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EU Swaps, Nasdaq-Facebook, Ex-Amaranth Trader: Compliance

Feb. 8 (Bloomberg) -- Energy and technology companies are among non-financial firms granted a three-year reprieve from parts of European Union rules on over-the-counter derivatives, under a compromise deal backed by lawmakers yesterday.

The European Parliament lifted a veto threat after regulators promised to phase in a requirement to route trades through clearinghouses that lawmakers deemed too burdensome for businesses that use swaps for hedging rather than to bet on financial markets.

Global regulators are seeking to toughen rules for the $639 trillion market for OTC derivatives, which became a target for oversight after the 2008 collapse of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest traders in credit default swaps.

The EU technical measures flesh out parts of a law to regulate trading in OTC derivatives that the EU adopted in 2012. The rules have already survived scrutiny by governments, meaning the parliamentary process was the last legal hurdle before they could enter into force.

Parts of the technical standards that aren’t subject to the three-year phase-in period are set to take effect “around mid-March,” Michel Barnier, the EU’s financial services chief, said in an e-mailed statement.

Barnier said that he would discuss possible clashes between swaps rules in meetings next week with U.S. regulators.

Compliance Policy

Banks May Have to Join Libor-Euribor Panels to Stop Exodus

Europe’s top financial regulator said he’s considering forcing banks to participate in setting Libor and Euribor rates after lenders including Citigroup Inc. and HSBC Holdings Plc pulled out of some panels amid the rigging scandal.

Regulators will draw up a list of lenders that should be forced to participate in the setting of interbank rates “in view of their involvement” in those markets, Michel Barnier, the EU’s financial services chief, said in an e-mailed statement today.

“Any banks considering withdrawing from the contributing panels should therefore take into account that they may be required to rejoin,” Barnier said. The plans to force banks to submit data for rate setting will be included in draft legislation on benchmark setting that the European Commission will present in the first half of this year.

Euribor-EBF, the group that administers the setting of Euribor rates warned last month that it may face an exodus of banks from its rate-setting panel. Since July, as many as 10 banks have dropped out of the setting of the Eurepo Index, which is also managed by Euribor-EBF. These lenders include Societe Generale SA, UBS AG and HSBC. Euribor is derived from a daily survey of interbank lending rates conducted for Euribor-EBF by Thomson Reuters Corp.

For more, click here.

Compliance Action

Nasdaq Moving to Resolve Facebook IPO Mishap Amid SEC Talks

Nasdaq OMX Group Inc. is moving to put its role in Facebook Inc.’s botched public debut behind it as talks with federal regulators progress and the firm awaits a decision on a settlement with brokers.

The second-biggest U.S. exchange operator and Securities and Exchange Commission officials are examining Nasdaq Stock Market’s technology controls in discussions spurred by the botched initial public offering, according to a person with knowledge of the matter who asked not to be named because the talks are private. Nasdaq and the SEC are in preliminary negotiations toward a settlement that may include a $5 million fine, the Wall Street Journal reported Feb. 6.

The SEC is still gathering information from Nasdaq, the person said. The exchange operator mishandled Facebook’s IPO on May 18 when its auction to set the first traded price for the shares failed after its systems were overwhelmed.

“We’re working closely with the SEC to resolve the issues that arose from the events on May 18,” Joseph Christinat, a spokesman for Nasdaq OMX, said in a statement. “We continue to believe we acted appropriately and in the best interest of investors under challenging circumstances and we have volunteered an accommodation plan supported by many members.”

John Nester, an SEC spokesman, declined to comment on discussions between the agency and Nasdaq.

The New York regional office of the SEC’s division of enforcement is conducting an investigation of Nasdaq related to the Facebook IPO, the company said in a regulatory filing in November. Nasdaq is cooperating with the investigation, it said.

Four brokerage firms say they lost a combined half-billion dollars after Nasdaq mishandled Facebook’s offering on May 18.

The SEC’s deadline to review the payout plan is March 29.

RBS Blocked $8.8 Million Bonus for CDO Trader in Lawsuit

Royal Bank of Scotland Group Plc’s former head trader for collateralized debt obligations lost out on about 5.6 million pounds ($8.8 million) in bonuses when he was fired for manipulating the price of securities, according to documents at a London employment tribunal.

Alex Mallinson, who is suing for unfair dismissal, said the lender withheld deferred cash and share awards after finding him guilty of gross misconduct. Edinburgh-based RBS “unfairly terminated my employment in order to make an example of me,” he said in written evidence made available yesterday.

RBS employees noticed Mallinson had sold bonds and then bought them back for slightly more the same day, a practice called a “wash trade,” bank compliance officer Sarah Goodsell said in a witness statement released earlier this week.

“It seemed the sole purpose” of the first “trade had been an attempt to manipulate the market and to reduce the market price of a particular bond,” she said.

