Libor Arrests, AIG Bailout Ends, EU Transfers: Compliance

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A former Citigroup Inc. trader is among three people held in the first U.K. arrests as part of global probes into tampering with the London interbank offered rate, according to two people familiar with the matter.

Thomas Hayes, a former trader at UBS AG and Citigroup, was arrested by the Serious Fraud Office and City of London Police yesterday, said the people, who asked not to be identified citing the continuing investigation. The other two men arrested worked at brokerage firm RP Martin Holdings Ltd., according to one of the people and a third person familiar with the investigation, who also requested anonymity. The employees are Terry Farr and Jim Gilmour, people with knowledge of the investigation said.

The three men who were arrested, ranging in age from 33 to 47, are all British nationals living in the U.K. and were taken to a London police station for questioning, the SFO said in an e-mailed statement.

Global authorities are investigating claims that more than a dozen banks altered submissions used to set benchmarks such as Libor to profit from bets on interest-rate derivatives or make the lenders’ finances appear healthier. Swiss lender UBS is expected to face a fine as early as this week that may surpass the record 290 million pounds ($466.6 million) paid in June by Barclays Plc, the U.K.’s second-biggest bank, to settle claims it attempted to manipulate Libor.

The agency and police also searched three homes in Surrey and Essex, according to the SFO statement. Arrests in the U.K. are made early in investigations, allowing people, who may not be charged, to be questioned under caution.

Libor, a benchmark for more than $300 trillion of financial products worldwide, is derived from a survey of banks conducted each day on behalf of the British Bankers’ Association in London. The rates help determine borrowing costs for everything from mortgages to student loans.

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Compliance Policy

Accounting Board Should Focus on China Over U.S., ICAEW Says

The International Accounting Standards Board should stop trying to get the U.S. to adopt its standards and instead focus on China and other countries that are more willing to follow the rules, a U.K. group said.

The era of convergence between U.S. and international standards “should be ended formally in a matter of months” the Institute of Chartered Accountants in England and Wales said in an e-mailed report. The IASB should look at “countries that have moved their standards close” to its proposals, known as IFRS.

Hans Hoogervorst, chairman of the IASB, last year criticized the U.S. Financial Accounting Standards Board’s rules that differ from IASB standards during a hearing in the European Parliament in Brussels. U.S. rules, known as Generally Accepted Accounting Principles or GAAP allow banks to be less transparent about derivatives on their balance sheet, he said.

U.S. Opposes Expanding UN Agency’s Remit to Regulate the Web

The U.S. government said yesterday it will oppose any proposals that would expand the United Nations telecommunications agency’s remit to make rules governing the Internet.

The World Conference on International Telecommunications is working in Dubai this month to update the 24-year-old framework that governs telecommunications networks.

In a blog post, the White House also said that in addition to rejecting new powers for the International Telecommunication Union, the country would oppose any rules that might lead to more state control over online content. The statement comes as a proposal backed by China and Russia that would give individual countries sovereignty over Internet addresses and domains was scrapped.

The ITU members are meeting in Dubai from Dec. 3 through Dec. 14 to discuss changes to the 1988 International Telecommunication Regulations, which don’t regulate the Internet. The ITU has said the WCIT conference won’t address expanding its powers.

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Bank Data Confidentiality Rule Awaits Obama After Senate Passage

Banks moved closer to greater confidentiality for information they share with the Consumer Financial Protection Bureau after the U.S. Senate unanimously passed legislation to extend the protection.

Senators backed amending the Federal Deposit Insurance Act to give lenders assurance that providing information to the bureau wouldn’t automatically waive any privileged status. The measure would correct what lawmakers and the bureau agree was an oversight that left the rule -- already in place for other regulators -- out of the Dodd-Frank Act, which created the agency.

Senators agreed yesterday to pass the bill by unanimous consent after Senator Jim DeMint, a South Carolina Republican who is stepping down next month, removed a procedural block on the measure. The House passed the bill on March 26 with bipartisan support.

Earlier, some lenders supervised by the bureau, which will examine banks with more than $10 billion in assets and some non-bank firms, objected to Jan. 4 guidance issued by the agency that said firms couldn’t withhold privileged information, such as that protected by the traditional attorney-client shield.

Japan to Name Brokerage Employees Involved in Leaks, Jiji Says

Japan’s Financial Services Agency plans to reveal the names of staff found to be involved in leaks of non-public client information that lead to insider trading or other illegal actions, Jiji said, citing unidentified sources.

Naming the staff would apply in particularly malicious cases. The agency also plans to disclose the names of fund managers who demand tips, Jiji reported.

