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CBOE Fined, South African Mining, Bank Losses: Compliance

June 12 (Bloomberg) -- Federal regulators fined the Chicago Board Options Exchange $6 million, saying its staff interfered with its three-year investigation of short-selling at a member firm in an unprecedented breakdown of trading supervision.

The settlement, which calls for immediate remedial actions, is the first ever assessed by the U.S. Securities and Exchange Commission for violations related to regulatory oversight, according to a statement. On June 7, an administrative law judge ruled that CBOE member OptionsXpress Inc., a unit of Charles Schwab Corp., helped facilitate sham transactions that violated U.S. securities laws known as Regulation SHO.

While actions against traders and investors are common at the SEC, exchanges enjoy legal protections in their capacity of self-regulatory organizations. In the CBOE’s case, oversight suffered when it transferred responsibility for Regulation SHO enforcement from one department to another in 2008, the SEC wrote.

During the investigation of OptionsXpress, it became apparent that CBOE staff didn’t know enough about the law to adequately enforce it, according to the SEC statement. Not only did they fail to detect violations, they “took misguided and unprecedented steps” to assist the firm that was under investigation.

As part of its response to the SEC inquiry, the CBOE said in January it planned to exclude trading industry directors from its board, bringing its governance in line with other exchange operators.

“This settlement marks a significant step in putting the SEC matter behind us,” CBOE said in an e-mailed statement. “All actions either required or recommended by the SEC, as well as those resulting from our rigorous self-review, have been or are now being implemented.”

Gail Osten, a spokeswoman for the Chicago-based market operator, declined to comment beyond the statement. CBOE said in a filing in February that it expected to pay as much as $10 million to settle the SEC’s investigation.

OptionsXpress says it did nothing wrong. Stephen Senderowitz, a lawyer representing OptionsXpress, yesterday disputed the interpretation of events in the June 7 ruling by Brenda P. Murray, the chief administrative judge for the SEC. He said OptionsXpress is reviewing the decision for the purposes of an appeal.

“We believe the evidence at trial demonstrated that OptionsXpress at all times acted consistent with all regulations and bought in the shorts and delivered securities as required,” Senderowitz said in an e-mailed statement. “The firm was in touch with regulators regarding the transactions, no one was harmed, and the transactions were neither novel nor exotic.”

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Compliance Policy

Japan Passes Changes to Law Regarding Failed Financial Firms

Japan’s parliament endorsed changes in legislation dealing with failed financial institutions as part of efforts by regulators worldwide to avoid a repeat of the global financial crisis.

The passed amendments, proposed by the Financial Services Agency, allow brokerages and insurers to join banks in being eligible for emergency capital from the state-run deposit insurance agency. The Upper House today also approved so-called bail-in rules that impose losses on investors of failing financial institutions to reduce taxpayers’ burden. The vote was broadcast live through the Internet.

The market meltdown following Lehman Brothers Holdings Inc.’s 2008 collapse prompted authorities around the world to bolster preparedness for financial turmoil.

Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. -- Japan’s three so-called megabanks -- will seek approval from their shareholders later this month to change corporate rules in accordance with the law amendment, the Tokyo-based lenders said in statements last month.

The revisions would allow the banks to issue preferred shares that can convert into common stock or be written off if firms become non-viable.

South African Law Changes to Raise Miners’ Costs, Law Firm Says

Changes to South Africa’s mining laws are likely to raise regulatory costs after amendments came into force last week, a law firm said.

The Mineral and Petroleum Resources Development Amendment Act, or MPRDA, became effective June 7 after being signed into law by President Jacob Zuma.

South Africa, with the largest known reserves of platinum and chrome, as well as gold, iron and diamonds, is bringing in changes even as it plans a further amendment bill this year. Higher expenses will further squeeze profits at mining companies already contending with above-inflation cost increases for wages and energy, while labor disputes and slumping commodity prices have forced some producers to suspend shafts or cut jobs.

The changes stipulate that the mines minister must refuse an application for prospecting rights should those rights concentrate resources under the control of one company, restricting “equitable access,” according to the law firm, which said the vague phrasing leaves the rule open to interpretation.

The changes also allow the minister to impose stricter conditions on mining rights where the land is occupied, which may go beyond the requirements of the Mining Charter.

The alterations may be superseded by an amendment bill after it’s introduced to parliament later in June.

EU Races to Meet End-June Deadline on Bank Creditor-Loss Rules

European Union finance ministers will grapple next week over how far the bloc should standardize its approach to writing down failing banks’ creditors as they seek agreement on a blueprint to end state bailouts.

While there is a “broad measure of agreement” on the draft creditor-loss rules, governments have just over a week to resolve their differences before the ministers convene in Luxembourg on June 21, according to an EU document prepared for the meeting and obtained by Bloomberg News.

