EU Basel, Israeli-Bank Clients, Ponzi Raid: Compliance

The European Union failed to seal a deal on Basel bank rules after disagreeing on bonuses, capital requirements for big lenders and powers available to the European Banking Authority at talks in Brussels yesterday.

Lawmakers from the European Parliament and diplomats agreed to reconvene on Feb. 27 after their negotiations ended without a deal on how to implement components of Basel bank regulations in the bloc.

The EU has struggled to agree on legislation to apply the international standards on capital, known as Basel III, which were published in 2010 as part of efforts to prevent any repeat of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.

EU lawmakers have insisted that the EU legislation to implement Basel III include curbs on variable pay as part of a quest to reshape lenders as utilities rather than money-making machines.

Members of the assembly’s economic and monetary affairs committee called last year for an outright ban on bonuses that exceed fixed pay.

Governments sought to reopen a draft deal reached in December by the assembly and Cyprus, which then held the EU presidency, to cap banker bonuses at twice fixed pay. Under that proposal, bonuses exceeding fixed salary would be allowed only if the majority of a bank’s shareholders voted in favor.

Several nations, including the U.K., opposed that plan at a meeting last week. The British proposal included retaining existing EU rules that require some portion of bonus awards to be deferred and ensuring that payouts can be clawed back, according to officials.

Compliance Action

Estonian Air State Aid Probed by EU Antitrust Regulator

AS Estonian Air faces an in-depth probe by the European Union executive over concerns state aid for the Baltic country’s national carrier wasn’t in line with the bloc’s rules.

The European Commission will examine about 65.5 million euros ($88 million) in capital increases given to the carrier by the Estonian government since 2009, it said in an e-mailed statement today.

While Estonia notified the Commission last December of a plan to grant an 8.3 million-euro rescue loan to the carrier, it also made three capital injections earlier without notifying the regulator, the EU executive said. The sale in 2009 of Estonian Air’s groundhandling business to the state-owned Tallinn Airport may also have involved state aid to the carrier, it added.

Estonia considers that its support for the airline is in line with EU state aid rules, Ahti Kuningas, the deputy secretary general at the Economy Ministry, said in an e-mailed statement.

Estonian Air spokeswoman Ilona Eskelinen didn’t immediately reply to calls seeking comment.

European Banks to See ‘Significant Consolidation,’ KPMG Says

The European banking industry is likely to consolidate as medium-sized lenders shrink and focus on their home markets, according to a study by accounting firm KPMG International.

The potential change will come as banks are “pulled in many directions at once” by capital and liquidity regulations and corporate governance and compensation rules, KPMG said in the report today.

European banks are already selling assets to prepare for tougher capital rules under Basel III international standards and slower revenue amid the sovereign debt crisis. Rabobank Groep, the Dutch lender, agreed yesterday to sell a controlling stake in its asset-management unit for 1.94 billion euros ($2.59 billion) as it sheds units to help strengthen its finances amid slowing asset growth and competition for deposits in the Netherlands.

“Even the regulators are now worried about the volume of regulation,” KPMG said in its report.

Bank Leumi, Mizrahi Clients Said to Aid U.S. Tax Probe

Dozens of U.S. citizens who used offshore accounts to avoid taxes have helped the federal government in a criminal investigation of two Israeli banks, Bank Leumi Le-Israel Ltd. and Mizrahi Tefahot Bank Ltd., two people familiar with the matter said.

Leumi and Mizrahi set up accounts in Israel that U.S. clients didn’t declare to the Internal Revenue Service, said the people, who asked not to be identified because they aren’t authorized to speak publicly about the probe. Those accounts served as collateral on loans from U.S. branches that gave clients access to their money in Israel, according to the people and tax lawyers for the banks’ clients.

Zvi Sperling, a Los Angeles businessman born in Israel who took such back-to-back loans from both Tel Aviv banks, was the first person charged by the Justice Department. Sperling agreed to admit he conspired with Leumi and Mizrahi bankers, according to a plea agreement filed Feb. 14 in Los Angeles federal court. The filing refers to the banks as Bank A and Bank B. Mizrahi is Bank A and Bank B is Leumi, the people said. Other clients will be charged in the coming weeks, the people and tax lawyers said.

