Jan. 2, 2009.

Sixteen of the FHFA’s lawsuits are before Cote. The FHFA’s case against Bank of America’s Countrywide Financial unit, at one point the largest originator of residential mortgages, is before a federal judge in Los Angeles who last month denied Countrywide’s motion to dismiss the claims for being brought too late.

Cote earlier denied UBS AG’s and JPMorgan Chase & Co.’s request to dismiss FHFA’s claims.

The case is Federal Housing Finance Agency v. Merrill Lynch & Co., 11-06202, U.S. District Court, Southern District of New York (Manhattan.)

Commodities Trader Accused of Hiding $8.3 Billion Position

A commodities trader was accused in a lawsuit by U.S. regulators of concealing an $8.3 billion position and causing his employer losses of $118 million.

The trader, Matthew Marshall Taylor, in 2007 fabricated trades in a New York-based futures commission merchant’s internal system and obstructed his employer’s discovery of his position, risk and profits and losses, the U.S. Commodity Futures Trading Commission said in a complaint yesterday in federal court in New York. The employer isn’t identified in the suit.

Taylor’s trades, after the liquidation of his position, caused losses of about $118 million, according to the complaint. The fabricated trades and concealment violated provisions of the Commodity Exchange Act, according to the complaint.

By Dec. 13, 2007, “Taylor’s scheme culminated in his concealment of a notional value of an approximately $8.3 billion long e-mini futures position,” according to the lawsuit. E-minis are futures contracts tied to the S&P 500 Index.

According to the complaint, Taylor concealed the position by bypassing the futures commission merchant’s internal system designed for entering and routing trades to the Chicago Mercantile Exchange and manually entering fabricated futures trades in a different internal system maintained by his employer.

Ross Intelisano, a lawyer for Taylor in New York, didn’t immediately return a call yesterday seeking comment on the complaint.

The case is U.S. Commodity Futures Trading Commission v. Matthew Marshall Taylor, 12-cv-8170, U.S. District Court, Southern District of New York (Manhattan).


SEC’s Annual Small Business Forum to Take Place Nov. 15

The U.S. Securities and Exchange Commission announced Nov. 7 the agenda for its upcoming annual small business forum, scheduled for Nov. 15 at the commission’s Washington headquarters.

In a release, the agency said the 2012 Government-Business Forum on Small Business Capital Formation will feature a panel discussion on implementation of the Jumpstart Our Business Startups Act. A second panel will focus on capital formation issues.

The forum also will include sessions to develop recommendations regarding crowdfunding, exempt securities offerings and regulation of smaller public companies. The sessions are open to the public.

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