Nations are divided over how much flexibility regulators should be given to exempt some creditors from writedowns, according to the document prepared by Ireland, which holds the EU’s rotating presidency. Some governments contend that uniform rules are needed while others want nations to have more discretion, the document shows.

The EU’s 27 governments are racing to meet an end-June deadline to agree on the plans, which leaders have said will be a first step toward more ambitious moves to centralize bank interventions in the 17-nation euro area.

Under draft plans presented last year by Michel Barnier, the EU’s financial services chief, losses at a crisis-hit bank would be absorbed first by wiping out its capital, then writing down unsecured debt holders in order of seniority.

Nations would also be required to build up standing funds, financed with bank levies, which would be tapped to cover restructuring costs at failed lenders. Compromise texts drawn up by Ireland would give regulators the power to exempt derivatives from writedowns, if including them would cause more harm than good.

The plans must be approved by governments and by the European Parliament before they take effect.

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Weidmann Says OMT Blurs Boundary Between Monetary, Fiscal Policy

The European Central Bank’s OMT program blurs the boundary between monetary and fiscal policy, Bundesbank President Jens Weidmann said at a hearing of the Federal Constitutional Court in Karlsruhe.

Outright Monetary Transactions, or OMT, is a program of the central bank allowing it to make outright transactions in the secondary sovereign bond markets, according to the bank’s website.

“I see significant stability problems in the Eurosystem’s government-bond purchase programs, as well as in other crisis measures, that blur the boundary between European monetary policy and the fiscal policy of individual nation states,” Weidmann said.

As hearings on the OMT at Germany’s top court began yesterday, the Stoxx Europe 600 Index fell 1.2 percent to 291.74 at the close of trading and the benchmark gauge earlier sank as much as 2.1 percent, reaching a seven-week low.

Peter Buergler, a trader at Luzerner Kantonalbank AG in Lucerne, Switzerland, said some of the uncertainty in the market is “still connected to the fear of stimulus being reduced by the Federal Reserve, and some of it is connected to the federal court hearings in Germany.”

The ECB’s OMT program violates European laws and the constitutional principle of democracy, Dietrich Murswiek, a lawyer for lawmaker Peter Gauweiler, told the Federal Constitutional Court in Karlsruhe yesterday. The court is reviewing seven cases filed over the OMT and the European Stability Mechanism at a two-day hearing.

The as-yet-unused OMT foresees potentially unlimited purchases of bonds of debt-stricken countries that sign up to adjustment programs. German Finance Minister Wolfgang Schaeuble defended the government’s policies, saying that Germany itself insisted on giving the ECB independence and “needs to be respected by the court.”

The plaintiffs include opposition political party Die Linke and political group Mehr Demokratie e.V., German for “More Democracy.”

Compliance Action

Traders Said to Manipulate Currency Rates to Profit From Clients

Traders at some of the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice.

Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.

The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives, the two traders said. The Financial Conduct Authority, Britain’s markets supervisor, is considering opening a probe into potential manipulation of the rates, according to a person briefed on the matter.

The $4.7-trillion-a-day currency market, the biggest in the financial system, is one of the least regulated.

The WM/Reuters rates are used by fund managers to compute the day-to-day value of their holdings and by index providers such as FTSE Group and MSCI Inc. that track stocks and bonds in multiple countries. While the rates aren’t followed by most investors, even small movements can affect the value of what Morningstar Inc. estimates is $3.6 trillion in funds including pension and savings accounts that track global indexes.

The FCA already is working with regulators worldwide to review the integrity of benchmarks, including those used in valuing derivatives and commodities, after three lenders were fined about $2.5 billion for rigging the London interbank offered rate, or Libor. Regulators also are investigating benchmarks for the crude-oil and swaps markets.

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China CSRC Lists 157 Shanghai IPO Applications as of June 7

The China Securities Regulatory Commission said 10 applications were approved of 157 companies that have submitted applications for initial public offerings on the Shanghai exchange as of June 7.

Thirty of 287 companies that have submitted applications for an IPO on the Shenzhen exchange got approved as of June 7, according to the authority.

Forty-three applications of 227 companies that have submitted applications for initial public offerings on Shenzhen’s Chinext board were approved as of June 6.

Courts

Madoff Family Reunion in London as Brother, Son to Testify

Almost five years after his fraud was uncovered, a London court will be the site of a reunion of sorts for Bernard Madoff’s family and colleagues as the liquidators of his U.K. unit seek to recover $50 million.

Madoff’s brother Peter and son Andrew are among the defendants who will testify during a six-week trial that starts today in London. Stephen Raven, the U.K. unit’s chief executive officer, and Sonja Kohn, a long-time associate of Madoff, are also defendants.