RBS was fined about $612 million Feb. 6 by regulators who found the bank had tried to rig interest rates. The U.K. Financial Services Authority said RBS colluded with other banks setting the London interbank offered rate, including another derivatives trader, who wasn’t identified, entering into wash trades to make corrupt payments to a broker.

Mallinson’s case isn’t connected to the Libor probe. His lawyer, Danielle Spiers, didn’t immediately respond to e-mails seeking comment.

“Alex Mallinson was dismissed for gross misconduct and the bank does not accept there is substance to his claim and will defend it,” RBS spokeswoman Rebecca Nelson said in an e-mailed statement.

Mallinson argued in his evidence that the trades had been to reduce the administrative burden on his colleagues to comply with internal pricing systems, not attempted market abuse.

For more, click here.

Swatch to Stick With Swiss Accounting Decision Amid SMI Doubt

Swatch Group AG said it will stand by its decision to switch to Swiss accounting standards even if exchange regulators make the use of international accounting a requirement for inclusion in the Swiss Market Index.

Comments attributed to Chief Executive Officer Nick Hayek yesterday by Finanz & Wirtschaft newspaper are accurate, Swatch spokeswoman Beatrice Howald said by phone. The CEO was cited as saying that the Biel, Switzerland-based watchmaker won’t change its stance, whether that means it drops out of the SMI or not.

Swatch said in October it would switch back this year to Swiss GAAP ARR accounting from international financial reporting standards. The company said the Swiss standard would be “more practical and less theoretical.” Hayek said in a September interview with Finanz & Wirtschaft that “over regulation” under IFRS was becoming a “catastrophe.”

Alain Bichsel, a spokesman for SIX Exchange Regulation, said the background for suggesting stricter rules for SMI-listed companies was that the Swiss GAAP ARR accounting standard was originally meant for small- to mid-sized companies to provide them with an easier procedure.

Bichsel said no decisions have yet been made and Swatch is the only company that would be affected by the new rules.

Moody’s, S&P Said to Be Probed by New York Over 2008 Accord

Moody’s Investors Service, Standard & Poor’s and Fitch Ratings are being investigated by New York Attorney General Eric Schneiderman over whether they breached a 2008 settlement with the state, a person familiar with the matter said.

The 2008 deal with then Attorney General Andrew Cuomo required them to change the way they were paid to rate mortgage-backed securities and to disclose more about their process.

The probe is looking into whether they have complied with the agreement, said the person, who wasn’t authorized to speak publicly about it and asked not to be identified.

The U.S. Justice Department and state attorneys general this week sued S&P, accusing the company of inflating ratings on mortgage-backed securities during the housing bubble. New York wasn’t one of the states that sued.

Michael Adler, a Moody’s spokesman, and Dan Noonan, a Fitch spokesman, didn’t immediately respond to e-mails yesterday after regular business hours seeking comment about the New York probe.

Catherine Mathis, a spokeswoman for McGraw-Hill Cos.’ S&P unit, declined to comment on the probe.

New York’s investigation was reported yesterday by the Wall Street Journal.


Ex-Amaranth Trader, CFTC Asks Court to Toss $30 Million Fine

A former natural-gas trader at Amaranth Advisors LLC, backed by the U.S. Commodity Futures Trading Commission, asked a federal appeals court to overturn a $30 million fine imposed by another regulator over alleged manipulation of the gas-futures market.

In a case that could determine the limits of the Federal Energy Regulatory Commission’s power to punish market manipulation, a lawyer for Brian Hunter told a three-judge panel in Washington yesterday that the CFTC has sole jurisdiction over futures trading on the New York Mercantile Exchange. The CFTC, which filed papers supporting Hunter, also argued yesterday.

Hunter’s lawyer, Michael Kim of Kobre & Kim LLP, said during the 40-minute argument, that there was no notice, “much less fair notice,” to Brian Hunter that his conduct was being regulated by FERC. Hunter claims his actions didn’t amount to market manipulation.

The dispute highlights FERC’s growing role as a regulatory enforcer. The Hunter case addresses questions including what determines market manipulation and which agency, the CFTC or FERC, has jurisdiction over violations involving futures trading, Marc Spitzer, a former FERC commissioner, said in an interview.

FERC argues that the CFTC’s exclusive jurisdiction over regulating futures contracts and futures markets doesn’t extend to manipulation.

Mary Connelly, a lawyer for the CFTC, told the judges yesterday that Congress never repealed her agency’s exclusive jurisdiction when it added regulatory authority to FERC.

For more, click here.

Two Former Mercury Interactive Executives Settle SEC Suit

Two former executives of Hewlett-Packard Co.’s Mercury Interactive unit settled a lawsuit with the U.S. Securities and Exchange Commission over allegations of backdating company stock options.