The measure was proposed at a meeting of the FSA’s Financial System Council yesterday. The proposals are part of a clampdown on insider trading based on leaks provided by brokerages. The regulator didn’t identify securities firm employees found this year to have leaked information on share offerings of clients.

Compliance Action

AIG Bailout Ends Four Years After Two-Year Rescue Plan

The U.S. Treasury Department is exiting its equity stake in American International Group Inc. through the final sale of shares acquired as part of a 2008 bailout that swelled to $182.3 billion.

The insurer’s near-collapse and bailout was followed by asset sales and a return to profit that helped Chief Executive Officer Robert Benmosche bring an end to the rescue.

For a timeline of the bailout events, click here and click here.

EU Probes National Curbs on Cross-Border Bank Capital Transfers

The European Union is studying whether national regulators broke EU rules by taking steps to stop banks from moving funds across the bloc’s internal borders.

The European Commission, the 27-nation EU’s executive arm, is monitoring the situation, according to Stefaan De Rynck, a spokesman for Michel Barnier, the EU’s financial services chief. The Wall Street Journal reported yesterday that the EU was considering taking steps against national regulators that restrict banks from freely moving funds.

German and Italian regulators clashed over a move by Unicredit SpA to allocate funds raised from German depositors to its central Italian unit, and the U.K. Financial Services Authority has pressured the U.K.-based units of EU banks to change their legal structure so that the FSA can set capital requirements, the Wall Street Journal reported.

The European Banking Authority also has the power to step in and investigate cases where regulators may have unfairly blocked banks from moving funds, De Rynck said. The EBA can mediate disputes between supervisors, he said.

Japan FSA to Begin Surprise Preventive Audits, Jiji Says

Japan’s Financial Services Agency it will begin to make unannounced visits to auditing firms suspected of “window-dressing their books or engaging in other irregularities,” Jiji Press said.

The surprise audits were made part of a draft of new auditing standards being considered by the agency, according to the newspaper. The standards were proposed by the agency at a meeting yesterday of the subcommittee of the Business Accounting Council. Members of the council “basically approved the draft standards,” Jiji reported.

The FSA will apply the standards at the beginning of fiscal year 2013, after they are finalized, the newspaper said. The agency hopes to regain public confidence with the new, stricter standards, after the accounting recent scandals in Japan involving listed companies.

JPMorgan Pressed by SEC on Prop Trading Before London Whale Loss

JPMorgan Chase & Co. was pressed by U.S. regulators to strengthen investor disclosures on proprietary trading almost a year before a wrong-way bet on credit derivatives cost the bank at least $6.2 billion.

The Securities and Exchange Commission asked Chief Financial Officer Douglas Braunstein to provide information about the bank’s so-called principal transactions revenue and proprietary trading, according to letters between the agency and the company from June 15 of last year through Feb. 17 that were made public yesterday. Proprietary trading, in which banks make bets with their own money, would be restricted under a Dodd-Frank Act provision known as the Volcker rule.

The letters preceded JPMorgan’s assertion in May that a portfolio of credit derivatives, which bet against the creditworthiness of U.S. companies such as Wal-Mart Stores Inc., was a hedge against a weakening economy rather than a proprietary bet. The position was amassed by trader Bruno Iksil, who came to be known as the London Whale because his wager was big enough to move the market.

JPMorgan, the biggest U.S. bank by assets, has said the trade was made through the company’s chief investment office, or CIO, and resulted in a loss in the first nine months of this year of more than $6.2 billion. Chief Executive Officer Jamie Dimon, 56, has said that figure could increase.

The U.S. Senate Permanent Subcommittee on Investigations is probing the loss.

Braunstein, 51, told the SEC that the bank had proprietary-trading positions in its fixed-income, commodities and equities desk within the investment bank. Trading with the firm’s own money represented a “de minimis portion of the revenues and earnings of the investment bank,” Braunstein said in a July 1 response to the SEC.

Mark Kornblau, a JPMorgan spokesman, declined to comment on the company’s exchanges with the SEC.


SEC Sues Consultant Who Arranged Chinese Firms’ Reverse Mergers

A New Jersey-based consultant who helped Chinese firms become listed on U.S. exchanges stole money raised for a client and manipulated stock-trading data to artificially reach the number of shareholders a company needed to go public, U.S. regulators said.

Huakang “David” Zhou and his consulting firm Warner Technology and Investment Corp. located more than 20 private companies in China from at least 2007 to 2010 to bring public in the U.S. through so-called reverse mergers, the Securities and Exchange Commission said in a lawsuit filed yesterday at federal court in Manhattan. Several of the firms have since failed, including at least one that collapsed amid fraud allegations, the SEC said.