The trial will be a reminder of the tragedy that Madoff’s Ponzi scheme caused not only for victims of the fraud, but also members of his own family. Peter Madoff will testify by video link from a U.S. prison where he is serving 10 years for conspiracy and falsifying records. Andrew Madoff’s brother, Mark committed suicide in December 2010 on the second anniversary of their father’s arrest, and three days after the U.K. lawsuit was filed.

Andrew and Mark “have suffered family loss,” their lawyer David Archer said. The estate of Mark Madoff is also named in the U.K. suit. “It’s unfair in the extreme that they should face these unmeritorious claims,” Archer said.

Bernard Madoff, 75, is serving a 150-year sentence in the U.S. for what prosecutors said was the biggest Ponzi scheme in U.S. history.

Pushpinder Saini, a lawyer for the liquidators, said during opening arguments today that Raven and other officials at the U.K. unit were aware the payments they were receiving from the U.S. were a “sham.”

There’s no allegation by liquidators that Kohn knew anything about the Ponzi scheme, her lawyer Trevor Asserson said in a statement before the trial started. She received a reasonable rate of remuneration for providing introduction and research services, he said.

Simon Rothschild, a spokesman for the liquidators, declined to comment.

The case is Madoff Securities International Ltd. v. Raven, 10-1468, High Court of Justice, Queen’s Bench Division (London).

For more, click here.

Ex-WellCare CEO Found Guilty in $40 Million Medicaid Scheme

WellCare Health Plans Inc.’s former Chief Executive Officer Todd Farha, 45, and Chief Financial Officer Paul Behrens, 51, were each found guilty of two counts of health-care fraud by a jury in Tampa, Florida, June 10.

Behrens was also found guilty of two counts of making false statements. The convictions were announced in a statement by the U.S. Justice Department.

The executives were charged in March 2011 with devising a scheme to defraud the Florida Medicaid program and making false, fraudulent statements on expenses for behavioral health-care services.

From 2003 through 2007, Tampa-based WellCare failed to pay the state $40 million in refunds, prosecutors said. A whistle-blower at the company told the Federal Bureau of Investigation about the plot. WellCare has paid out at least $427 million in settlements to government agencies and shareholders since 2007.

“The company acted swiftly in October 2007 upon learning of the wrongdoing and separated the individuals involved,” Jack Maurer, a spokesman for WellCare, said in an e-mailed statement. “Over the past five years we have cooperated fully with state and federal authorities in their investigations, and resolved all of the issues that directly involved the company.”

WellCare sued its former executives and that action was stayed pending the outcome of the criminal trial, Maurer said.

“We have made significant changes to the governance of our company to help ensure that this never happens again,” he said.

The case is U.S. v. Farha, 11-cr-00115, U.S. District Court, Middle District of Florida (Tampa).

Chemical Makers Lose Court Challenge to Train Safety Rules

Chemical makers failed to show any harm from a rule boosting safety requirements for shipping dangerous substances by rail, a U.S. appeals court said, throwing out a lawsuit challenging the 2012 regulation.

The Arlington, Virginia-base Chlorine Institute argued that the Federal Railroad Administration rule would constrain or eliminate chemical makers’ ability to ship products by rail.

Judge Karen LeCraft Henderson, writing for a three-judge panel of the U.S. Court of Appeals in Washington, found any impact described by the chemical makers to be “at most -- speculative.”

The Chlorine Institute also didn’t argue that any carrier actually diminished any individual member’s shipping ability, “only that it could do so,” Henderson wrote.

Frank Reiner, president of the institute, said the group was reviewing the decision and had no immediate comment.

The case is Chlorine Institute Inc. v. Federal Railroad Administration, 12-1298, U.S. Court of Appeals for the District of Columbia (Washington).

Interviews/Hearings

Transaction Tax Would ‘Punish’ Repo Market, ECB Official Says

European financial transaction tax would probably hurt the repo market against the unsecured market under current proposals, Cornelia Holthausen, principal adviser at the European Central Bank, said at a conference in London hosted by International Capital Market Association.

Such an effect would likely contradict liquidity rules in Basel III agreement. It is unclear whether the aims of the latest plans for such a tax would be achieved, and what its side effects would be. The levy would probably create distortions if it’s only enacted in a subset of euro area countries, according to Holthausen’s remarks.

Francesco Papadia, former director-general of market operations at the central bank, said interbank secured and unsecured borrowing could dry up if a tax is enacted.

Papadia made the remarks at the same event.

Interbank borrowing would likely be substituted by borrowing and lending from central bank, where repo would be exempted from levy, he said. He sees damage to the overall functionality of the financial system, with little revenue for the public coffers.

To contact the reporter on this story: Carla Main in New York at cmain2@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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