The SEC reached agreements with former Chief Executive Officer Amnon Landan and former Chief Financial Officer Douglas Smith after the two men and a third former official, ex-general counsel Susan Skaer, appeared yesterday for a hearing on the case before U.S. District Judge William Alsup in San Francisco.

The settlement was confirmed by Michael Torpey, a lawyer for Skaer, whose case isn’t settled, he said. An electronic court docket entry also listed the settlements, without providing any details on the terms.

The former executives argued that the SEC allegations are too old and their actions weren’t improper. The SEC had requested that the judge decide the case in its favor without a trial.

The agency has pursued the five-year-old lawsuit against Landan, Smith and Skaer over changing dates on stock options to make them more valuable, a practice among many technology companies that led to a federal investigation, the ousters of 90 executives and directors, billions of dollars in restatements and criminal charges against executives at 10 companies.

Alsup said in court yesterday that settlement talks were set for immediately after the hearing and told attorneys that “I am going to issue an order in the next few days. If you are going to preempt that with a settlement, do it quickly.”

Stephan Schlegelmilch, an SEC lawyer, said the staff’s recommendation for settlements must still be approved by the commission.

“We cannot comment on any settlement, but any settlements will be made public if approved by the commission,” he said in an e-mail.

K.C. Maxwell, a lawyer for Landan, also declined to comment.

SEC attorneys say more than 40 stock option grants at Mercury Interactive were backdated from 1997 to 2002, and $258 million in compensation expenses weren’t reported to investors as a result, according to court documents. Landan, Skaer and Smith were all involved in the practice, the SEC said.

Backdating grants to days when share prices were low inflates their value and may hide costs from investors if left undisclosed. Mercury Interactive paid $28 million in 2007 to settle a related SEC lawsuit and three former company directors and a former chief financial officer settled SEC lawsuits over the practice.

The executives said the company was open about backdating, the SEC waited too long to sue and the agency lacks evidence that they violated securities or accounting rules.

The case is SEC v. Landan, 07-2822, U.S. District Court, Northern District of California (San Francisco).

K1 Hedge Fund Founder Kiener Indicted in $311 Million Fraud

K1 Group founder Helmut Kiener, who was convicted in Germany of defrauding investors in a Ponzi scheme, was indicted by the U.S. for his role in a $311 million fraud, the U.S. attorney in Philadelphia said.

Kiener, a German national, was charged yesterday with four counts of wire fraud, two counts of bank fraud and three counts of money laundering based on allegations that he devised a scheme to defraud Bear Stearns Cos. using hedge funds in the Bahamas and the Cayman Islands. Kiener’s partner John Tausche, 61, of Blowing Rock, North Carolina, was charged with one count of bank fraud and one count of money laundering.

Kiener, 53, was convicted in 2011 and sentenced to 10 years and eight months in prison after confessing to using new investors’ money to make up for losses in the wake of the financial crisis.

K1’s funds are being liquidated in the British Virgin Islands. Kiener’s personal assets were placed in insolvency proceedings in Germany, where he is incarcerated.

Tausche is “cooperating with authorities,” his attorney Joseph Grimes said.

“He’s doing everything he can to make right the harm that was done to investors,” Grimes said in a phone interview.

If convicted, Kiener faces a maximum of 200 years in prison and a maximum possible fine of $7.9 million. Tausche faces a maximum of 40 years in prison and a fine of $1.9 million.

The case is U.S. v. Kiener, 13-00062, U.S. District Court, Eastern District of Pennsylvania (Philadelphia).

Comings and Goings

House Democrats Obama Urged to Replace Fannie Mae Regulator

A group of House Democrats is urging President Barack Obama to nominate a permanent director for the Federal Housing Finance Agency to replace an acting chief they say is standing in the way of aid for struggling borrowers.

The 45 lawmakers led by Representative Elijah Cummings of Maryland, the top Democrat on the House Oversight and Government Reform Committee, said in a letter to Obama that FHFA Acting Director Edward J. DeMarco should be removed because of his refusal to use U.S.-owned mortgage firms Fannie Mae and Freddie Mac to provide loan modifications including principal reduction.

The letter reflects a renewed effort by Democratic lawmakers and consumer advocates to get Obama to replace DeMarco, a career civil servant who inherited the job of overseeing Fannie Mae and Freddie Mac in 2009. Senate Republicans in 2011 blocked Obama’s nominee for the post, former North Carolina banking regulator Joseph Smith.

The White House has been actively seeking potential candidates for the job in recent months.

Potential nominees for the FHA post could include administration officials such as Michael Stegman, the Treasury Department’s housing adviser, or academics such as Harvard University professor Nicolas Retsinas, former director of the school’s Joint Center for Housing Studies.

Denise Dunckel, an FHFA spokeswoman, said she had no comment on the letter.

To contact the reporter on this story: Carla Main in New Jersey at

To contact the editor responsible for this report: Michael Hytha at

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