“Those two banks are under investigation for making loans to permit their depositors to repatriate undeclared, offshore assets to the U.S.,” said Robert Fink, a tax attorney at Kostelanetz & Fink LLP in New York who represents clients who have come forward. “The focus is on undeclared foreign bank accounts on which income has been earned that has not been reported to the IRS.”

The probe, which the people said involves a U.S. grand jury, comes amid a U.S. crackdown on offshore tax evasion that has widened since UBS AG, the largest Swiss bank, avoided prosecution in February 2009.

Orit Reuveni, a spokeswoman for Leumi, said in an e-mail that the bank is “within the scope of a U.S. inquiry into tax matters involving U.S. customers,” and that it is cooperating with the probe. Calls and e-mails seeking comment from a spokesman for Mizrahi weren’t returned. Benny Shoukron, a spokesman for Mizrahi, said by phone last week that the bank is looking into the Sperling matter.

Sperling “recognizes the serious mistakes that he has made, and he accepts full responsibility for his conduct,” his attorney, Steven Toscher, said in an interview.

Charles Miller, a spokesman for the Justice Department, declined to comment.

The case is U.S. v. Sperling, 13-cr-108, U.S. District Court, Central District of California (Los Angeles).

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Frankfurt Prosecutors Arrest Six in Investment Ponzi Scheme

Frankfurt prosecutors conducted about 130 raids in Germany that resulted in six arrests as part of a probe into a Ponzi scheme they say resulted in losses for about 1,000 investors.

About 1,200 officers raided locations in seven German states yesterday and more than 100 million euros ($134 million) was frozen, prosecution spokeswoman Doris Moeller-Scheu said in an e-mailed statement. The case centers on real-estate investment company Deutsche S&K Sachwert AG, she added, without identifying any of the approximately 50 suspects.

Losses may total in the hundreds of millions of euros as investors “sought a new profitable and safe investment possibility in the wake of the 2008 financial crisis,” Moeller-Scheu said.

Efforts to reach S+K by phone were unsuccessful and the company didn’t immediately respond to an e-mail seeking comment.

Cohen SAC Deposition Seen Hurting Bid to Avoid SEC Insider Suit

U.S. investigators have subpoenaed a 2011 deposition of SAC Capital Advisors LP founder Steven Cohen, whose sworn statements on insider-trading compliance may hurt him as he tries to persuade regulators not to file a lawsuit with the potential to shut his $14 billion firm.

The SEC told the hedge fund Nov. 20 that it planned to sue SAC for securities fraud and so-called control-person liability for failing to supervise employees. The same day, the agency accused an ex-SAC portfolio manager and his hedge-fund unit of insider trading for persuading Cohen, 56, to make $700 million in illegal trades. Prosecutors also indicted the manager.

Cohen’s testimony, reviewed by Bloomberg News, establishes his personal control over the unit, CR Intrinsic, and records his unfamiliarity with his firm’s compliance and ethics policies on insider trading.

Also of interest was a statement that no employee had ever been punished for violating the firm’s compliance policy. In a six-year investigation of insider trading by Wall Street firms, federal prosecutors or the SEC have accused the former portfolio manager, Matthew Martoma, and six other SAC employees of trading on illegal tips while at SAC.

Cohen’s deposition answers helped Stamford, Connecticut-based SAC win its dismissal from the underlying lawsuit, filed by Fairfax Financial Holdings Ltd. over short-sale damages. In new light, they provide fodder for regulators seeking to establish he was a negligent manager.

The threatened SEC suit may prove the gravest threat Cohen and his firm face from the U.S. government, which is also investigating whether he and SAC violated criminal laws.

Martoma’s indictment and the SEC complaint against him and his SAC unit contain no allegations of wrongdoing by Cohen. Martoma pleaded not guilty and isn’t cooperating with federal prosecutors in their investigation of SAC.

In a control-person liability suit, however, the SEC doesn’t have to prove Cohen engaged in insider trading -- it need only show that he failed to properly supervise Martoma or the other accused SAC employees by turning a blind eye to what they did, or by being grossly negligent in not catching them.