The lawsuit, which accuses Zhou of using the stolen money to pay his son’s mortgage, marks the latest move in a broader SEC probe targeting the financial statements of firms based in China that have listed their shares on U.S. exchanges. The SEC, which has deregistered the securities of almost 50 companies and filed fraud cases against more than 40 issuers and executives as part of the investigation, has also targeted auditors who have refused to turn over documents, citing Chinese law.

Many of the companies entered U.S. capital markets through reverse mergers, in which a closely held firm buys a shell company already public on an exchange, allowing them to list shares without the scrutiny of a public offering.

Robert Brantl, Zhou’s attorney, declined to comment.

New York Fund Manager to Pay $1.3 Million to Settle SEC Claims

Steven B. Hart, a New York-based portfolio manager, will pay $1.3 million to resolve U.S. Securities and Exchange Commission claims that he conducted illegal trading schemes to benefit his investment fund Octagon Capital Partners LP.

The SEC claimed that Hart made more than $831,000 from the trades over a four-year period, including one scheme in which he illegally matched 31 pre-market trades to benefit his own fund at the expense of his employer’s, according to a statement yesterday by the agency.

A call seeking comment from Robert Anello, an attorney for Hart, wasn’t immediately returned.

Rajat Gupta Should Pay Maximum Civil Penalty, SEC Says

Rajat Gupta, the former Goldman Sachs Group Inc. director found guilty at an insider-trading trial, should be required to pay the maximum civil penalty, the U.S. Securities and Exchange Commission said in a court filing.

Gupta was motivated by personal gain and can afford the $15 million fine the SEC is seeking because he still has tens of millions of dollars for an “enviable retirement,” Kevin McGrath, an SEC attorney, said in yesterday’s filing in federal court in Manhattan. The former Goldman executive is worth about $85 million, evidence at his trial showed, McGrath said.

Imposing the maximum penalty is needed to send a deterrent message, McGrath said.

Gupta, who is appealing his conviction, should also be barred from being an officer or director of a company and from violating securities laws, the SEC said in a filing. Gupta objected, saying the commission hasn’t shown that there’s a likelihood he will violate securities laws in the future.

Gupta was convicted by a jury in June of one count of conspiracy and three counts of securities fraud.

The case is U.S. Securities and Exchange Commission v. Gupta, 11-07566, U.S. District Court, Southern District of New York (Manhattan).


BlackRock’s Fink Comments on Libor Tampering, Economy

Laurence D. Fink, chief executive officer of BlackRock Inc., talked about global probes into tampering with the London interbank offered rate, the outlook for the U.S. economy and investment strategy.

Fink, who spoke with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers,” also discussed U.S. fiscal negotiations and the selection of Mark Carney as the next governor of the Bank of England.

Comings and Goings

Barclays Hires Former FSA Chief Hector Sants as Compliance Head

Barclays Plc, the bank fined for Libor manipulation, hired former Financial Services Authority Chief Executive Officer Hector Sants as head of compliance and government and regulatory relations, a newly created role.

Sants, 56, will report to CEO Antony Jenkins and will manage compliance employees at the bank, London-based Barclays said today in a statement. His compensation wasn’t disclosed. Starting on Jan. 21, Sants will also oversee relationships with governments and regulators, including his former employer.

Barclays, Britain’s second-largest bank, was fined a record 290 million pounds ($468 million) in June for submitting false London and euro interbank offered rates, leading to the departure of top executives. Jenkins is seeking to overhaul the culture of the bank following scandals including wrongly sold loan insurance.

Sants announced his departure from the FSA in February 2010, but agreed to stay on after the government proposed handing supervisory powers to the Bank of England.

Harvard-Trained Regulator Has Eyes Focused on Bank Behavior

Former Harvard and Yale economist Stefan Hunt is helping U.K. market regulators protect consumers from those who might profit from their tendency to make bad economic decisions.

In his work with the regulators, Hunt draws on research he has done to understand why people make bad financial choices. Hunt, who is part of a 25-strong research team at the Financial Services Authority, said that while people are not completely irrational, we do make some “systematic and predictable mistakes.”

Regulators are attempting to use behavioral economics to better understand the mindset behind the improprieties plaguing Britain’s financial hub such as rogue trading and improper sales.

Hunt, 37, said he hopes awareness of behavioral science will make for better rules and fairer markets as the FSA prepares to split its role and create a new consumer-protection agency next year.

Behaviorists challenge the notion in traditional economics that people weigh their options and pick the best outcome for themselves. Instead, they look at the psychology of choices.

Hunt is a research manager within the Economics of Financial Regulation team run by Peter Andrews. He’s less than revealing about his work so far, because much of it isn’t yet public, and the FSA didn’t publicize Hunt’s hiring. It’s clear, however, that there is a strong focus on retail finance, a 1.2 trillion-pound industry in the U.K.

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