SAC declined to comment on the deposition. A spokesman, Jonathan Gasthalter, has said that Cohen acted appropriately and that SAC maintains rigorous compliance standards.

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Finra Fines ING Firms for E-Mail Retention, Review Violations

The Financial Industry Regulatory Authority said it fined five affiliates of ING Groep NV $1.2 million for failing to retain or review millions of e-mails for periods ranging from two months to more than six years.

The firms are Directed Services LLC, ING America Equities Inc., ING Financial Advisers LLC, ING Financial Partners Inc. and ING Investment Advisors LLC, Finra said in an e-mailed statement.

“We are pleased that this matter has been resolved with Finra,” Joseph Loparco, an ING Groep spokesman, said in an e-mailed statement yesterday. “It did not impact our clients, and it did not result from any customer issue.”

“The five broker-dealers communicated this information to Finra in a series of self-reports that began in October 2010,” Loparco said. “The broker-dealers also undertook an extensive internal review of their policies, procedures and systems and have cooperated fully with Finra’s investigation.”


Two Ex-Xinhua Finance Board Members Admit to U.S. Tax Crime

Two former board members of Xinhua Finance Ltd. pleaded guilty to a charge of conspiring to obstruct the U.S. Internal Revenue Service as part of a deal with prosecutors to drop insider-trading allegations.

Shelly Singhal, 45, admitted yesterday in federal court in Washington that he conspired to hide about $3.5 million in forgiven debt from the IRS for Dennis Pelino, a fellow board member, and Loretta Fredy Bush, the company’s former chief executive officer.

Pelino, 65, pleaded guilty to the same conspiracy charge on Feb. 15 as Bush did two days earlier. All three face as much as five years in prison when sentenced April 29.

Xinhua Finance, the first Chinese company listed on the Tokyo stock exchange, provides information products focused on Chinese and international financial markets.

The three defendants were indicted on May 10, 2011, for allegedly using various entities to disguise the sale of shares in Shanghai-based Xinhua Finance from the Securities and Exchange Commission and investors, and to engage in insider trading. They were also accused of manipulating the company’s balance sheet to avoid taking so-called impairment charges.

Under the indictment, all three defendants faced four charges of mail fraud. In 2011, the three pleaded not guilty to the charges.

The case is U.S. v. Singhal, 11-cr-00142, U.S. District Court, District of Columbia (Washington).


Walter Seeks SEC Rule Requiring Exchanges to Test Technology

Exchanges and clearing firms would have to routinely test their technology for stability and security under a rule being drafted by the U.S. Securities and Exchange Commission.

SEC Chairman Elisse B. Walter told an audience at American University’s Washington College of Law yesterday that the agency has accelerated a proposal for a mandatory technology-review program. It would require market participants, including exchanges, clearing firms and other trading platforms, to test how their systems respond to outages and notify the agency about any disruptions.

The rule would convert a voluntary program, known as Automation Review Policy, that was created after the Oct. 16, 1987, market crash known as “Black Monday.” Under that program, exchanges voluntarily follow SEC guidance and submit to periodic SEC inspections of their systems.

“A voluntary standard is no substitute for a mandate and a requirement that you must follow,” Walter told reporters after the speech. She declined to say when the SEC might release a rule proposal for public comment.

Walter’s speech surveyed the SEC’s efforts to improve its technology in an era of high-frequency traders and electronic market makers. The commission’s Midas database and planned consolidated audit trail are key to that effort, she said.

The consolidated audit trail will trace how orders are routed through the equity market’s complex plumbing. Midas will allow the commission to view all orders, order cancellations and trade executions on U.S. exchanges.

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Levitt Refuses to Support SEC in Turf Battle With FSOC

Arthur Levitt, who was the longest-serving Securities and Exchange Commission chairman, said he is supporting the Financial Stability Oversight Council in a dispute with the SEC over jurisdiction.

The SEC “abdicated responsibility on money market mutual funds” and “without the threat of FSOC action I don’t believe the commission will act,” Levitt said yesterday in the interview. He talked with Bloomberg’s Michael McKee and Carol Massar on Bloomberg Radio’s “Bloomberg Surveillance.”

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